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Nifty pictures of stocks and commodities, take 3: the latest



March 29, 2011 – Comments (12)

I have the latest research from the same fella's that put out the other commodities -vs- stocks commentary I posted last time.  The last post had 2 charts from the same guys that were interesting in that they showed the ratio of commodities to stocks in a different position.  One was from 2002, one was from 2009.  I have no idea at all how to reconcile those different views except calculate everything myself, which would be quite a task.  Fortunately, a new paper is out and we can take a look at what it offers.

An enormous challenge facing investors is the availability of information (and opinions).  The challenge isn't that we have a hard time finding information, its that so much information exists that it can easily overload us.  In his 90's book on contrarian investing, David Dreman presented a study that showed the accuracy of peoples predictions based on how many pieces of information they were given with which to predict, and also their confidence.  The more information they got, the more confident they became in their assessments, but accuracy peaked at a very small amount of information.  More info made people less likely to conclude correctly, after a point.  

And therein lies a big challenge, and the reason why many different investing styles can win and do very well, but "collective" investing attempts are likely to fail.   Take 20 good CAPs players or, better, 20 people who made alot of money investing in real life, and give them each 5% of a portfolio to manage.  How likely is that portfolio to do really well?  Probably not very likely.  One guy will say "XL's chart is broken, sell it", another guy will say "sweet, XL is down, lets load up" and so forth.  The performance of this "all star collective" will be even worse if you limit each all star to their 1 or 2 or 3 best ideas, probably.  Even the best laid plans of the very brightest minds do frequently go awry.  And that is why, I think, the majority of great hedge funds are one guy with a research team.  Because at the end of the day you have to filter everything back through one mind lest your actions become too random to be effective.  And therein lies a challenge for all of us:  we need to eventually draw our own conclusions if we hope to perform maximally.  

For me, this is relevant, because surfing blogs and reading articles on stocks has sort of become my hobby.  And frankly, I think its clouding my judgement via this process of information overload to some extent.  I think that the next long, secular bull market is likely to begin when stocks decouple from commodities to the upside, and not before, and that is in fact the signal that I think will mark the onset of the next secular bull, the next time to buy and hold stocks of many kinds.  

So, as has been my view for the last year, the literally triple your money question is where are we at in this great commodity bull market?  


12 Comments – Post Your Own

#1) On March 29, 2011 at 1:54 AM, checklist34 (98.39) wrote:

Here are another set of long term charts and graphs, provided again by Stif Nicolaus, via the Bannister and Lintner.  Bannister is noteworthy for predicting, in 2002, an epic commodity bull market that would last until 2015 or so and see prices probably triple in certain things.  He was right, and now he is proving tonot be a permabull, but have a pretty generally balanced outlook.


Exhibit 1:  stocks just had their worst decade in US history, commodities just had their best.  The return in commodities after the other times their 10 year rolling return hit the top of that line has been negative over the next 10 years.  Stocks on the other hand have performed well over the next ten years from any time returns had gotten as low as they had in 2008.  From the march bottoms the 10 year rolling return would have been even worse, I suppose.  Over the 10 years from any point where the market got anywhere near that low for rolling 10 year returns have been good, and frequently they have been stellar (>10% per year or even much more).  This could be used as an argument against guys like Binve and I, who offer that we are likely still in a long secular bear market.  It would be a strong argument against a late decade drop to anywhere near the 2009 lows or, in fact, any drop near them again.  That would be an unprecedented event in American markets. 


Exhibit 2:  commodities rolling 10 and 5 year returns.  They are at all time highs for 10 year returns, and near all time 5 year highs.  There has never been a 10 year period where returns got to the top of that channel and weren't negative over the next 10 years.  There has never been a 5 year period where returns got as high as they are now and didn't go negative over the next 5 years.   For commodities to significantly rally from here and not subsequently correct substantially would be unprecedented in American history.


