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Global Timber and Forestry Warning of Global Contraction?


If lumber has some predictive power in terms of overall economic growth, the recent message seems to suggest a period of real weakness is close at hand.

Lumber is always an interesting commodity to watch. Whether we understand or appreciate it fully, wood is used in nearly everything around us. When the global economy is expected to grow, lumber prices should go up as demand for building increases. Take a look at an index that tracks the price of lumber directly below.

Notice the significant decline that occurred at the start of April this year. The steepness of the decline is quite similar to mid-April/May of last year, as the Flash Crash occurred and concerns over Greece became front-page news. As a gauge of fear, then, it does appear as though lumber prices are warning us of something major to come. As far as the equity side, take a look below at the price ratio of the iShares S&P Global Timber and Forestry Index Fund (WOOD) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/WOOD is outperforming (up more/down less) the denominator (IVV).

Clearly equity investors in anything Timer/Forestry-related have been shunning the industry, and in what appears to be a fairly substantial way. The bottom line is that if lumber does indeed have some predictive power in terms of overall economic growth, the recent message does seem to suggest a period of real weakness is close at hand. The bond market seems to confirm that given that yields are going lower even as the Fed ends it quantitative easing (QE) program. Either way, volatility in the equity markets is back, and back with a vengeance.
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No positions in stocks mentioned.

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