Are renewable energy companies the ‘new Kellogg company’? Aspects of a new broad commodity bull market

The longer you are participating in the financial markets, the more you going to see thru narratives that come and go. People always look for reasons why trends occur. That’s part of human nature. Often there are several narratives competing against each other causing confusion among traders and camps debating each other. The more popular a particular narrative, the more cautious you should be as trader. It’s no different than politics.

A current popular narrative is that oil is gaining in price and Gold lost a part of its recent gains due the Covid vaccines news. This narrative approaches the oil and Gold markets as isolated entities, operating on their own and the correlation between the narrative and the markets operates in a one dimensional manner. Is that accurate? I don’t think so, it’s short-sighted. I rather use narratives that went through the test of times, aren’t triggered by timely superficial mainstream media headlines, and most important are NOT political. Where can you find such narratives?  By studying the work of successful investors as Jim Rogers for example. He is my favorite to learn how commodity cycles work. He is an effective investor for years, could retire early to travel the world, so there must be something accurate in the way how he views markets.

Roger’s book ‘Hot Commodities’ (2007)  gives direction to how see markets in a big picture context. He describes a negative correlation between the price movements of stocks and commodities. When  stocks go down, commodities go up. And when commodities go down, stocks go up. 

As Rogers wrote in 2007 in ‘Hot Commodities’:

“Historically, there is a negative correlation between the price movement of stocks and commodities. On any chart of bull markets in stocks and commodities, they are parallel lines going in separate directions. Commodities were hot in the period between 1906 and 1923, when stocks went nowhere – and the reverse was the case during the roaring twenties. Many of us still remember the hot commodities and cold stocks of the 1970s. Quite the opposite was the case during the 1980s and 19990s. Studies have confirmed this negative correlation between stocks and stuff. Two recent studies for example headed by  Barry Bannister, a capital-goods analyst show that for the past 130 years stocks and commodities have alternated leadership in regular cycles averaging 18 years”. 

The chart below shows a long term overview of stock and commodities cycles 

Where are we today in the stock – commodity cycle?

The last commodity bull started in the early 2000s after the Nasdaq tech bubble popped, and ended in 2008 for most commodities, except Gold and Silver. These latest two ended their bull in 2011. The opposite was again the case for stocks starting a bull market in 2009 and may now in a topping process. Commodities are dead cheap again nowadays and may be ready to start a new bull cycle. 

The last phase of a bull market always ends in hysteria, and the last phase of a bear market always ends in extreme pessimism. When we apply that to the current situation we see a deep settled belief in technology companies as solar, wind, alternative energy (as ethanol), battery and EV (stocks) as I wrote in my former blog on the renewable energy versus fossil energy debate. 

There is a settled belief supported by governments and climate activists that renewable energy technologies are the ultimate answer for infinite cheap and clean energy. Can we call this a mania that should be placed in a context of an aged bull market in tech stocks? I think so. 

Fossils as oil and natural gas are part of the commodities market that went through a bear market the last couple of years. And iron ore too, and coal (the most hated energy commodity by the Greta’s and climate activists of this world) as well as that is needed to make the required steel and aluminum for all those planned wind and solar utilities. Last but not least there is an anti fossils investment thesis established, resulting into an extreme pessimism described in this great blog by Chris MacIntosh from Capitalist Exploits. It discourages and even attempts to withhold investors to pick fossil energy as an investment. Great timing at the end of a commodity bear market I must say! This will only result into a bigger imbalance between supply and demand for commodities the coming years.

At the end of a bear market, supply destruction becomes an issue due absent investments in exploration, building and permitting of new wells and mines during the former years. As Rogers wrote in ‘Hot Commodities’, the last phase of a commodity bear market ends when supply and demand imbalances are perking up. Investment money starts to flow into commodities markets when demand has outgrown supply and translates into higher commodities prices, aka commodity inflation. Higher commodities prices will come. It has been a natural cycle for decades between stocks and commodities and due the greenish government policies and interventions my expectation that it could become even more an issue.

What will be the impact of rising commodity prices on the costs and margins of renewable energy companies? I guess that is won’t be as shiny as many think. Are renewables really so cheap? Time will tell, but I suggest you keep in mind markets are correlated, and these are not just one dimensional, but characterized by many. I end this already too long blog with the following: 

Rogers also wrote about why he thinks this negative correlation between stocks and commodities exists:

“Consider Kellogg Company, the world’s leading cereal producer, with $8 billion total sales. When the price of the massive supplies of wheat, corn, sugar and paper that Kellogg needs to make and box all those different cereals is low, the company is likely to make a lot more money. At worst, the cost of doing business is under control; at best, it’s declining and Kellogg makes bigger profits at bigger margins. In the commodity bear market of the 1980s and 1990s, when commodity prices were low, Kellogg stock did extremely well -moving from a $2 stock to more than $40 in 1999. By the end of that year -and the first year of the commodity upturn- Kellogg stock had sunk by 50%. It stands to reason that when the prices of commodities Kellogg needs are going up, the company is under more pressure to control costs and profit margins. And a rising commodity market would hurt many companies and their margins, while decreasing prices for those same goods over long periods would help them”.

The question is; will renewable energy companies become the ‘new Kellogg’ companies? I certainly have no crystal boll, but time will tell.

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