The recent rally in the commodities sector has some serious doubters.
"I've got three words for you: Dead. Cat. Bounce," David Rosenberg, chief economist over at Gluskin Sheff & Associates Inc., told Bloomberg.
Rosenberg was quoted in a broader Bloomberg piece that questioned the fundamental basis for the rally. Hint-hint in the headline: 'Face-Ripping' Rally in Canada Material Stocks Missing Key Piece.
In a low-growth world, the argument goes, commodities can have no claws.
And fair enough on the demand side, I suppose.
Here the picture of growth is not what it once was. Despite the best efforts of governments presiding over the world's largest economies, global GDP growth is sluggish in a world where China's appetite for commodities, at least growth wise on a percentage basis, has waned.
So Rosenberg:
“There is no fundamental long-lasting recovery in the commodity space without global demand growth shifting course and accelerating, and that’s just not in the cards in the foreseeable future," he tells Bloomberg. "It’s completely overbought at current levels and I wouldn’t draw any comparisons to the past.”
And that might be true if demand was the market's only driver. But in a world where commodities are also driven by individual supply, and the ebb and flow of currencies, I think Rosenberg overreaches.
Certainly there are those who would challenge the description: The rally as feline flesh on a short-lived rebound coming as a matter of course after a multi-year bear market in many resources, especially metals.
Kerry Smith, over at Haywood Securities, was quick to respond to questions, saying in an email he viewed the rally as longer and more sustained.
"But I certainly wouldn't call this steady rally since January a dead cat bounce," he said in an email.
John Tumazos, of John Tumazos Very Independent Research, was also sceptical that the rally is just fluff and outlined core drivers behind it.
"In general, economic growth may not be necessary for prices to rise," he says in an email. Instead, he notes, the supply side of the picture may underpin strength in some commodities (especially metals), among other things.
Tumazos rhymes off some of the drivers of the recent rally:
(1) The 6% drop in the US dollar since January 21st. (2) Negative interest rates in four nations accounting for 30% of global government bonds. (3) About a 25% drop in scrap metal supplies due to low prices. (4) And some significant mine output cuts in zinc, copper and iron ore.
Among notable supply changes there have been hefty cuts to zinc mining by Glencore amidst a slew of already planned mine shutdowns on the back of exhausted reserves.
In gold, we've witnessed a huge surge in ETF inflows, as Tumazos and others note, that belie a deep, if sudden, desire by investors to diversify out of other sectors in an uncertain world of negative interest rates, among other monetary policies and issues.
And even in iron ore -- perhaps one of the commodities expected to perform worst in coming years -- strength has returned in part because of supply response.
As Tumazos notes, "Iron ore suffered from output cutbacks at all seven top producers and a 25% drop in scrap flows requires 125 million tonnes more iron ore -- which triggered large rises in scrap steel and then finished steel prices."
So to the Rosenbergs of the world: The commodities cat may be bruised. But it's a scrappy creature and looks to be clawing its way back despite slower demand growth.