Exhibit 3:  history of US currency relative value.   I suppose if I say I'm not a gold bull, not a commodity bull, and maybe a dollar bull, I risk getting shot directly in the eye with a pink paintball, while trying to walk home from my favorite restaurant.  But in general what we've seen over the last decade with respect to the dollars trade-weighted value is just a continuation of a long term trend.  It could be argued that in all honesty, nothing that dramatic has happend with the dollar over the last decade. I'll go get a paintball protection kit tomorrow.

Also, US share of world GDP has been trending down for as long as this chart offers data.  This is a good thing, as it means the rest of the world is doing better, which in the long run is not a bad thing for citizens of the US.  The last time we had a big slide it ended with the tech boom, which is quite possibly responsible for the US's share stabilizing for a time (we invented most of that stuff, after all).  Will we lead the world into another great era of something new?  Maybe when we get tired of importing all that oil and finally do someting about it?  


Exhibit 4:  oil prices and US GDP yoy.  This is clearly not bullish for the economy right now as we have obviously just had a surge in oil prices.  The bullish argument would be that alot of the recessions following oil price shocks have had other things associated with them.  In the early 80s we had Volker tightening considerably, in the early 90s we had the unwinding of a big CRE bubble and 5000 savings and loans exploding.  10 years ago we had the tech boom ending and the tech bubble bursting, and in 2008 we had the financial crisis and locking up of world markets.  Thats a valid point to argue against a recession being certain due to spiking oil prices, but its not comforting.  

By and large, I don't think there is much bullish for commodities here.  I have liquidated almost all of my commodity stock positions over the last few months and I'm comfortable with that.  If the S&P carries on to 1500 or 1600 or something, I don't think its going to be on the back of surging energy stocks as I think surging energy prices to justify those stocks surging would lead to economic damage and a non-surging S&P would result from that.  

Look, I am just a broken record about this at this point, and if i'm wrong I'm wrong...  but the worlds economy is not that great, we don't have huge developed world wage growth, we have high developed world unemployment.  If commodities keep surging they could realsiticlly represent a meaningful negative to worldwide economic growth, and could realistically lead to slowing growth and or recessions, which could realistically lead to falling commodity prices.  Throw in the possibility of a huge commodity user - China - quite possibly facing a slowdown in construction which has risen to 70% of its GDP, austerity in Europe, and you have a situation where I think commodity surges will be likely followed by commodity deflation episodes.  Flopflation, not constant dramatic commodity price inflation, remains the most likely outcome in my view.  We also have record levels of "investmentmoney" long more than one commodity right now (gold and oil come to mind, I'm sure the same is true in many others). 

The counter-view is dollar collapse, money printing, and all of those arguments presented plenty of times by others.  Here is my argument against hyperinflation in the US and why I view it as an almost zero probability event:  when in history has this happened in a country with teh worlds largest GDP, worlds highest standard of living,that was the worlds largest manufacturer, that had the worlds most formidable millitary, that had (by at least some measures) a declining money supply?   Thats it.  Keep it simple.

I don't wish anybody harm, but I am not commodity bullish here and if they surge dramatically going forward I think that the biggest money to be made will be well timed and well thought out bets against them, not piling into the wagon as it careens down the hill toward town.  

If you desire "store of value" investments, I think farmland (which is certainly going up in price in recent years, but which differs from commodities in a couple of ways including being able to generate about a 4-5% return via renting it, and being 100% necessary for life.  Many commodities are necessary for life, but, notably, gold isn't).  In my view if you are truly convinced that complete destruction of the dollar is likely, buying a plot of farmland will remain a better choice than buying precious metals.  And if we experience the end of this great commodity run, or a deflationary episode in the future, it is likely to fall less in value than a gigantic basket of commodity futures, and it offers the ability to generate some return for its holder.  Farmland is more likely to give a good return over the next 5-10 years, and less likely to really hurt you if we experience a deflationary episode or the end of this great commodity run.  Long farmland as my single biggest position.  Very little left in the way of long commodity stocks, just a position in ATPG and a completely hedged one in TCK.  Everything else is gone.  

