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Politics : Welcome to Slider's Dugout

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From: RonMerks	11/9/2006 3:03:21 PM
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The Coming Nuclear Winter Base Metals - by Frank Veneroso. Anyone read this? Comments? This is a 25 page report. I'll just post the first page. It's a good read. kitco.com Introduction I am going to give you a bearish presentation on base metals. I have titled this presentation the “Coming Nuclear Winter For Base Metals”. It is my belief that the current base metals prices, which are a multiple of marginal cost, which is their long run price equilibrium, are simply ludicrous. They are here only because of unprecedented speculation. This speculation has resulted in price increases in base metals in real or inflation adjusted terms that are far greater than in any half decade cycle since the late 19th century. Base metals are not assets. They are goods of use. Like all such goods they must follow the basic principles of microeconomics. That means that such record high prices will in time, ration demand or, to use the more colorful language of the market place, they will destroy demand. At the same time they will encourage supply. The end result will be huge surpluses and an inevitable reversion to mean and more. That implies prices below marginal cost yet once again. I believe this process has been well underway for some time. The yet higher prices this year along with their perseverance will make matters worse – worse perhaps than they have been in any cycle since the late 19th century. Because generalized inflation in this cycle has been especially low, once the industry specific pressures on costs abate and reverse – as they always do - we will see that marginal cost has not changed, even in nominal terms. But the excess of record overshooting in this cycle will lead to extremely deep undershooting of marginal cost when this cycle finally reverses and runs its course. This is the microeconomic side of the story. Less compelling but still real is the macroeconomic side. In almost all base metal cycles, after those several years of a bull market which triggers the microeconomic forces of reversal described above, there occurs as well a global economic slowdown or recession. This adds to the inevitable downswing in the base metals cycle by lowering global demand below trend. It is now widely recognized that the four year U.S. economic expansion is now endangered by a bursting of the U.S. housing bubble. It is less commonly acknowledged that the investment boom in China – the other global economic locomotive – will end in a bust as well. My assessment is that some measure of both will materialize in the coming year or two. This will add to the forces that will round trip this extraordinary base metals bubble. It is not a necessary condition of the bear market I foresee, but it will probably be a contributing cause. + 24 more pages.

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