Rubin and Gartman spar over commodities

By Mark Noble | February 13, 2009 | Last updated on February 13, 2009
6 min read

A discussion panel on oil at the Calgary Petroleum Club can get tense at the best of times, but when the panel consists of two of the most outspoken commodity commentators on the continent, sparks may fly.

Dennis Gartman, a hard-nosed commodity trader and publisher of The Gartman Letter, and Jeff Rubin, the outspoken chief economist for CIBC World Markets, were brought together by Horizons BetaPro, presumably to highlight how radically views can clash on a commodity like oil. Horizons BetaPro offers arguably the most widely traded ETFs in Canada, leveraged bull and bear ETFs that track oil prices.

Gartman and Rubin were not far apart in their near-term oil forecasts. They both see oil prices staying low while the global economy remains in crisis. Where it goes from there, however, is a point of contention.

Rubin forecasts oil to hover as low as $32 a barrel while the global economy starts to recover. That recovery, he says, may come sooner rather than later.

“We cannot have an economic recovery without a change in oil demand. If we’re going to produce more GDP, we’re going to burn more oil. Within the next 12 months, we’re going to see a turnaround,” he declared. “Find a strong enough wind and even pigs can fly. Force-feed a $14 trillion U.S. economy with $2 trillion in stimulus and GDP will respond.

“That’s not macro-economics, that’s arithmetic. What the long-term consequences of that are is open to debate.”

Once the turnaround is underway, Rubin expects oil prices to skyrocket, because there will be less supply in the marketplace. He says many of the newer oil projects will not flow at the current oil prices, and the world will be producing 2 million fewer barrels of oil per day when demand returns.

“Oil is not going to flow at $20 to $40. Oil is not going to flow in the Canadian oil sands. It’s not going to flow in the Oronoco Oil Sands in Venezuela, it’s not going to flow in the deep water fields in the Gulf of Mexico, it’s not going to flow in the deep sea field off Brazil,” he says. “The oil markets that come out of this recession are going to be that much tighter than the markets that led to triple-digit prices. The real legacy on these oil prices will be supply destruction.”

Gartman predicts the price of a barrel of West Texas Intermediate will hover at around $40. He’s unsure how much of a supply crunch there will be, as OPEC countries will have little choice but to keep the taps wide open — oil is their primary income source.

“For a country like Iran, you have to triple the number of barrels sold at $35 [to sustain the same level of income] as you needed at $135,” he says. “As long as there is a market that tells you it has to bid for storage. As long as there is excess supply out there and it shows up in the term structure. As long as that contango continues, I can’t be bullish on the crude oil market. That doesn’t mean I’m bearish.”

Rubin took the view that the supply situation would have been a fundamental reason for speculators to run up the price of oil to a high of $147 a barrel, at which point speculation became “its own worst enemy” and the global economy ground to a halt.

“The same factors that drew speculators into the market in 2007 and 2008 are going to bring them back in 2010. What did they see in 2007 and 2008, when oil was a one-way bet? They saw a succession of world record oil prices not lifting a single [additional] barrel of oil out of the ground,” he says. “Four of the last five global recessions were caused by — guess what — not Cleveland housing prices, but oil. Oil has been its own worst enemy. What $147-oil gave us was the same thing the 1973 and 1980 oil shocks gave us — a huge, deep oil recession.”

Gartman argued that too many institutional investors got into commodities in general as long-only play. He recounted that he had to fight the growing belief that commodities were a long-term asset class.

“Commodities ain’t no asset class. Stocks are an asset class; bonds are an asset class; commercial property may well be an asset class. Commodities are simply commodities,” he says. “Bunch of yahoos bought into it. They bought long the commodity market and they owned it in size. They had no idea what they were buying.”

Gartman says the run-up by institutional investors is a big reason why the Harvard Endowment Fund — a big proponent of adding commodities as a separate asset class to a portfolio — is down 48%. He says they didn’t just buy huge positions in crude oil; they bought everything from massive positions in spring wheat to livestock.

There were fundamental supply issues in commodities, Gartman said, but the proof that speculation — particularly by institutional players — was behind the run-up could be observed when all commodities peaked and then crashed in a matter of days in early July. All commodities seem to have reached astronomical growth on par with crude oil.

For example, during the same period that crude oil peaked at $147 from $50, the price of spring wheat rose from $3 to $25, hard red wheat tripled from $4 to $12, and soybeans more than tripled from $4 to $15. Like crude oil, all these commodities had tight supply-versus-demand at their peaks.

“I think speculators were a huge reason for the run-up. Every pension fund and endowment got into a very crowded space, and now they’re saying ‘what are we going to do?’ ” he says. “Do you think all of them have that tight a supply at exactly the same time? They all topped out at what was, at the most, a 72-hour period. Suddenly did supply and demand all shut off at the same time? The answer is no. Clearly the specs were involved and got caught on the wrong side.”

Rubin said the drop-off in oil supply reflected falling demand, given how far the economy has dropped. He believes oil continues to be held at a high price, possibly as a hedge against impending inflation.

“What does it tell you when crude prices are the same price as they were in 2004? To me it tells me — whoa — in 2004, the world economy was growing at 4%. And 2009 is maybe the deepest post-war recession. Why isn’t oil at $10 a barrel; that would be my question,” he said. “People have great doubts about what’s going on in Washington right now, and the ability of the economy to turn things around. There is great uncertainty about whether the stimulus packages will be able to work.”

The debate turned a little nasty when Rubin expanded on that point, to explain why he refuses to hold any government bonds. He believes the 30% to 40% increase in money supply, coupled with a U.S. deficit-to-GDP ratio of roughly 11%, will eventually plunge the U.S. into a serious monetary crisis, like those experienced in the wake of the Vietnam and Korean wars — only this time, worse.

“I’ll tell you, the great head-fake out there is we’re not ‘going sushi’; we’re not going the route of Tokyo. We’re ‘going Argentina.’ That’s where these kinds of money supply growth and fiscal deficits lead,” Rubin said.

“That’s just wrong,” Gartman immediately countered. “To think the Federal Reserve are idiots, and they are simply going to allow those reserves to sit in the system, is just wrong.”

The Fed, he said, will reduce the money supply once it’s apparent that a recovery is underway.

“To think they won’t respond and bring the reserves back out once the economy turns out is illogical,” he says. “The largest position I have, and I have two major accounts that are my own accounts, retirement funds, are long-term treasury stripped government securities and Canadian stripped government securities. And let me think, that felt pretty damn good last year. I’m going to continue to buy more government stripped securities.”

Gartman suggested that the views of inflationists are actually an investment opportunity, which is why he owns gold. He invests in trends, and says gold is on an upward trend due to inflation fears.

“I’m not a gold bug. I don’t think the world is coming to an end. I don’t think you need to own gold, dried food, distilled water and ammunition, and head up to the hills. Most gold bugs I meet remind me of Ted Kaczynski, the Unabomber,” he said. “But I do own a little bit of gold because I understand the inflationists out there really do believe an unforced, undisciplined, preposterous inflation lies ahead. I don’t believe it, but gold has been going that way and as a good trader, I own it.”


Mark Noble