In the next 10 years we will see a public managed farmland REIT.  It will blow up and sell for a huge premium to NAV.  Hows that for a radical prediction?

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#2) On March 29, 2011 at 2:01 AM, checklist34 (98.39) wrote:

I wish everybody well, including myself, but I would just urge commodity bulls to sit back and take a hard rational look absent any hyperbole. And maybe discuss some exit strategies. 

If the S&P goes to 1600, in my view that means commodities have begun to outperform because if they (especially oil) continue to go up as fast or faster than the S&P, it will impact profit margins and the economy, which will impact the S&P.  

So if the market goes up alot from here, in my view, it likely means commodities have stabilized or something, which likely means commodity stocks won't outperform.  

If the market drops in my view that could mean spiking comomdities or dropping commodities (another deflationary episode ala 2008 and 2010).

So, if the market goes up alot from here, in my view, the normal basket of momentum and value stocks are likely to be what outperforms, not commodity stocks.  

My picks for a case where the market goes significantly higher in the next 1-2 years?  Financails and cheap beaten up big cap stocks that still have some growth and stuff. 

My picks for a case where the market goes down significantly sometime soon?  Nothing, I think thats likely to mean a growth scare for the world economy which is likely to mean commodity speculation backs off from its record high levels, which is likely to mean falling commodities and everything else.  It may well mean that precious metals outperform again like last summer.  And bonds.  

And hedges.  I do not think this is a time to be recklessly bullish or aggressively bearish, I still think everything is sort of in a no mans land where no path is abundantly clear.  

I am leaning over the last week to expanding my long positions, reducing cash, and taking a huge hedge.  Aggressively neutral instead of passively neutral.  IF we go way up and I lose on the hedge, I am comfortable my long picks would beat the market enough to make up for it and more.  

If I do something like that I'll post the ideas.  

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#3) On March 29, 2011 at 7:50 AM, MoneyWorksforMe (< 20) wrote:

Seems to me like what you just described was stagflation. Sourced from Wikipedia:

"Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock, such as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable.[5][6][7]

Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,[8] and the government can cause stagnation by excessive regulation of goods markets and labor markets,[9] Either of these factors can cause stagflation. Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.[10]


Take a look at the CRB Index during the late 1970's. This isn't inflation, or deflation. What we have coming is stagflation. 

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#4) On March 29, 2011 at 11:17 AM, checklist34 (98.39) wrote:

MoneyWorks, you are certainly in the majority with that viewpoint, and perhaps history will prove it correct. 

But the period in the 70s had high wage growth (wage growth that decade was as high as the rise in the CPI, and in the 3 years when inflation was highest during that period, wage growth was basically the same as CPI growth).   Also, the period in the 70s did not involve a period of world deleveraging (however substantial that deleveraging ultimately becomes we will have to see), and the period in the 70s did not have a factor akin to what China represents today:  a substantial buyer of many of the worlds commodities (if not the largest buyer of many) that faces a realistic probability of coming to demand substantially less of them (see Chanos's theory on a China slowdown).  There are some not-insignificant deflationary forces at work and potentially at work in the world today, much more so than were at work in the 70s.

Another factor at play is the massive speculative interest in commodities today, all time records for many (except not yet, but close, for gold).  Those wall street types, all hot and bothered over commodities AFTER a record bull market in them, can change their minds and flip on a dime (like last summer or fall of 2008)

So I view the highest probability as being if commodity prices continue to surge from here it leads to an economic slowdown, and for all of the reasons above this leads to dropping commodity prices, not commodity prices continuing to rise or staying where they are.

