A Look At The Respective Rallies in Tech, Housing and Oil

We did a B.I.G. Tips report last Tuesday comparing the tech and housing bubbles to the current rally in crude oil.  Paul Kedrosky asked to publish the chart from the report last week, and then he provided his take on the oil rally the next day.  Today the Wall Street Journal makes the same comparison in a front-page article titled "Bernanke's Bubble Laboratory."  Below is the first paragraph from the story:

"First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities."

Click here to check it out.  It's worth a read.

Below is the chart from our B.I.G. Tips report last week.  Click here to subscribe to Bespoke Premium today.

 

Comments

[Dan Caldwell]

Adjusted for inflation, commodities still have a lot of room to run. I used to work in the copper industry and here's my take:
(1) The strong dollar of 90's + the U.S. being the only MAJOR buyer killed the commodity infrastructure, many mines and refineries closed, expansion plans got shelved and the rest moved offshore where labor was cheaper.
(2) It takes 7+ years from scratch to bring a new refinery or mining project to full production.
(3) Most of the cheap and easily accessed minerals and oil have already been tapped.
(4) New minerals and energy can now only be found in harder to reach places, with politically unstable governements, making new projects unpallatable.
(5) China and India are adding +1 million vehicles/mo. (source Bloomberg) and China is adding about 8 million families/year to the growing middle class with disposable income who want better living quarters, i.e. condos which requires more copper, cement, steel, etc.
(6) China's electrical infrastructure buildout alone is taxing existing global copper mine production, without much left over for anyone else.

Bottom line: The roots of the supposed commodity bubble began in the late 80's and 90's with the deterioration of the refining and mining infrastructure and the strong US dollar. There are very few new oil fields, refineries, or mines being started or brought on line, and existing producing facilites are constrained by previous lack of investment. My worry is that with P/E's in the single digits that China will use its sovereign funds to take out existing mining companies, cutting the U.S. off from future supplies, if and when the economy does rebound.

Are raw materials and oil in a bubble? On an iflation adjusted price chart the answer is no IMO. Adjusted for inflation, copper should trade at around $6. I think energy and materials are now in wave two of a decade long bull run which won't end until you see a lot of new mining startups or an unknown future techonology that obsoletes the automobile.