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Cycles of commodities -vs- stocks, 110 years



March 12, 2011 – Comments (26)

I wrote a blog about an article published by stifel long ago, here.  I recently commented on the same article and posted a picture in "the long view" here.  That basic concept:  that long equity bull markets tend to occur in periods of commodity disinflation.  I think that the paper mentioned and the basic concept are relevant here for a variety of things including

A)  possibly acting as a "all clear" for the onset of the next secular bull market

B)  understanding where we are at in this great commodity inflation cycle

Here's the pic:  


We see 4 periods where stocks outperform commodities, and 4 periods where commodities outperform stocks.  We see that over time stocks outperform (I am assuming this chart does not include reinvested dividends, and I am sure it doesn't count any carrying costs for commodities, so the actual outperformance of stocks over time would be much more.)

We see that each period of outperformance is fairly dramatic, with either stocks or commodities moving up relative to the other not by a percentage, butby a multiple.   The periods are these:

~1877-1902:  stocks move up relative to commodities by about 4.2 times

1902-1920:  commodities move up relative to stocks by about 4.5 times

1920-1929:  stocks move up relative to commodities by about 6.3 times

1930-1948:  commodities win by 3 times or so

1948-1970ish:  stocks win by 5.6 times

1970's:  commodities win by 2.5 times

1980-2000:  stocks win huge, outpacing commodities by 17 times to the top of the Nasdaq bubble

2000-current:  commodities have won so far by 3.5 times

Some notes:  Quite literally the "triple your money question", as I blogged last February, remains where are we in the commodity inflation cycle. 

Severity of the current cycle:  The current cycle is already fairly dramatic, being the most severe such cycle we have had except the 1902-1920 cycle, which included a world war and what not.  So historically, there isn't a whole lot of precedent for it becoming more dramatic.  The counterpoint to that is that the outperformance of stocks we just had, and the valuation of those stocks at the top, was a true extreme, and so a greater dip of commodities relative to stocks may be justified based simply on the extreme equity valuations in 2000.

Age of the current cycle:  Beyond that, this commodity cycle is already quite "old" as well.  The 1902-1920 cycle could, arguably, be described as a 1910-1920 cycle (as the 8 years from 1902-1910 didn't really see commodity outperformance), making it 10 years of severe commodity outperformance.  The Great Depression/WW2 cycle is also a complicated one.  We had deflation BUT such dramatic drops in stock prices at the beginning that commodities won.  Then we had stocks outperform fairly significantly until the onset of WW2 where presumably high demand for commodities + panic led to commodities significantly outperforming.  The 70s,it could be argued, saw all of the commodity outperformance in 2 years flat.  And that leaves the current cycle as already the longest, arguably, that we have seen.  It would fit fairly wel with history if we bounced along the bottm for a while.  That may be a sign that its wearing out - if it starts bouncing along the bottom of this chart, presuming we can make or Stifel offers an extended version of the chart.  

So the current cycle is already "old" and "severe", it would seem.  That doesn't mean its over, and doesn't mean it can't get more old and more severe... But it probably does mean that we are out of "value" territory and into "momentum" territory with commodities, a view I would absolutely agree with. 

Take another look at that pic, this time with pretty trend lines. 


That doesn't make it look like commodities have topped.  

I found another such chart, incidentally from an article by the same authors, that tells the same story but looks drastically different when you draw pretty trend lines on it.  (I say things in silly ways sometimes, like "pretty trend lines", because thats alot cooler than writing everything all seeking-alpha where its "oh, so, serious!" like you're trying to get a job writing about this stuff somewhere)


Macro:  I know the macro guys love the commodity story right now, for the most part, but there are some ill forebodings for commods out there.  Chinas real estate bubble, world debt (a bipolar boding, is this, as the debt itself is deflationary, but money printing to address it, should it occur, isn't).   Lack of wage growth in the developed world does not support dramatic commodity increases, as they (commod increases) would eventually lead to recession, which would lead to commodity prices falling, etc.  I stand by my basic argument that the prospect of hyperinflation is nil, the prospect of significant runaway inflation is low for the reasons given above, and a type of combat between blood thirsty monentum fueled commodity speculation, emerging market demand, and the deflationary realities that exist here and there is the most likely outcome.  Flopping between periods of commod inflation and commod deflation, with runaway headline inflation nowhere in sight.  Flopflation, if you please.  

