Goldman Sachs is replaying its best-selling tune of yesteryear. It has just proclaimed the start of another commodity supercycle.
We are in the very early stages of a supply crunch that will last for years and ultimately drive resource prices through the roof - or so goes the argument.
A global monetary and fiscal reflation boom will collide with the delayed effects of chronic underinvestment in oil, mining and agriculture for almost a decade.
The bank's commodity chief Jeff Currie - the world's most closely followed energy guru - says we are entering a new phase akin to the pre-Lehman "noughties" when the industrial revolutions of Asia were devouring resources and raising fears of peak oil, peak copper and peak food.
All the major economies have abandoned austerity and declared a collective war on inequality. The planned spending surge on green deals and social welfare in Europe, America and the OECD bloc will be buttressed by a consumer spending expansion in China. The combined largesse will match the "BRICs" investment bubble of the 2000s in scale and outrun the supply of "almost all commodities".
If correct, the vaccine catch-up rally for unloved commodity stocks over the last three weeks is just an 'amuse bouche' before the supercycle gets going in earnest.
That is the broad thrust. If correct, the vaccine catch-up rally for unloved commodity stocks over the last three weeks is just an "amuse bouche" before the supercycle gets going in earnest. The Bloomberg commodity index has fallen 60 per cent since its last hurrah in 2011. In synthetic terms, it is back to half-century lows.
Goldman Sachs says there is no political appetite for the contractionary debt-reduction policies seen after the global financial crisis: whether the Tea party and the fiscal "sequester" in the US; or Osbornian austerity in the UK; or the draconian Schauble cuts of Europe's Lost Decade.
It predicts something more like the "guns and butter" policies of Lyndon Johnson in the Sixties, the era of the Great Society and the welfare programmes of the War on Poverty. LBJ's Keynesian deficit spending was coupled with the Vietnam War and the budget-busting costs of Soviet containment.
This time the strategic imperative is to counter China and the Xi-Putin axis. We already see it in the rising British defence budget, with the once unthinkable backing of Labour. Military, technological and cyber rearmament is the new Western consensus.
Running to hit 'escape velocity'
The bull case is that central banks will accommodate this fiscal expansion much as they did 50 years ago (bar Germany's Bundesbank), deliberately letting their economies run hot to achieve "escape velocity" after the long malaise of secular stagnation.
Goldman Sachs says this revival of inflation will lead to the "revenge of the old economy", and the effect will be turbo-charged: a V-shaped recovery in demand will collide with a structural supply shortage, something normally seen only towards the end of the business cycle but already visible today even in a downturn. "Nearly every commodity is in deficit despite lockdowns," it said.
This includes oil once you strip away the distortions of the pandemic. Upstream investment in new oil and gas fields neared $US900 billion ($1.22 trillion) a year in the glory days. It halved after Saudi Arabia flooded the crude market in 2014 and prices crashed. Then came the Paris climate accord. The advent of electric vehicles and talk of stranded assets scared the bankers away. The capital markets began to shun Big Oil.
The International Energy Agency said investment remained stuck at $US480 billion in 2018 and 2019, and will barely reach $US300 billion this year. The IEA's Fatih Birol says the well depletion is eroding 3 per cent of global supply annually. "We're losing one North Sea each year," he said.
Bracing for the crunch
Eventually, there must be a crunch. Goldman Sachs says that moment is coming sooner than generally supposed. The COVID second wave is a "speed bump" that will not prevent a rebalancing of the crude market as the glut is cleared next year.
Mr Currie thinks Brent prices will reach $US65 by the fourth quarter. From there, presumably, it is off to the races since he calculates that 8 per cent of global supply will vanish by 2025.
America's nimble frackers in the Permian shale basin have capped previous rallies quickly by reactivating drilled wells but this time they are under much tougher financial discipline.
Westbeck Capital said the oil market is heading for a perfect storm. Insider buying by oil executives has reached record levels. There could soon be a buying scramble to unwind hedge contracts - de facto short positions - setting off a feedback loop. China and India are rushing to acquire stocks while crude is still below $US50.
"All the stars are aligning for a powerful bull market," it said.
Electric vehicles are not going to change the immediate equation for oil, even if 31 per cent of new car sales in Germany last month were EVs or hybrids. It will take years to whittle down the global stock of petrol and diesel vehicles on the road.
The great green switch can happen in parallel with another crude price spiral. Indeed, I suspect that we will see $US100 again before we all rush out to buy ever-cheaper EVs, and the oil industry goes into faster run-off.
My own view is that Goldman Sachs is right about the commodity supply crunch - up to a point - but the jury is out on the putative global spending boom and the return to inflationary economics.
Gridlock in Washington heralds austerity-lite. The Republican Senate will agree to some infrastructure stimulus and a splash of money on green super-technology - to combat China - but it will not fund Joe Biden's $US1.7 trillion shopping list of windmills, solar panels, EV charging points and the like.
The US Federal Reserve lacks the legal authority to deliver compensating monetary stimulus with rates at zero and the QE magic wearing off. It is pushing on a string. "It can't make the real economy take off like a rocket," said former Fed governor Randall Kroszner.
The European Central Bank said in its monthly bulletin that eurozone fiscal policy will be "contractionary" in 2021. Most countries are not spending enough to avoid permanent scarring from the pandemic. The EU Recovery Fund is too small and will come too late to make much difference in 2021 or 2022. The ECB can keep mopping up Club Med bond issuance to avert a sovereign debt crisis, but it too is pushing on a string with negative yields across the board.
As Chancellor Rishi Sunak said on Wednesday, the pandemic hangover in Britain will be long and grim. Most of the world faces legacy damage.
There will be another resource supercycle. The rhythms of the commodity market are as old as the Pharaohs. But this one may be less exuberant and more sluggish than the last one. History never quite repeats itself.
The Daily Telegraph, London