Rare earth minerals have been occupying the minds of many investors to an inordinate degree in past months. More so, it seems the importance of these particular minerals have been occupying the minds of militaries and governments for quite some time.
The escalating tensions between two economic behemoths has been compounded by an increasing concern of concentrated supply of militarily critical elements by an opposing force. The US has long stated their intention to move critical military-related supply of rare earths away from the globally dominant supply of China.
The topic ratcheted up the ‘national security dial’ again last week as China has begun using threats of a rare earth embargo on Lockheed Martin following the U.S. company winning a contract to upgrade batteries of Patriot air defence missiles in Taiwan. The likelihood of the embargo being implemented is slim, considering the communist China has a particularly deft skill at applying capitalist leanings at the forefront of their communist chest-beating, although if 2020 has taught us one thing, it’s that unpredictability is the theme of the times.
Regardless of China’s intention to follow through with the threats of embargo on rare earths, the mere suggestion has forced China’s counter-parts to significantly ramp up efforts to reshore critical supply chains, or at the very least, ensure they are controlled outside of Chinese interests.
One such beneficiary of this latest escalation is Australia’s publicly listed Lynas Corporation (LYC.ASX), who keen Icarus readers will note, was featured here ICARUS EXCLUSIVE: Trade Play – ASX.LYC – Lynas Corp Ltd as an Icarus Exclusive Trade Idea on August the 5th.
Aside from the geopolitical impacts supporting the individual case for Lynas, it is becoming increasingly evident that the world may very well be on the cusp on an explosive Commodity super-cycle, similar to that which was experienced in the 1970’s, conveniently following the abolishment of the Gold-standard.
The world, thanks to COVID, is awash with a gargantuan amount of freshly minted liquidity, both in the form of the ‘old fashioned QE variety’, but also all-out ‘helicopter money’ courtesy of direct cash payments to citizens affected by the COVID pandemic.
The combination of extreme central bank policy, being juiced by government fiscal policy and direct cash injections to the citizenry, combined with the likelihood of an explosive return to ‘government supported growth ‘post-vaccine’ may very well produce one of the greatest commodity super-cycles of the modern era. We may have already seen the initial stages of this, led by rapid and unrelenting increases in the prices of Gold and Silver.
The current S&P GSCI Total Return Index vs SP500 is at the lowest level recorded. Aside from generally depressed prices of major commodities in recent years, the fact that the FAANG bubble has launched the broader market higher amidst ‘real world’ economic devastation will provide for some very intriguing viewing in months and years ahead.
With the strength of FAANG being relied upon to support the global growth narrative, and being seemingly impervious to general downward pressure, one could reasonably assume that the gap will be closed predominantly by rising commodity prices.
If we discount the gargantuan increase in central bank balance sheets and general ‘free money explosions’ occurring around the globe in concert, and focus purely on the demand for commodities in a ‘rebooted post-COVID world’ the potential for commodities equities to provide a generational investment opportunity could stand alone as one of the most compelling investment thesis of current times.
The always insightful Jesse Felder, of The Felder Report, has outlined some further support for the theory that a commodity super-cycle is upon us. We’d suggest readers check it out here: https://thefelderreport.com/2020/08/05/a-generational-opportunity-in-commodities/
The Icarus Trade Ideas have a continuing commodity and resource theme, and we expect this to continue into the future, although with an ever moving landscape of volatility and black-swan events, we remain nimble and attuned to the broader set of signals being sent by Mr. Market.
Chart of the Day
Join Hedgeye CEO Keith McCullough and Jesse Felder, former hedge fund manager and founder of The Felder Report, in this pro-to-pro investing discussion about the current market environment.