Syllogisms?
Last Thursday, the Financial Times reported on the death of Misao Okawa, a Japanese woman who could have remained unheard of if her exceptionally long life had not led her to be honoured by the press, having been born in March 1898. In passing away at the age of 117, the oldest person in the world reminded us of the extremely long life-spans of inhabitants in Japan, whose average life expectancy of 84 years is the longest in the world. The death of Misao Okawa, followed a few days later by that of American Gertrude Weaver, greatly reduced the number of members of the very exclusive club of people still alive who were born in the 19th century. Only three people now belong to this club.
In contrast, a club that is regularly gaining members is that of people aged 100 year of age, and especially those from Japan. By 2015, we estimate that 700,000 Japanese people will have crossed the 100-year threshold. With an increasing scarcity of those born before 1900 comes an abundance of people reaching 100: the trend is clear and relentless.
These themes of scarcity and abundance, are not only precious for demographers, but also for investors, who quite rightly would like to see in them essential factors in the formation of prices. IT calculation and storage capacity is a good example: the offer developed at such a rapid pace that between 2006, when AMAZON began to rent its capacity, and today, AWS (Amazon Web Services) divided its prices by 46. In the same vein, if we analyse components of the US consumer price index since 2010, the highest negative contribution comes from televisions, showing that abundance is often synonymous with price deflation. If what is scarce is expensive, it is hardly surprising that what becomes slightly less scarce on a daily basis sees its price decline.
Commodities prices seem to escape this spontaneous rule. The three essential farm commodities, sugar, cotton or corn, are currently trading on prices 30% lower than their average prices of the past five years. However, no exceptional harvest or major technological revolution enabling a multiplication in the productivity of the hectares cultivated has changed the landscape. And what about copper, which is also well below its peak levels, whereas it is becoming increasingly scarce with reserves estimated at around 40 years of consumption?
The explanation for this decline in commodities prices apparently lies simply in the economic slowdown of global growth and, in the case of copper, in the slowdown in China, which consumes 50% of global production. The increasingly rare nature of products does not therefore always lead to the increase in prices that we could imagine.
Understanding the change in commodities prices oscillates between two reading grids that are difficult to reconcile: on the one hand, the long-term grid, in which the number of years of reserves is often referred to (120 years for iron, 60 years for oil and just 20 years for gold) and the short-term grid which is based on recent demand and adjustments in production capacity.
Those focusing on the long-term reading could be surprised by innovations (shale oil temporarily undermined those believing in the theory of a shortage of oil), while the short-termists are at the mercy of any slight change in economic conditions.
The example of commodities reminds investors of the consistently complex nature of reconciling the long term and the short term. It also reminds us that what is rare can be cheap and that what is abundant can be expensive. The European bond market is currently a perfect and somewhat worrying illustration: whereas the ratio of debts to GDP is at a historical peak, never before has European debt (with the exception of Greek debt) been so expensive: the French state was able to borrow at 0.46% over 10 years with an increasingly high stock of loans (€2038 billion at present!).
Rare is often expensive, abundance is often cheap… but exceptions to the rule are always impressive.
Didier LE MENESTREL