This document discusses the potential for a "perfect storm" in commodities markets. It notes that commodities prices have been flat or declining recently, with many metals and agricultural commodities down significantly year-to-date. Several factors are cited as contributing to downward pressure on commodities, including rising US oil production, flat global demand, and bumper agricultural harvests. The document then presents three potential scenarios - that commodities could bounce back on emerging market recovery, that the decoupling of commodities from equities could continue, or that equities could follow commodities lower in a broader deflation. Winners and losers under current conditions are also identified.

1. Perfect Storm for Commodities
05 December 2013
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3. I. Market Update
II. Perfect Storm for Commodities
III. Scenarios
IV. Winners + Losers
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4. HiddenLevers
MARKET UPDATE

5. Market Update
QE Taper Tantrums
Q3 US GDP = 3.6%Iran Détente
Nasdaq 4k

6. Macro Snapshot
Employment, manufacturing, equities, and bond spreads trending in the right
direction – why won’t CPI get with the program?

7. PERFECT STORM FOR COMMODITIES
HiddenLevers

8. Commodities Past
Real commodities prices flat
since 1870’s – 0% real growth
Commodities markets appear
highly cyclical over 200 years,
and we look to be at a top
source: Business Insider

9. Commodities Present: Oil & Energy
sources: EIA, DOT
US oil production has recovered rapidly,
while total vehicle miles are well below
2007 peak.
But global demand and risk premium have
kept oil up 4.6% YTD.
Supply is up… And demand is flat.

10. Commodities Present: Metals
Gold -27% YTD
Silver -37% YTD
Silver tracking gold down
perfectly, with leverage
Copper -13% YTD
Aluminum -18% YTD
Copper and aluminum
falling on weak global
demand

11. Commodities Present: Agriculture
source: HiddenLevers, UN, Financial Times
-16% YTD
-27% since July 2012
Long term trend
Agriculture commodities
down since mid 1990s
Double digit declines in
2014 + 2015 expected
triple top
Reasons for continuing drop
- Favorable weather
- Falling input costs
- Larger harvests
- Bumper crop in corn

12. Commodities Future: Deflation?
CPI has
generally
followed
S&P 500 –
divergence
started
mid-2012
US CPI had a lagged correlation with S&P 500 until
breakdown in mid-2012, despite Fed efforts. Are
commodities and CPI predicting deflation?

13. precious metals out of favor Food prices deflating into 2015
US oil demand declining
Perfect Storm for Commodities – Recap
Top of Commodities Super Cycle

14. HiddenLevers
COMMODITIES DEFLATION – SCENARIOS

15. Scenario: Commodities bounce back
EM/BRICS
recovery is
key
Signals rising
world wide
inflation
source: HiddenLevers
Equities now a leading indicator economy
USD weakness
helps spur
commodities
Will this trend
pick up?

16. Scenario: Equities decoupling continues
US economy pickup
doesn’t increase
commodity demand
QE continuing means
decoupling story in
tact
source: HiddenLevers
QE meltup + deflation in other risk assets
Tech growth in US is
not like manufacturing
growth in EM
Decoupling is the
current dynamic
1996-1999
S&P + 125%
Oil - 55%
Copper - 55%

17. Scenario: Equities follow Commodities down
Industrial metals
and S&P have long
history
source: HiddenLevers
Deflation spiral on all risk assets
Fed taper will kick
this off
2008 Crisis
S&P - 52%
Oil - 76%
Copper - 64%

18. Good
Commodities
Bounce Back
Bad
Decoupling
continues
Ugly
Equities
follow
Commodities
Scenarios: Perfect Storm for Commodities
EM recovery would
lead to rising inflation
and a commodities
bounce.
Commodities could
decouple from
equities if tech-led
growth continues
Fed has failed to raise
CPI – could be prelude
to stronger deflation,
with commodities and
equities down
together

19. HiddenLevers
WINNERS + LOSERS

20. Winners – Middlemen
Food Makers Car Makers Utilities
Oil Refiners Plane Makers

21. Winners – Lower input costs

22. Losers – Producers + Resource economies
source: HiddenLevers
Gold -27% YTD
GDX -55% YTD
Gold miners + producers
are leveraged plays on
commodity prices
CAD -8% YTD
AUD -14% YTD
Currencies of
commodities suffering
with key exports

23. Find it on HiddenLevers
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Macro Themes
Economic
Data
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source: Burtynski
War Room
Gold Crash
Commodities
Industry
groupings
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BRICS

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