To conclude:  I know people love conclusions and predictions, both when writing and reading, but there really isn't one to be drawn here.  If a case could be made that the trendlines have meaning, then I cannot conclude anything as the two charts, generated by the same authors tell such different stories.  It cannot be denied that this commodity cycle is already large and long by historical stanards.

The answer to this question:  "where are we in the commodity inflation cycle" is the most valuable one you could have aside from seeing a chart for the S&P over the next 5 years or something.  Thats how the big bucks will be made, and lost.  Getting the end of this commodity inflation cycle right.   

I wish I knew which of the charts above was right.  For while they tell teh same story, the same really important story - commodities and stocks take turns outperforming with stocks winning substantially over time - they tell it somewhat differently.  If I had to bet, I'd bet on the smaller, blurrier chart from 2002.  That we're much nearer to the end of the commodity cycle than the beginning, in magnitude.  I don't doubt that we linger around the bottom for several more years, however.

As always, I start my posts without planning and write them, I made all these pics as I typed this, hoping to come to a conclusion.  Conflicting charts make one ... challenging.  





26 Comments – Post Your Own

#1) On March 12, 2011 at 3:48 AM, checklist34 (98.57) wrote:

Can anybody explain to me why I can post pictures from photobucket in replies, but not in the original post?  That is beyond odd.

here are the 3 pics, in order:




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#2) On March 12, 2011 at 3:59 AM, checklist34 (98.57) wrote:

On a side note, in my view, the market is in no mans land right now. Its not expensive, its not cheap, I'd say its roughly fairly valued.  Its had this huge run, but its still down over the last 11 years. 

I wouldn't get all bearish on it by ANY means, but I'm not feeling the urge to go buy a bunch of stuff at all.  

And, my portfolio is still stacked with financials bought mostly in march 2009, and which I am up on enough so as to take literally a 20% penalty if I sold them all out.   So my plan is to hedge the financial holdings, hopefully in a clever manner, and just go (as they say on another site) eat a sandwich.  A really big sandwich that takes several months.  ...

Unless we get a meaningful dip.  I have no interest in buying anything unless we see an actually meaningful dip.  And I won't do it.  And in general, I wouldn't mind just being out of the market for awhile anyway, because... lets face it, this isn't Q1 2009, and there is NOTHING that cheap out there, or even close. 

So its sandwich time.

But first I'm leaving for the desert Sunday, bat country, for a big old birthday bash and all, and there's always a chance that this will be the time those bats finally get me.  

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#3) On March 12, 2011 at 4:10 AM, portefeuille (98.93) wrote:






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#4) On March 12, 2011 at 4:29 AM, checklist34 (98.57) wrote:

thanks porte

you know, the smaller, blurrier chart of commodities to stocks looks more realistic to me.  It seems from what I know about the 70s like commods must have outperformed in the latter half of that decade.  That chart shows that, the other one doesn't. 

maybe we are near the bottom of that channel after all.

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#5) On March 12, 2011 at 8:46 AM, binve (< 20) wrote:


I haven't read the entire post yet, but we have talked about this before and I will likely agree with it mostly if not completley. I really think this is an excellent cycles observation. I really like how how this theory plays out: periods of of economic outperformance where a premium gets placed on growth and innovation (which inevitably gets too far ahead of itself) and then a pullback and emphasis place on real assets (which gets too far ahed of itself) which leads to another growth cycle.

Regarding the images:

The problem is (and I have no idea why this is the case) the Caps blog form does not allow you to combine an image (img tag) within a link (a tag) within the main post body ... but it does in the post comments.

The easiest way is to just do a img tag seperately and a link tag separately for the enlarged version. I put up a tutorial years ago and floated it around in some comments (like here): Step 5 is the one you are interested in.

