Commodity Insight: The news out of China

The best-performing group of markets last year were commodities as measured by the CRB Index. The CRB is to the commodity markets as the Dow Jones is to the stock market.

And in 2022, while the Dow fell 8.8%, the S&P dropped 19.4% and tech-heavy Nasdaq tumbled 33.1%, the CRB index rose 21.2%.

The rise with most hard assets in 2022 convinces me the commodity super cycle remains alive and well going into 2023.

Based on history, the super cycle has years to go before it runs its course. And that means moving forward I will remain firmly in the camp of the bulls looking to buy commodities on weakness, rather than selling hard assets on strength.

However, I am uncomfortable being a bugged-eye bull toward most all markets for the time being.

As I stated in the final column I wrote for this newspaper in 2022, “I am uncomfortable being a bull until the first quarter of the new year has passed. I am being patient — and you should do the same.”

Keeping me patient and restrained as a bull are several major fundamentals that have yet to totally unfold. The first, of course, is the Federal Reserve hiking rates at their fastest level in 40 years and the slowing of the U.S. economy.

Most economists agree that the nation is headed for a recession, but it comes down to a soft or hard landing. And that remains a big unknown.

From CNBC with a headline, “Why everyone thinks a recession is coming in 2023,” Patti Domm wrote: “Economists have been forecasting a recession for months now, and most see it starting early next year. Whether it’s deep or shallow, long or short, is up for debate, but the idea that the economy is going into a period of contraction is pretty much the consensus view among economists.”

In early December, when China abruptly abandoned its “zero-COVID policy,” it was viewed as another reason for world economic growth to slow and spark a global recession.

China claimed nearly 60,000 COVID-related deaths between Dec. 8 and Jan. 12. But in recent days a host of opinions are starting to change regarding the Chinese economy as things are starting to improve and look up.

Reported in “China’s economy is poised for a ‘burst’ of economic activity” by Goldman Sachs on Jan. 13: “The abrupt end of China’s COVID controls might hamper growth in the very short term, but the reopening is expected to result in a sharp rebound in the coming months. Our economists recently raised their full-year GDP growth forecast for 2023 to 5.2% from 4.5% because of China’s earlier-than-expected reopening.”

I agree with Goldman Sachs. Over the near-term, in the first quarter of 2023, U.S. and global growth may be hampered pushing a host of commodity markets lower.

But when the Chinese economy begins to rebound vigorously and the U.S. Fed begins to slow and pivot regarding rate hikes, commodities, per se, should benefit.

The markets I highly favor on the long side of the ledger in the final three quarters of 2023 and beyond are cattle and hog prices, crude oil, copper, the platinum group and silver.

I am tempted to tout natural gas, but in recent days that commodity has slumped to a 19-month low due to unseasonably mild weather and weak demand, which have been the key drivers of the sell-off. But natural gas does appear undervalued to me at this point in time.

The grain markets of late have shown a willingness to rally as ending supplies remain tight and weather issues in Argentina remain supportive. But in the absence of weather issues in the United States this growing season, I am skeptical grain markets can rise much further from current levels.

However, the fate of the grain markets rests with the acreage mix this planting season and the growing conditions this summer.

A shocking new development was announced this week that China’s population dropped for the first time since the 1960s.

To grasp the long-term economic significance of such a development comes these comments from AgWeb: “American agriculture silently is watching the greatest disappearing act in world history. China, the biggest food importer on the planet, is entering the real-time throes of a potentially devastating population crash and the effect could be immense for U.S. farmers.”

Strong headwinds face the stock and commodity markets in the first quarter of this new year. Be patient. Do not chase rallies. Do not sell weakness.

And watch the news coming out of China, which is bullish on one hand and bearish on the other.