Beware commodity investors: “An era can be said to end when its basic illusions are exhausted.” Says who? Ruchir Sharma does, he is the head of emerging markets at Morgan Stanley and a columnist for Newsweek, the Wall Street Journal, and the Economic Times of India.

In a recent article, Sharma compares the current commodity bubble to the dot-com bubble from ten years ago, he even refers to it as “commodity.com” and says it is much bigger than thought by many. And he makes a bold warning: “When the rapture is over, the nations and companies that have been living high off commodities will also share the sinking feeling that followed the dotcom boom.”

Interesting parts of his article are highlighted below…

“… one idea still has the power to capture the imagination of the markets: that the inexorable rise of China and other big developing economies will continue to drive a “commodity supercycle,” a prolonged upward rise in the prices of commodities ranging from oil to copper and silver, to textiles, to corn and soybeans. This conviction is the main reason for the optimism about the prospects of the many countries that live off commodity exports, from Brazil to Argentina, and Australia to Canada.

I call this illusion commodity.com, for it is strikingly similar in some ways to the mania for technology stocks that gripped the world in the late 1990s.”

“At the height of the dotcom era, tech stocks comprised 30 percent of all the money invested in global markets. When the bubble finally burst, commodity stocks — energy and materials — rose to replace tech stocks as the investment of choice, and by early 2011 they accounted for 30 percent of the global stock markets. No bubble is a good bubble, and all leave some level of misery in their wakes. But the commodity.com era has had a larger and more negative impact on the global economy than the tech boom did.”

The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments. Copper is piling up in bonded warehouses not because the owners plan to use it to make wire, but because speculators are sitting on it, like gold, figuring that they can sell it one day for a huge profit.”

“A decade later [after the dot-com bubble] the chatter was all about the big emerging markets and oil, but with a darker mood. Commodity.com is driven by fear and a total lack of faith in human progress: fear of a rising phalanx of emerging nations with an insatiable demand led by China, of predictions that the world is running out of oil and farmland, coupled with a lack of faith in the human capacity to devise answers, to find alternatives to oil or ways to make agricultural land more productive. It’s a Malthusian vision of struggle and scarcity: of prices driven up by failing supplies and wages pushed down by foreign competition.”

“Excitement about rising commodity prices exists only among the investors, financiers, and speculators who can gain from it.” 

“The strongest common thread connecting the dotcom and commodity.com eras is the fundamental driver of all manias: the invention of “new paradigms” to justify irrationally high prices. … When the rapture is over, the nations and companies that have been living high off commodities will also share the sinking feeling that followed the dotcom boom.”

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