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Diapason Commodity Strategy - 2012-04-30

Diapason Commodity Strategy - 2012-04-30

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Published by: derfem on May 08, 2012
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05/10/2012

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 For important Disclaimers and Disclosures, please refer to the last two pages of this publication
The Diapason Capital Markets Report
 
 APRIL 30,2012
 VOLUME 4 ISSUE 16
Key economic data this week 
March Pending Home Sales jump 4.1% m/m
March Durable Goods Orders lower on aircraft
February Case-Shiller House Price Index rise
March New Home Sales gave back February gains
 April CBO Consumer confidence index falls
Q1 initial jobless insurance claims gains gone
Mar China HSBC “flash” PMI higher — still sub-50
Mar China imports lower on payback to Jan-Feb gains
 
The commodity supercycle is ending? China isn’t all that matters, Part
There has been a lot of debate about the end of the "Commodity Supercycle" in recent days. The subject came up alongmarket speculations that a hard landing will take place in China, and that the "miracle" is "over. The premise here is thatif the infrastructure development of China is over, then surely the so-called "Commodity Supercycle" is over.
Could this meme be correct? We disagree with those notions on five counts: (1) We do NOT believe that China is in for ahard landing (we expect higher growth in Q2 2012), and (2) even if China’s growth ratchets down from "boiling" to"simmering" that does not necessarily mean an end to the upward trend in commodity prices as other emerging countriesand even OECD economies would soon take up the "slack" from Chinese demand moderation;
(3) a China paradigm shift from investment to consumption does not necessarily derail the commodity gravy train -- it just rearranges the order and the number of the train cars; (4) the Fed’s reaction function almost guarantees that rateswill stay low too long again, and will likely re-ignite inflationary pressures in a 1970 context; and (5) the "commodity su-percycle" being discussed is not really a "Supercycle", but only a “boom” in a longer, larger, higher-amplitude period of economic activity (the “Long Wave” or “Kondratief (K) Wave”) which could top out in sometime in 2022-2026.
Chart of the Week:Pending home sales jump 4.1% 
 
 
3
 
 For important Disclaimers and Disclosures, please refer to the last two pages of this publication
The Diapason Capital Markets Report 
 APRIL 30,2012
 VOLUME 4 ISSUE 16
 
The Diapason Capital Markets Report 
Commodity supercycle ending? China isn’t all that matters, Part 2
or combination of processes that cause the "Long Wave" in the first place. The variancesin the signatures or profiles of these booms and boomlets within the "Long Wave" is con-sistent with the evolution of macro-economic conditions and their effect/consequences(the phases or the "seasons") within the broad sweeps of a 50-60 year long (Super)Cycleof economic activity. An in-depth discussion of the "Long Wave" or "K Wave" is not germane at this point, andwe will leave it for another report in the near-future. What we want to accomplish in thisstudy is to pinpoint where we are in the current cycle, and whether or not we expect theboom/boomlet to continue, and if yes, for how long. To borrow a phrase once used aboutbusiness cycles, it can be said that "the study of commodity booms necessarily beginswith the decomposition of these booms". For our purposes, we will limit our analysis to
 APRIL 30,2012
 VOLUME 4 ISSUE 16
the booms and boomlets that occurred after WW IIdue to the paucity of data before that.
The three commodity booms after WW II
Three major commodity booms since the Second WorldWar had taken place, and in all three, demand shockspredominated as triggers to the commodity price rises.However, as we will later see, these commodity boomsdo not always have the same characteristics.
The first boom,
in 1949–51, was caused by the mas-sive inventory build-up in response to the Korean war.
The second boom,
in 1968–80, was accentuated bywidespread harvest failures and by OPEC’s price man-agement, which tripled the price of oil.
The thirdboom
started in 2002 and may not have run its course

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