Supercycle buster

The Shenzhen, Shanghai and Hong Kong stock markets are pulling in billions of dollars in IPO offerings for a host of Chinese companies. If the global monetary base begins to contract under the weight of soaring oil prices and the gathering global credit crisis, many of China’s listed companies will lose market value and stock prices will slip. The Chinese are the world’s great savers, but their savings will be lost. Disposable income inside China will shrink. So will demand for commodities.

The present commodities supercycle will end in a world in which power black-outs are a regular daily occurrence and fuel supplies have been rationed. Only then will sustainable alternative energy sources be considered. Now that China has more than doubled its oil imports compared to the last five years, they are as dependent upon the black liquid as those outside this country.

Minicycles within the supercycle

I see a quick end to the present base metals supercycle. I also see two minicycles before the actual collapse of the present global economic paradigm.

As you can see in the graphic at the beginning of this article oil prices started to rise on schedule with the forecast of deficient oil supply versus demand. The first minicycle will run from October 2007 to April 2008. Prices will skyrocket, plateau sometime around December 2007, stay at their lofty levels for three months, then decline around April 2008.

Using this pricing model, after we come off the “high” prices we will return to oil in the "inexpensive" $90 a barrel price range. China will have greatly reduced factory orders during the high plateau from December 2007 to March 2008. That will trickle down, reducing consumption for all purchasable products within China.

The second minicycle will begin in late September 2008 and repeat the same pattern until April 2009. If depletion forecasts from the Association for the Study of Peak Oil (ASPO) are accurate, after that point the world will be unable to balance supply with the optimum demand needed for sustained economic growth.

During the two minicycles there will be an enormous amount of money made in a short period of time. Prices of commodities and materials of every conceivable type will be at their highest levels ever as oil will also be at its highest price ever. It will last for a short while - and then demand destruction will take its toll worldwide.

An age of insufficiency is beginning. The super-contractionary phase of the world economy is getting underway. Only the economies of the large oil-producing regions of the world will prosper.

As this supercycle slides to a halt, I believe we will begin to think differently. Instead of focusing on consumption and profit, perhaps our mind-set will shift towards conservation, durability and sustainability. If we don’t, it will be because we have not learned from our past.