Over the weekend, I read an intriguing article from Reuters.
Titled ‘Western economies rediscover meaning of scarcity’, this piece was written by financial historian Edward Chancellor. The article provides a fantastic insight into what we all came to expect from markets in the pre-COVID era and how they’ve changed since.
As Chancellor comments:
‘Economics used to be defined as the study of the distribution of scarce resources. The word, deriving from ancient Greek and Latin, originally signified the management of household affairs. In modern usage, to economise means to use sparingly. Yet in recent years, we have acted as if there were few economic constraints.
‘Several factors, real and financial, created the impression that economic resources were boundless.’
The 2010s were underscored by this very ideology of limitless growth spurred by limitless resources. Money, materials, and labour were all cheap and plentiful — a fact that has been especially true in Australia with our inflated property market, historic mining booms, and mass immigration.
Our nation thrived in the ‘limitless’ era, and many of us have prospered because of it.
But now, things are different.
2022 has reminded the world about what it had forgotten…
Scarcity is what the economy is really built upon.
A matter of supply and demand
It has been fascinating to watch as markets adapt to our new paradigm. At the same time, it has been brutal for investors.
The shift from the speculative frenzy of the pandemic years to more defensive and value-oriented companies has caught many off guard. I include myself in that distinction, too, because even I didn’t expect it to be this brutal.
It has been a few years since we’ve had such a drawn-out bear market like this one. And while we owe a lot of the ongoing pain to inflation and interest rates, scarcity is quite possibly the bigger long-term threat.
Central bankers, after all, are trying to fight demand. But there is plenty of evidence to suggest that inflation is being spurred by supply instead. Here is how an article from Forbes last month describes the situation:
‘Economists are beginning to speak of “immaculate disinflation.” This new concept argues that when inflation is caused by supply chain issues — like demand/supply mismatches, difficulty in securing products from China, port problems, energy inflation caused by a war in the Ukraine, and so forth — the Federal Reserve does not have to do anything to bring the inflation rate down; inflation will decrease by itself when the supply issues are resolved — as they inevitably are over time.’
This is the silver lining, so to speak, in our current market malaise.
It is hoped that inflation will simply resolve itself. And while I do think some supply issues will be fixed in time, not all will be…
Some materials, for example, are seeing increased pressure in both demand and supply. And this isn’t just because we don’t have enough container ships currently to deliver it all. They are, simply put, a fundamentally scarce resource.
Copper concerns
The best example of the kind of circumstances I’m describing can be seen in copper.
This humble base metal has long been a key component in many goods. As with many commodities, though, the pandemic has seen a dramatic shift in the market for copper.
S&P Global notes that underinvestment in new mines is a growing problem:
‘Mining company executives’ preference for safe, short-term returns has led to a massive underinvestment in new copper mines and exploration, jeopardizing the metal-intensive energy transition.’
This will naturally place price pressure on the metal as global output slows.
At the same time, demand is only increasing too. Take a look at these estimates from Wood Mackenzie for long-term copper consumption:
|
|
| Source: Wood Mackenzie |
The chart shows that by 2050, there will be a 62% gap between supply and demand. This is because copper, like many metals, is becoming increasingly important for the transition to renewable energy.
Because of this, copper is likely to become increasingly scarce.
More importantly, for investors, it is also likely to increase in price. Maybe not in the short term, as traders continue to focus on inflation woes, but almost certainly in the long term.
Tune in tomorrow for more details on how to navigate these turbulent times.
Because in an era of resurgent scarcity, investors can still find ways to bank big profits…
Regards,
 |
Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
