Although I have been trading in very short timeframes as of late, I like to keep an eye on the bigger picture as a sort of ballast to my approach in the markets. Lately, there has been a tremendous amount of debate and discussion on the collapse of bellwether commodities, such as copper, and what it means downstream for the economy and the stock market.
You may hear the old market axiom, "Every bull market has a copper top," used by various pundits in the financial media. And while there have been enough occasions for that dynamic to ring true, a broader perspective toward the long-term commodity cycle should be introduced in the discussion for greater context.
I believe we are now on the back side of one of, if not the greatest commodity super cycles the world economy has absorbed. The ramifications of this for the global economy will be far-reaching -- from the cheaper input costs in manufacturing and shipping goods to the considerable benefits of cheaper energy for the average consumer.
I spoke tangentially to these points in my note, The Usual Suspects
, in August:
Our economy through tremendous gains in productivity (and accounting) has transitioned to profitability at such a historically high petroleum and commodity cost multiplier, that by dialing energy and commodity prices lower here through the relative tightening (no additional QE) of monetary policy could in fact provide the most comprehensive stimulus to the economy and the consumer -- just when the Fed was perceived to have no additional rounds left in the chamber. To think that even five years ago before the financial crisis hit, the US economy would be able to maintain the degree of profitability it has exhibited today (with over 9% unemployment, a 12% output gap and -- until last week -- $100 oil) would have been perceived as pure academic fiction. No economist in their right mind would have believed that these economic conditions could have produce such results.
Certainly, it will not come without the perceived negative effects to those emerging economies that have, up until this year, led the global markets -- and have benefited disproportionately from the booming commodity trade.
However, that has historically always been the case with emerging markets. Those that have managed the profit windfalls responsibly, and have found a foothold on the global stage, will transition to a more developed economy.
But for the sake of argument and clarity, I created the chart below from a historical chart of the Dow
and the excellent long-term commodity chart created by Hackett Financial. I did not scale the components to each other for the basic reason that its utility is to simply convey what directional relationships between the two asset classes develop after the commodity cycle peaks.
As evident in the last two occasions where the commodity cycle has peaked, the stock market has initially followed commodities lower for only a spell, before breaking out of the long-term trading range it was confined to. This makes rational sense, in that investment capital that was riding the commodity boom will eventually make its way over to the market that had been underperforming on a relative basis.Click to enlarge
(See also Institutional Participation Disruptive to Market Equilibrium
and Staying Above Support Levels Key to Market's Short Term Success
)Editor's Note: This article was originally posted on Market Anthropology.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.