Once more, about commodities

It seems mildly baffling to propose that commodity prices are high because of the expected (announced but not meaningfully implemented) China stimulus if the actual economic data (which is abysmal) didn’t crunch the commodity prices in the first place. By baffling, I don’t mean ill-considered or unreasonable. It is simply a difficult topic to parse.

It also wouldn’t explain why all commodities are elevated, in price, as opposed to just the ones in which China is the incremental buyer.

That suggests a more “common macroeconomic component” (e.g. aggregate demand, aggregate supply) to it, in which things like monetary and fiscal policy are cited.

Yet both MP + FP are now firmly in a contractionary stance. Strong US goods demand, (e.g. a toaster is aluminium, iron, copper, nickel etc) which went through the roof as COVID hit, is now also peaking, as per the Target and Walmart updates of last week.

That leaves the other common macro component, not demand, but rather supply, and here we can point the finger at absenteeism (chicken throughput decreases if every second worker is at home, as it does for those in a copper mine, or whatever you like to imagine) but this too should be a fading COVID impact, given vaccination rates and case flows.

Of course, perhaps COVID case rates are higher than we understand them to be. That is a possibility.

But then, the other supply component, of tangled freight, shipping, and port logistics, all seem to be sequentially improving. It would be hard to understand how a COVID case rate supply issue could impact such a narrow set of produced items (commodities) whilst being alleviated in other, arguably higher person to person contact professions.

Since throughput at ports is up, truck availability is improving, and flatbed quote rates are declining, all of this seems to strip us of the common narratives or explanations for high present commodity prices.

As you might imagine, we are underweight commodities, and wish to think it all through.

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