Juggling Dynamite

After rising 90% from its March 2020 low, the Bloomberg Commodity Spot Index (below), which tracks 23 energy, metals and crop futures contracts, yesterday surpassed its previous all-time (fleeting) highs touched in 2011 and 2008.

Oil and gas prices (which make up 39% of the CRB index) have led the way, even as less cartel-manipulated commodities have fallen since May:  iron ore is -47%, copper -13%, palladium -36%, not to mention lumber -63%.  One thing is for sure, higher fuel costs, especially heading into the northern hemisphere winter, will crimp the consumer discretionary spending upon which developed economies presently depend.

China has used some 40 to 50% of many minerals and agricultural products globally over the past two decades.  First, to build products for western exports (as China joined the WTO in December 2001), and then, since the 2008 financial crisis, to build out domestic infrastructure and property development.

As excesses have become glaring and socially destabilizing, Beijing now seeks to reduce financial leverage with restrictions on the amount developers can borrow and, yesterday, with a new ban on loans to speculate in commodities.  As shown below, since 2013, the Chinese credit impulse (movement of credit through the banking system in dark blue) has been contracting since last spring and typically leads global commodity prices with a lag of 12 months.  The present levitation in commodity prices stands ominous. As property development has become the most significant driver of China’s economy in recent years (responsible for an estimated 29% of GDP), China itself has driven the largest share of global economic growth, about a third overall.

Within the property sector, Chinese residential spending (construction, renovation and transaction costs) accounted for a record 10% of its GDP in 2020, as shown below, and compares with just over 6% for this sector at the peak of America’s 2007 housing bubble.  Unfortunately, Canada shares the dubious distinction of a similar 10% of GDP now coming from residential property spending of late, as I explained here in Lethal levels of financial leverage are highly contagious. While Treasury yields have risen with energy prices over the past two months, higher interest rates are a growth-depressing headwind for highly levered economies.  The deflating world economic surprise index (below in blue) suggests the run-up in rates (US 10 year yield in red) should be short-lived. As demand has already turned down from government-boosted spending,  a record number of tanker ships are now waiting to unload their cargo at American ports (LA port below in blue). All of this suggests that the inventory rebuilding that began in August and September (see orange below) will continue–similar to what happened in 2008 and 2000 (after the Y2K spending splurge)–and deflationary forces will resume domination over a world awash in goods and short on free cash flow.

It can be challenging to imagine the extent and implications of the disruptions currently unfolding simultaneously in our foundational systems of transportation, energy, goods and food production.  Many fear that we will have insufficient resources to make the shift or that living standards will collapse in the process.  But that’s not a given.

For one thing, the new systems require a fraction of traditional inputs like energy, water, land, animals and vehicles, so we do not need to replace these items one for one.  Not even close.

In just one example, moving to 100% wind, water, and solar energy is so much more efficient than our present system. It will reduce Canada’s aggregate power demands 63% from current levels, as shown here from Stanford’s The Solutions Project.

Furthermore, when sharing autonomous transportation as a service, capturing and storing passive energy, and making food and products on-demand with precision fermentation and 3-D printing, we need a fraction of the vehicles and are not having to haul oil, gas, goods and food around the globe like today. So, we won’t need all of the vessels, energy and materials that are presently used for that production and distribution daily.

Recycling and reusing obsolete infrastructure affords a treasure trove of materials for the new.  In addition, ‘rare earth’ minerals are not that rare and, when enabled, new technologies continually evolve to higher efficiencies and more accessible resources.

For a helpful overview of the latest research and developments, see ReThinkX’s Ending the  Age of Resource Scarcity: Part 1–Why Mineral Shortages Won’t Derail Clean Energy:

It’s often believed that the clean energy disruption could be fundamentally constrained by resource scarcity in the form of insurmountable raw materials and mineral bottlenecks. Increasingly, some argue that it entails a net decrease in the energy available to societies, and therefore warn of an unavoidable decline in material prosperity in coming decades.

In the following two-part series, we will address some of the most notable perspectives that uphold this mythology. Doing so, we will show that if societies make the right choices – and that’s a big ‘if’ – the clean energy disruption can represent a fundamental break with historical patterns of scarcity and a breakthrough into a new age of energy abundance.

How the super-wealthy hide billions in tax havens and shell companies pic.twitter.com/83dvJdpy2u

— Business Insider (@BusinessInsider) October 5, 2021