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24 March 2015

Dallas, Death - and the Supercycle



I was not a watcher of the 1980s TV soap opera “Dallas” (in fact, I’ve never seen it at all), but I’m sure many readers were. But even for those like me, without direct knowledge, one plot line will be recognisable because of all the hype that surrounded it - it was almost impossible to avoid at the time. I’m talking, of course, about the cliffhanger at the end season eight, when Bobby Ewing was killed in a car accident. Lots of wailing and gnashing of teeth, no doubt, amongst the aficionados. But then, miraculously, at the end of the following season, he came back to life. What happened? Well, the accident, and the whole of the following season up until that last episode, turned out to have been nothing more than a dream, and everything was restored to how it should have been.

Back to Life

It’s not the first time a dead character has come back to life, of course. There have been plenty of others in fiction over the years; Sherlock Holmes was dead and gone after his fall down the Reichenbach Falls - until Conan Doyle realised that the goose he’d just killed was the one that laid the golden eggs. He may have had a temporary falling out of love with his character, but that realisation pretty soon brought the miracle recovery to his readers. Just as a personal view, I tend to think it is a bit of a weak plot device, really only occurring where the author has - almost too late - realised that it’s the character the public really want, not the author. 

Anyway, what’s that got to do with commodity markets? Well, it’s to do with the way a period of time seems to have been an illusion and the way things seem to revert back to where they were before. 

Unfashionable Commodities

One of the most well-used and trusted commodity indices is the Thomson Reuters CRB Index. I’ve just been looking at a chart of that function and it shows something which I think may be quite interesting. It’s no secret that commodity prices have been hammered hard since the last peak around 2011 - the poster-children for that would clearly be oil and iron ore, but think also of nickel, copper, even, in its own rather turgid way, aluminium. Prices have come off a long way since then. Commodities have become unfashionable and returns have reflected that lack of interest. We’ve all got richer on the storming performance by equity markets (and for those fiscal and monetary hawks who will take me to task and tell me it’s all artificial, and is simply building for a bigger crash - I’m not arguing that point here; I’m simply saying what has happened. Past, not future) and ignored commodities. 

Looking at the chart shows us that the troughs - going back a long way - typically sit at about an Index level of 200. That’s broadly true going back to the early 1980s; for example, in the slumps of mid-80s, early 90s, turn of the century and - most recently - 2008/09. The interesting part is that it is now again approaching 200 - currently, around five percent above what seems to be the typical trough level. We would seem, therefore, to be approaching a level which has historically been one of major support.

Bumping along the Bottom?

So, we have an asset class that is unfashionable and ignored by many investors and at the same time it is approaching historic support levels. That could suggest that perhaps commodities could be looking to stem the decline; I wouldn’t go so far - personally - as to suggest that we should be looking for a rally in the near future, because I tend to the view that there are still problems with global growth, which is after all the true engine behind sustainable commodity price increases, but in general terms, we may soon be looking at bumping along the bottom. Of course, there has to be the proviso that the CRB index is quite broad, and therefore there is plenty of scope for different performance between different commodities.

Reality or Fantasy?

So what is the relevance of the Dallas issue? Well, another way of looking at the chart could be that we are back to where we were in about 2000. So was the whole supercycle a dream? Just like Bobby Ewing’s death? And have we just returned to reality after a fantasy where commodities were pretty much the hottest investment  around? I have to confess I would like to think the phrase “new paradigm” was no more than the stuff of dreams - or nightmares.



My thanks to Miles Linington for drawing my attention to the Thomson Reuters CRB Index chart.


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