Set up to top out – Resources
Now imagine what BMW, Volkswagen and Daimler Benz are seeing - the European consumers of commodities. If you put commodity prices in Euros, without commodity prices doing anything, those big car manufacturers are paying almost 50% more than they were ten years ago simply because of the fall in the Euro versus the US dollar. Their buying power is down by a third since the Euro peaked in 2008 and has dropped 12% (that's a big move for a currency) in the last year. If you think the US could be put into a recession by inflation, the risk is 12% higher in Europe because a lot of their input prices (particularly energy) are priced in USD. The situation we have now - commodity prices and the US dollar rising together - is not "normal" and you have to ask….how long can this symbiosis go on? The obvious assumption is that at some point the correlation between the US dollar and commodity prices will resume meaning commodity prices come off, possibly rapidly, because the ‘globe’ cannot tolerate commodity prices and the US dollar rising indefinitely at the same time.
And this is the point - Over the last year, the correlation between the US dollar and Commodity prices has broken down. Commodity prices have been going up (not down) AND the US dollar has been going up.
The bottom line – We can’t take this resources cycle for granted. One of the biggest risks for Australian investors, who have seen a fabulous run in the resources sector, is a peak in the resources sector. History tells us that the resources sector is a long duration trading sector not an "invest forever" sector. It is not to be trusted. It is to be traded at it's big multi-year pivot points. The sector has led our market. Meanwhile we have a set up that brings the next pivot point closer. One day this commodity price cycle has to end.But as always. Let's not predict, let's react. Don’t sell BHP today. Don’t sell commodities or commodity based stocks today. All that's happened so far is that the chances of a commodity price peak and, therefore, a resources sector peak, has moved from unlikely to inevitable. It just hasn’t started yet. And may not for months. So there's nothing to do yet.
Some Numbers: These won't save you when the top comes. Performance numbers: Some charts (source Refinitiv):
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