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#6) On March 12, 2011 at 1:34 PM, checklist34 (98.57) wrote:

ok, I will try that.  

The key here, and why I thought my hour or two of digging was dissapointing, Binv, is that its tough to say which chart is more correct.  Same author, etc., but the trendliens just done work the same. 

oh well, gun to my head, I'd bet that the commodity inflation cycle is closer to a peak than not.  

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#7) On March 12, 2011 at 2:43 PM, Valyooo (34.75) wrote:

From Griffin 

Using the fed model, the Dow should be trading at 23,000...that is 11,000 points worth of fear priced in, hehe. Or quite simply the risk/ reward for investing in stocks versus treasuries is enormously high.

By the way, if you notice in this link the Dow earnings are almost back to their peak in 2007, yet the stocks are still far from their peak. and economically there is a HUGE amount of upside left to go.

 The natural p/e for the S&P is somewhere between 17 and 19, trading at 13-14 means a heck of a lot of unemployment/ inflation fears are priced in.

The implications are that stocks are still cheap as a whole.


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#8) On March 12, 2011 at 2:53 PM, rexlove (99.69) wrote:

Nice post. I tend to have more faith in the trend charts so in this case I'm think we are either having commodity prices go way up or stock prices way down or some combination of both. I recently picked up some silver stocks but after seeing this chart I wonder if I shouldnt buy some more.

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#9) On March 12, 2011 at 3:43 PM, checklist34 (98.57) wrote:


    No debate for your points, they are good.  

    I'll add a bullish argument:  the last time the fed model was super bullish was at the onset of the late 40s to late 60s bull market.  I have some data on that somewhere or other.  

    if interested, i tried to tackle this subject semi independently a cuople of times:

    If we are in a secular bull market, stocks are chepa.  If we're in a secular bear still, however, they really aren't.  And as far as I can assess, they are roughly fair valued in terms of p/b, p/s, p/cf, and so forth.  

    I'm just agnostic about valuations and market direction here, hence my disinterest.

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#10) On March 12, 2011 at 3:44 PM, checklist34 (98.57) wrote:


    I like the trendline charts too, but before you use the one chart to justify buying more commodities,

     you must note that the other chart shows us at the bottom of the channel.  Right near the bottom of the channel.

    so the question becomes, before any conclusion can be drawn, which chart is accurate?

     and, fascinatingly, both charts are by the same authors.

I'm trying to get to the bottom fo which chart is more reliable, but I got nothing.



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#11) On March 12, 2011 at 3:49 PM, dwot (28.95) wrote:

I think in favor of prices going up is "natural" inflation.  Historically commodity prices have declined relative to costs overall because of technological advances.  I think cost savings from technological advances will be small relative to the past because technology is extremely mature at this point.  You'd need something truly revolutionary to cause commodity price declines at this point.

What I think is also in favor of prices going up is that easier to access commodities have been found and mined, so overall the cost of extracting commodities has to increase.  There still could be amazing finds, and companies that make those finds would be where to invest...

What would make prices decline is the degree of over building that currently exists.  I think there is over building in housing and in business and this reduces overall demand.

I'd agree that currently the commodity bull run is fairly mature.

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#12) On March 12, 2011 at 3:59 PM, checklist34 (98.57) wrote:;jsessionid=abc2umFPtp6A05_cu0R6s?symbol=CI+A0&chartMinutes=&chartAggregation=M

chart of the continuous commodities index.^GSPC+Interactive#chart5:symbol=^gspc;range=19940701,20110311;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on

hopefully thats a chart of the S&P over about teh same timeframe

August 1994:  CCI=~235, S&P=~ 465.  ratio = ~2

Jan 1995:  CCI=~235, S&P=~470.  rateo=~2

June 99:  CCI=~190, S&P=~1330.  ratio =~~7

recent:  S&P=~1300, CCI=~670, ratio = ~2

drop in ratio =~3.5, as shown in the pic above

rise in the ratio from 1995-2010 = flat.  

drawing a straight line over from 1995 to 2011 puts us about in the middle/bottom of the channel on the top chart and near the bottom fo teh channel on the lower chart.

