Booming demand from China and India, coupled with supply constraints because of years of under-investment mean that commodities prices will stay high, despite last week’s correction, for the foreseeable future. Right? Unlikely, says Bill Miller, the chairman and chief investment officer of Legg Mason Capital in the US.

Miller, currently the only US mutual fund manager with 15 years of consecutive outperformance, says that the consensus views on markets tend to be wrong at the turning points, being invariably bullish at the top and bearish at the bottom. And the consensus view on commodities, fuelled by bullish reports in financial newspapers such as the Financial Times and Wall Street Journal, is that the boom will continue, at least for a while yet, and the falls of the last week simply mar a correction. Miller says in Legg Mason’s latest quarterly newsletter to clients, written last month, that: “I can’t help but be sceptical of the advice to start or increase a position in commodities after the biggest bull move in 50 years.” The last bull market in commodities occurred between the OPEC oil price shock of 1974 and about 1980. For the subsequent 20 years, commodities prices did nothing. The time to buy commodities was around 2000, during the tech boom, because that is when they were unwanted. “The excitement and enthusiasm surrounding commodities, and the belief that they will continue to rise, is not surprising,” Miller says. “People want to buy today what they should have bought five or six years ago – call it the ‘five-year psychological cycle’.” He says: “Fifteen Fed (US Federal Reserve) tightenings have taken us from negative real short rates to real rates headed toward 3 per cent in the US. Japan is moving away from its zero interest rate policy, and global central banks are mopping up the excess liquidity created when deflation fears were rampant. The 10-year bond is now over 5% per cent for the first time in four years, and housing data is rolling over, which is likely to put some pressure on consumer spending, as well. The so-called global carry trade is fading in popularity, and some of its biggest beneficiaries such as New Zealand and Iceland have seen their currencies break down. “Other areas where speculation ran high until recently, such as the Middle Eastern markets, have experienced dramatic corrections. A big difference between today and the commodity bull markets of the 1970s is that then the US Fed monetized the rise in prices leading to persistent inflation. Today, central banks are withdrawing liquidity, not adding it. “So far there has been no impact on commodities, and except for a few scattered areas of the world, most assets and markets are continuing to rise. I think that will get more difficult to sustain, especially if liquidity becomes scarcer. “The first to feel the pain could be where the gains have been the greatest, which would be emerging markets and commodities. “The US equity market has lagged those of the rest of the world by a wide margin for several years, and within our market the mega-cap S&P names have lagged the small and mid caps, which are in the seventh year of relative outperformance – quite long in the tooth by historic standards. Part of the reason for the relative lack of interest in US stocks has been the relentless rise in short rates. Our central bank has been noticeably more hawkish than the rest of world, and money has flowed to where money was the easiest, outside the US. As we end our tightening cycle, and others remain engaged in theirs, our market should become relatively more attractive.” Miller says that, in general, investors can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is “long term” in most people’s eyes and long enough to convince them that the malaise is “permanent” and to have migrated their money elsewhere, such as to whatever has done best in the past five or six years. best in the past five or six years.

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