Thursday, October 1, 2009 7 comments ++[ CLICK TO COMMENT ]++

David Rosenberg bearish on stocks but bullish on commodities and Canada

Writing for The Globe & Mail, David Rosenberg, the ex-Merrill Lynch economist who now works for boutique firm, Gluskin Sheff + Associates, suggests that stocks are not the place to be but likes commodities. Since Canada is exposed to commodities, he also likes the Canadian market as an investment destination. Rosenberg is famous for being bearish and for maintaining his bearish view. I don't follow him much and this is the first time I have heard his bullish views on commodities (Rosenberg appered to be quite bearish on commodities a few years ago.)

As some may know by now, I'm bearish (or at least not bullish) on commodities. It's interesting to hear Rosenberg, who is one of the few who does not see strong economic growth in the future, remain bullish on commodities. This is an interesting position because commodities have rarely performed well when the economy has contracted (the exceptions are wars or performance off major lows.) Nearly all commodity bulls are inflationists or strong economic bulls. Rosenberg is neither so this is a unique position for someone expecting deflation or low inflation.

David Rosenberg's commodity call seems to hinge on a technical view. Namely, he is pointing to the fact that the CRB commodity index did not hit a low below the prior lows during the sell-off last year. However, as I speculate below, it may turn out that the 2008 low is similar to the 1980 low, which was a multi-decade top in most commodities.



The difficulty for anyone betting their life savings on commodities comes down to figuring out whether the current prices are "too low" or not. Rosenberg argues that the low last year is the floor. I have been bearish on commodities for several years now but even after the massive crash last year it is difficult to say if commodities have entered a bear market. Even after the crash, many commodity prices stayed way above marginal cost of production (although it's hard to know what that number is for sure.) This likely means that speculation (i.e. bubble) is driving the prices; or that economic fundamentals have indeed changed (i.e. emerging markets altered the supply & demand environment.)

Rosenberg's call here is interesting because he is basically arguing that the economy, which he expects to remain weak, can support, say, $70 oil prices. Admittedly, there is some nuance here. Rosenberg, like most commodity bulls, is actually expecting the economic growth of developing countries to drive the prices but I'm not sold on that. As I have argued in the past, many developing countries are either too small (in non-PPP terms) or they are dependent on exports to the weak developed economies.

Some commodities did really well during the Great Depression, a deflationary period, but what is working against commodities now is the fact that commodities have already gone through almost a 10 year bull market. Oil has gone up around 700% off its low for example. Anyway, all this is interesting and I'm sure will have big consequences one way or another. I am personally staying away from this game for the time being.


(On top of all this there is the possibility of China running into problems which will crash commodities but that's pure speculation and this discussion is not based on such a scenario.)

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7 Response to David Rosenberg bearish on stocks but bullish on commodities and Canada

sunny
October 1, 2009 at 8:14 PM

<span>I agree with Rosenberg/Rogers that we may be in a secular bull market with commodities ever since 2000 but I am skeptical of commodities in the short term. I am personally in the deflation camp and with if the dollar bottoms out and treasuries stay where they are or rally, commodities may be a relatively bad investment. For commodities to go up either one of two things need to happen: the US dollar weakens considerably or China/India consumes a lot more commodities. With the current supply level of commodities being extremely high, the recent move in commodity prices in the past six months seems to be just a reaction to the dollar weakening considerably. With the US economy far from recovery, it doesn’t seem that things will go back to the ‘old normal’ of global GDP being powered by the US consumer. In my opinion buying commodities in the longer term is basically buying into the argument that China is able to successfully decouple its economy and have its people start consuming goods and services like in the US. My take is that deflation will come back for a few months till the US decides to pass another stimulus which will devalue the dollar even more. More deflation may create a good entry point for building a position to buy commodities or commodity companies for the mid to long term if one believes the China decoupling argument. </span>

crispstocks
October 1, 2009 at 10:43 PM

Some commodities did really well during the Great Depression, a deflationary period, but what is working against commodities now is the fact that commodities have already gone through almost a 10 year bull market.


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Sivaram Velauthapillai
October 2, 2009 at 2:03 PM

I think you are right in suggesting that anyone betting on commodities is essentially making an indirect bet on decoupling. If China continues developing as it has, it will decouple. The question is, when? I suspect it may as far away as 20 years or 25 years from now. But others suggest it is imminent and will happen really quickly.

P
October 5, 2009 at 6:35 PM

Re  "Namely, he is pointing to the fact that the CRB commodity index did not hit a low below the prior lows during the sell-off last year. "

Is the graph in USD?  What if priced in a different currency?

sunny
October 5, 2009 at 7:21 PM

I believe commodities are sold in dollars in the spot and futures markets...although OPEC would love to change oil to be priced in Euro's someday. 

Sivaram Velauthapillai
October 6, 2009 at 2:13 PM

Funny that you mention the oil currency issue because, big news today is the so-called secret meeting debating a move away from US$ in pricing oil.

Sivaram Velauthapillai
October 6, 2009 at 2:19 PM

P: "Is the graph in USD?  What if priced in a different currency?"


I always laugh at a question like that because it is sooo true. It calls into question the whole theory behind technical analysis. As you imply, I"m pretty sure that the graph will look different if plotted in a different currency. So which currency plot should be used? ;)


A classic example of this is the S&P 500 in the last 10 years. In nominal (US$) terms, the S&P 500 shows, what technical analysts call, a "double top". It peaked near the same level in 2000 and 2007.

But if you looked at it in Canadian dollars--I'm in Canada so this is actually how most Canadians would see it--the S&P 500 in 2007 came nowhere near the 2000 peak. The S&P 500 would not have been considered a "double top."

Perhaps this is another nail into the coffin of technical analysis...

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