I am afraid that there is just some discrepancy here and the best way to go about it would be independent analysis, which I don't know how to do right now.  lol

when I get mycomputer back from a pack of grade schoolers I'll post up the authorsthoughts on the matter.


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#13) On March 12, 2011 at 4:07 PM, checklist34 (98.57) wrote:

dwot, I love those thoughts, thanks for stopping by.

I am a bull on humanities ability to invent new stuff...  We are, after all, creators of things like Einstein, Edison, Jobs, Ford, Wright, and all the others. 

Its a valdi point no doubt about resources easiest to get being to some (maybe large) extent "gotten", but ...

The author of that paper authors that once up, commodity prices don't so much tend to trend down as to plateau.  It could reasonably be said that its not commodity deflation, but commodity deflation relative to GDP that leads to the periods where stocks outperform. 

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#14) On March 12, 2011 at 6:13 PM, rexlove (99.69) wrote:

"you must note that the other chart shows us at the bottom of the channel.  Right near the bottom of the channel."


Yes - but that chart only goes back to 98. You cant draw much conclusions from the ratio chart since it occurs during the time period when stocks underperformed commodities. Why assume 2 as the bottom of the channel? Why not 1 or .25?  To me the ratio chart is still trending down.

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#15) On March 12, 2011 at 6:19 PM, rexlove (99.69) wrote:

"you must note that the other chart shows us at the bottom of the channel.  Right near the bottom of the channel."


Yes - but that chart only goes back to 98. You cant draw much conclusions from the ratio chart since it occurs during the time period when stocks underperformed commodities. Why assume 2 as the bottom of the channel? Why not 1 or .25?  To me the ratio chart is still trending down.

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#16) On March 12, 2011 at 8:39 PM, checklist34 (98.57) wrote:


    the second chart is also 130 years +

    same timeframe as the first.  In the second post its the 3rd picture from the top.  It ends about 10 years ago, and applying data from then until now we get to a point rather close to the bottom of that trendline channel.  

     it is a long term chart, same data as the other, same authors of the article it was found in.  

     therefore it is difficult to conclusively conclude, from these charts, where we are in that channel we both like.

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#17) On March 12, 2011 at 9:08 PM, HarryCaraysGhost (88.03) wrote:

Hey man,

You seem down, maybe this will cheer you up-

YouTube - McDonald's - Filet-o-FishA McDonald's Filet-o-Fish - CachedI


gaurantee you will be singing that stupid song in your head for at least the next two days ; )

Also you seem a bit anxious for the next buying opportunitty, which I fully understand. All I can say is... wait for it.


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#18) On March 12, 2011 at 9:29 PM, HarryCaraysGhost (88.03) wrote:

Sorry wrong link. This should be right-

I guess the point I was getting at was- yes stocks seem either fairly valued or expensive at this point. So all I can do is pick a commodity trade, or find a really excelant company at a cheap price.

2012 looks to be the buy year in my charts.

Double Cheers.

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#19) On March 12, 2011 at 10:24 PM, checklist34 (98.57) wrote:

I don't konw how I could seem down?  I'm happier than a pig in stink.  But thanks

I don't know if buying commodities because stocks ar etoo expensive right now makes sense, I think commodities are probably more "expensive", or at minimum equally.  

I am anxious to buy, mostly because I have a theory I want to test.  I am sure I will remain anxious to buy, because I have a theory I want to test, for awhile.  oh well, ...  

But, now that you mention it, this is a somewhat boring "lab" in that you can't just sit up all night and experiment, because you can't create the conditions you wish for, you just have to wait for them.  Good thought.

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#20) On March 12, 2011 at 10:37 PM, AvianFlu (< 20) wrote:

What an excellent topic! This is a real gray area since there are so many variables to consider.

There is one key factor that I haven't seen discussed yet. Shortages lead to higher prices. Actions of the federal government are artificially creating shortages. For example, restrictions of land usage are reducing the production of certain energy and agricultural commodities. Thus, I would expect those to increase in price.

Also, consider how depressed commodity prices were before they starting trending upwards. Yes, they have increased a lot but given how low they were when they started there is probably room to keep moving up.

