Upshot of the Obama win: room for the crop and commodity boom to keep booming

The bottom line of the Barack Obama win last night is that the long commodity bull market can last a few years more.

FOUR MORE YEARS! FOUR MORE YEARS! FOUR MORE YEARS!

 

Sorry. Just had to say that line.

I don’t know how much longer the commodity bull market will last, nor does anyone else. My personal guesses are that the long term equity bear market will end in 2016 and the long term commodity bull market will end in 2018. What’s your guess?

Commodity bull markets tend to last 15-20 years, so this one’s getting long in the tooth. Started around 1999-2000, just when  the equity markets started swirling down the toilet. Actually, just before that, as the dotcom bubble took stocks to silly heights, then collapsed. The bottom of an equity cycle and the beginning of a commodity cycle, and vice versa, overlap. And they’re related, because cheap commodity prices allow manufacturing companies to produce stuff more cheaply and expand production more easily. High commodity prices make life hard for manufacturers. (Just ask meat manufacturers – livestock producers – about that!)

After a long time in a commodity bull market there’s a lot of investment in new resource production capacity, and that eventually crashes commodity prices as big new supplies come to market, buyers find substitutes, and some heavy resource users go out of business. We’re well into that trend.

But Barack Obama’s winning bid to be re-elected as U.S. president almost certainly means a continuation of “quantitative easing” and “financial repression,” two forms of extreme government financial manipulation that have the effect of forcing money out of money market funds and other “safe” investments and into riskier assets, such as stocks and commodities. The manipulation of interest rates to near-zero makes people chase yields – corporate bonds and stock dividends – and asset price increases – stocks and commodities. As long as people are forced by desperation to throw money into risky stuff, there will always be an underlying investment demand for commodities, and that will allow them to occasionally pop. That’s part of what’s been happening since 2008. And the extreme measures being used right now to prop up the world’s economies – actions being undertaken in the U.S., Europe, China – will continue with Obama back in the Boss’s chair, so that should keep world demand limping along for a while yet.

If Mitt Romney had won there might have been a lot less of this sort of stuff. Certainly he suggested he wouldn’t engage in much of it. But then, who knows what he really would have done? Just like all of America, I could never actually get a sense of what the Romneydude truly planned to do or really believed. If he’d been elected, he might have dropped the “I’m not actually a moderate” act and continued much of what Obama’s been doing via Ben Bernanke and Timothy Geithner. (Not that all the financial repression is “moderate” – it’s extreme – but being extremely interventionist during a period of economic crisis has been re rigueur since the 1930s). We’ll never know. But if he had actually been converted on the road to Damascus into a true-blue, harsh,  Fox News-type right-winger, there could have been a major loss of oxygen for the commodity engine. If Romney had come in, deflated some of the money bubble blownf into the system since 2008, and begun clearing the Western world’s debts, it could have helped the commodity boom end a bit sooner.

For crop growers, it’s almost certainly a good thing that Obama got back in. We’ve just lived through a historical grain market rally this year, and the high prices reached late this summer had a lot to do with commodity bull market. The U.S. Midwest drought set the date for the pop, but the actual price levels reached were only possible because of the already-elevated price of crops going into summer. That’s due to the commodity bull market, that has raised all ships. So the continuation of the commodity bull market is essential for people who own land and machinery and can crank out big crops.

For livestock producers and young farmers trying to buy land, the Obama win is probably a bad thing, if it encourages sky-high commodity prices to linger. They might have done better if Romney had come in and withdrew some of the jet-fuel from the economy.

That, for what it’s worth, is my little take on the impact of yesterday’s election.

 

 

About the author

Ed White — Ed White has specialized in markets coverage since 2001 and has achieved the Derivatives Market Specialist (DMS) designation with the Canadian Securities Institute.

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