Minyan Mailbag - Is there a commodities bull market?
By Todd Harrison Oct 29, 2004 12:16 pm
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Is there a commodities bull market?
Are commodities signaling inflation?
For starters let's take a look at the weekly and monthly commodities index, $CRB.
The weekly $CRB looks like compelling evidence of a commodities bull market but is it really?
The monthly $CRB looks bullish too, but not as much. We are above the trend line however, which is somewhere between 240-260.
Does that make a commodities bull market?
Let's break out some components to see why.
OK going all the way back to 1990 are any of those are showing us inflation?
Are any of those showing us a commodities bull market or even hinting at it?
Could it be that the 17% energy component is single handedly making the entire index look bullish?
Let's take a look.
What a difference.
Those two charts account for most all of the rise in the CRB on about any timeframe you look at.
Let's look at a couple more however.
OK so copper and gold contribute but note that gold is just now back to where it was in 1990. All it has really done is correct back the overshoot to the downside.
Copper is interesting as well. But... is copper a function of inflation or is it a function of depressed investment because of poor prices for years? We now see some demand from China causing a spike with new mines a year or so away from production, and we also hear screams of inflation. Is it REALLY inflation, or is it an overshoot to the upside because of stupid investment in chip factories instead of copper mines over the last five years?
Let's turn back to energy. How much of that rise is due to "inflation" vs. peak oil and geopolitical concerns? I am not sure there is an answer to that question but if much of it is due to peak oil, especially at a time of increased worldwide demand then what does "inflation" have to do with it? IMO not much, if it really is a peak oil function. The next question of relevance is this: Regardless of the reason, is the rise in energy costs inflationary or deflationary looking forward from here? This has been debated on Minyanville before and I am not going to rehash all of the old arguments. I will present a new one however. The U.S., UK, Europe, and Japan have all recently revised 2005 GDP down as a result of increased oil prices. What does that tell you? Steve Roach has a 40% chance of an oil shock recession. Given stagnant wages and poor job growth with less consumer discretionary spending, put me in the camp that says this is deflationary. As for: Are we in a commodities bull market? Outside of energy and precious metals perhaps, the individual charts sure do not look like it to me.
Minyan Mike Shedlock
No positions in stocks mentioned.
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