We disagree on whether inflation is in the cards. There are scores of case histories showing a clear relation between "printing money" and inflation. The inflation we are currently experiencing is a direct result of the first QE. The time lag between bouts of printing and inflation showing up is typically 24 months, plus or minus. So the current inflation represents the results of the early phase of the first QE program. Since they did plenty of QE after the early phase we can expect the inflation to continue and intensify. Except to say that there is currently no inflation at all (source: the federal government). That was a joke. Result: higher commodity prices since it will take a larger quantity of increasing less valuable dollars to buy the same amount of any given commodity. However, once you adjust for inflation you may find they didn't really go up much.

People always get tripped up by predicting time frames. So I'm going to be extremely vague and predict "a few more years" of commodity price increases.

Disclosure: Long RJA and RJI. Do not own US stocks or any bonds, in general.

Final thought: having lived through the 1970s I think it will be wise to get out of commodities fast when the time is right, since they can drop with startling speed.

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#21) On March 12, 2011 at 10:48 PM, whereaminow (< 20) wrote:

On a side note, in my view, the market is in no mans land right now.

So are the paper currencies. 

Its not expensive, its not cheap, I'd say its roughly fairly value

There's no way to value it. Objective pricing has been so severely distorted that economic calculation is falling apart.

The charts are great. The ideas are well thought out. The post is excellent.

But there is a little matter of economic calculation. It helped check the excesses of the swings from one side to the other in the commodity-stock history. Somewhere, ultimately, some currency could be measured against something real.

Not no more. Both stocks and commodities are infinitely undervalued against something with no worth. 

I pointed out in a blog late 2009 that none of the CAPS gurus predicted both the rise in gold and stocks from their troughs. That rise continues. Both commodities and stocks continue to rise because there is no relationship anymore between their value and the value of paper money.

This is why I am the biggest bull on CAPS 

This was meant to be a one-liner reply, but I got rolling. Sorry. 

David in Qatar 

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#22) On March 13, 2011 at 12:03 AM, FleaBagger (27.51) wrote:

Maybe I'm just exposing my idiocy, but I don't see how any chart shows us nearing the end of the cycle or at the extreme of its severity. We're still way above the bottom trend line for the stock/commodity price ratio. We should see a further decline before stocks rise versus commodities.

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#23) On March 13, 2011 at 3:19 AM, checklist34 (98.57) wrote:

Flea, again, only in one of the two charts.  In the other we are right down at the lower line of the long term channel. 

I apologize to all, I don't know how that point, which I tried to make, is missed.  Bad writing I guess. 

The question becomes which chart, etc., as mentioned above. 

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#24) On March 13, 2011 at 3:24 AM, checklist34 (98.57) wrote:


    As stocks and commodities are denoted in fiat currencies...  the correlation should (or at least could) still hold regardless of the depreciation of a currency against one or both it seems?  

    I sorta kidna expect the other long term trendlines to eventually prove reliable also.

    I fear, of course, the reality that "long term" could be agonizing to anybody before it gets here and he/she could say "there, it all worked out", lol.

    thanks for the comments

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#25) On March 13, 2011 at 3:34 AM, checklist34 (98.57) wrote:


    I have never and would never dispute that actual money printing would cause inflation.  

    I have and would dispute that its occuring in anything like the form commonly described and observe that the broadest measures of money supply are dropping, not rising.  And I note that some catalysts for commodity demand decline are present in the world.

     The author of the paper(s) from which the graphs above were taken estimated in 2002 (the first paper) that the cycle would last until 2015.  I don't konw what their current views are, exactly.  


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#26) On March 13, 2011 at 10:41 AM, binve (< 20) wrote:


Here are a few more thoughts. All commodities tend to have a violent parabolic run up to the ends of their cycles. Sometimes it is only a 100% run up, sometimes >300%, but the main move tends to happen at the end and in a short period of time. (as evidenced on this long term real oil price chart, which oil is the biggest and most visible component of the CRB and most commodity baskets: this chart from here:

Here is my take on some channels for the most recent cycle.


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