Onshore Energy Conference — London Onshore Energy Conference — London | Page 28

COMMODITIES PRICING 1984 – 2016 10,000 9,000 Aluminium Copper Iron ore (RHS) Coal (RHS) Brent (RHS) 8,000 $/tonne 6,000 200 150 5,000 100 4,000 3,000 50 2,000 1,000 0 20 10 20 12 20 14 20 16 08 06 20 20 04 02 20 20 8 6 00 20 19 9 19 9 2 0 8 6 4 19 9 19 9 19 9 19 8 19 8 19 8 4 0 SOURCE: pH REPORT, IndexMundi Their pricing soared during the subprime period of the early 2000s, and went even higher during the post-2008 period. But this proved to be a temporary illusion, as the promised economic recovery was unsustainable in the long term. The past two years of The Great Unwinding have, therefore, seen investors facing, Januslike, in opposite directions at once. They could not ignore the mounting evidence of over-supply in oil markets, for example, where the International Energy Agency’s latest monthly report has warned that June saw OECD commercial stocks of crude and products “swelling by 5.7 mb (million barrels) to a record 3,093 mb”. But nor could they simply ignore the impact of new stimulus measures by central banks in Japan, Europe and the UK, as these provided the firepower to fund some short-lived but spectacular speculative rallies in futures markets. Today, however, the chickens are coming home to roost with regard to the policy failures of the stimulus period. Pension funding has now reached “crisis point”, in the words of the UK’s former pension minister, while Deutsche Bank’s CEO has argued that ECB policies are “working against the goals of strengthening the economy and making the European banking system safer.” The critical issue is that central banks have been in denial about the changes taking place in demand patterns as a result of ageing populations and falling fertility rates. Their Federal Reserve/US-type forecasting models still assume that raising interest rates will 28 $/tonne $/bbl 7,000 250 reduce demand, and lowering them will release this pent-up demand. But today’s increasing life expectancy and falling fertility rates are completely changing historical demand patterns. We are no longer in a world where the vast majority of the adult population belongs to the wealth creator cohort of those aged 25–54, which dominates consumer spending: Increasing life expectancy means people no longer routinely die around pension age. Instead, a whole New Old generation of people in the low spending, low earning 55+ generation is emerging for the first time in history. The average western baby boomer can now expect to live for another 20 years on reaching the age of 65. Fertility rates in the developed world have fallen by 40 per cent since 1950. They have also been below replacement levels (2.1 babies per woman) for the past 40 years. Inevitably, therefore, this has reduced the relative numbers of those in today’s Wealth Creator cohort, just as the New Old generation is expanding exponentially The Fed/US models are therefore long past their sell-by date. The New Olders already own most of what they need and their incomes decline as they approach retirement. So they have no pent-up demand to release when interest rates are reduced. In fact, they have to save more and spend even less, in order to avoid running out of cash during their unexpectedly extended retirement. A more modern forecasting model, based on these demographic realities, would immediately recognise that demand growth and inflation are therefore likely to be much weaker than in the past. “You cannot print babies” should be the motto hanging on every central bankers’ wall. Unfortunately, it is too late to quickly reverse their demographic myopia. Instead, The Great Unwinding is now set to evolve into The Great Reckoning. Investors, companies and individuals must prepare for heightened levels of volatility, as markets continue their return to being based on the fundamentals of supply and demand, rather than central bank liquidity.