George Soros was a hedge fund manager who made $1 billion on a single trade. That’s when the world started paying attention to him.
Soros popularized the term “reflexivity.”
Reflexivity is defined as a positive feedback loop in finance. Investors’ beliefs in what should happen make it happen … and it reinforces their beliefs once it does.
Soros said the concept provided him with context for his investment decisions. It helped him identify market bubbles and exploit price discrepancies.
I agree. Reflexivity is a great way to size up price action.
And it explains how a hated industry, such as the steel industry, could turn into a profit machine in the coming months and years.
Steel Prices’ Backdrop
Watch my video below to learn more about how you can profit from the materials sector.
I want you to see how reflexivity can push prices to extremes … and back again.
But first, you need to understand the economic backdrop for steel prices.
Economic expansion weighed on the steel industry, beginning in 2011. That may sound counterintuitive, so let me explain…
The global economy rebounded after the 2008 financial crisis.
Investors favored growth-sensitive sectors such as information technology, real estate and financials as the economy expanded.
But they shunned the materials sector.
The economic cycle and natural market forces changed investors’ appetite. This caused the VanEck Vectors Steel exchange-traded fund (ETF) to fall 78% from 2011 to 2016.
After a short-lived revival, reflexivity is now adding to the pain.
Investors saw the U.S. trade war with China as reason to abandon stocks in inflation-sensitive industries.
Several ETFs that track resource and materials stocks lost 20% or more of their value last year.
Steel included.
The World Steel Association estimates China both produces and consumes half of total global steel production! And the country is the largest single exporter of steel products.
Investors believe the trade war is a threat to China’s economy and its steelmaking industry. They were sure that steelmakers’ prices would fall. And they did.
Steelmakers’ shares fell hard in May … and most of 2018.
But remember reflexivity…
Investors’ perceptions drove steel shares back to an extreme low this year. Trade war or not, the price for these companies is now detached from economic reality.
For this reason, things are set to change.
Reflexivity Will Push Steel Prices Higher
Investors shouldn’t expect steel shares to go much lower, because inflation is lurking.
Inflation rose a little bit this year and sporadically over the previous three years.
But investors aren’t worried about it at all.
And they’re in for a surprise.
We’re approaching a phase of the economic cycle that’s inflationary.
As it turns out, iron ore is the chief natural resource used in steelmaking.
Iron ore prices just rose to a level not seen since 2014.
China imports 68% of all iron ore shipped around the world.
Chinese steelmakers are producing a record amount of steel. Their demand for iron ore is helping to drive prices higher.
Take a look at the chart below:
An inflationary backdrop like this will support steel and materials prices.
When prices begin to rise, it will help change investor perceptions and appetites.
SLX ETF: Take Advantage of the Coming Surge
It’s time we start preparing for how a little inflation can lead investors to change the way they feel about the market.
Investors may be avoiding the steel industry today, but we shouldn’t.
Now is a great opportunity for us to capitalize when inflation creeps higher and reflexivity produces a new appetite for steel stocks.
Consider the VanEck Vectors Steel ETF (NYSE: SLX).
The ETF tracks an index of iron ore and steel companies. Its top holdings include Rio Tinto PLC ADR, Vale SA ADR, Reliance Steel & Aluminum Co. and Allegheny Technologies Inc.
SLX is poised to climb 18% or more in the coming months … and as much as 87% in the years ahead.
Good investing,
John Ross
Senior Analyst, Banyan Hill Publishing