To clarify when I talk of inflation or deflation in these posts that ponder commodity prices, I speak to the prices of the commodities themselves, as thats what I view as the big question for investors today:  are commodity prices going up more, or are they stabilizing, or dropping, from here, over the next 5ish years.  

thanks for the input

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#5) On March 29, 2011 at 12:15 PM, MoneyWorksforMe (< 20) wrote:


"Also, the period in the 70s did not involve a period of world deleveraging (however substantial that deleveraging ultimately becomes we will have to see), and the period in the 70s did not have a factor akin to what China represents today:  a substantial buyer of many of the worlds commodities (if not the largest buyer of many) that faces a realistic probability of coming to demand substantially less of them (see Chanos's theory on a China slowdown).  There are some not-insignificant deflationary forces at work and potentially at work in the world today, much more so than were at work in the 70s."

While I mentioned the period of the 1970's to back up my argument for stagflation, and rising commodity prices I neglected to mention that I believe there are distinct differences in how will we arrive at higher inflation this time around. We both agree that deflationary forces are everywhere: U.S. housing market, the European debt crisis, high U.S. unemployment, higher commodity prices, possible real estate bubble in China, interest rate hikes outside of the U.S.  --this isn't our point of contention.

Where we disagree is on how we attain high inflation with stagnant wage growth and all of the former deflationary pressures. Admittedly, wages are not growing as they did during the 1970's but this is not the only way a sustainable rise in commodity prices occurs. What is causing inflation in commodites this time around is mostly due to a lack of faith in major fiat currencies and government. This is why the CRB index has been much more highly correlated to global economic policies as oppose to real global GDP growth, and/or an increase in wages. Have a look at the correlation between the fed's balance sheet and the CRB index.

All major currencies have been and will continue to be debased. Investors are buying commodities as a means to store wealth, as Japan, Europe, China and the U.S. continue print money to solve their economic problems and maintain competitive exchange rates.

Add to this the U.S., European, and Japanese debt problem and the growth in the U.S., China and Europe it becomes all too clear why commodities are climbing higher. The U.S. and Europe still have no viable plan to solve their growing debt problems.

What is driving inflation this time around? By comparion, the U.S. national debt was around $1trillion dollars in 1980 vs. $14.3 trillion today. M2 money supply was $1trillion in 1980 vs. $9trillion today. These trends are not linear either, as I'm sure you know. Over the past decade the increases in each have been closer to exponential.

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#6) On March 29, 2011 at 12:51 PM, leohaas (30.08) wrote:

"I would just urge commodity bulls to sit back and take a hard rational look absent any hyperbole..."

Good luck with that one! Otherwise, excellent work (as usual).

On stagflation: it clearly is NOT here. It requires prices and wages go up. Wages are flat; therefore, no stagflation. I'm not saying stagflation cannot happen: it can. We'll just have to wait until one of two events:
1) full employment
2) the majority of workers are unionized again, and the unions are demanding (and getting) raises that keep up with expected inflation.
Which of these two is it that stagflation proponents expect?

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#7) On March 29, 2011 at 10:11 PM, rofgile (98.97) wrote:


 Good post.  Right now I think the most overvalued assets are found in commodities, at least according to historic trends.  The rise of China and much of the rest of the world could challenge these trends, if we are restructuring the world to a different level of demand (and quickly).  However, nothing is free in economics, and every action has a reaction.  At some point, I am expecting the high levels of inflation in China or pollution or civil reforms to strain their growth.  Who knows though?


 More and more, I think it is becoming tricky to invest, since nothing is currently and clearly under-priced without a good reason.  I think it is looking like a good time to start a business or such enterprise rather than to invest.  I wish interest rates would start to rise in the US to get to the next cycles of the recovery.  (Lets stop artificially propping up home prices, loans, etc).

 (I am conservatively selling stock still, but will hold a couple of key investments (banks, wind power, solar?, construction)). 


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#8) On March 29, 2011 at 10:20 PM, Option1307 (30.65) wrote:

Holy geez those are some amazing charts!

I'm running out of "blog of the year" awards checklist, so you think you could tone down the greatness of your blogs please? Thanks ;)

This such have way more than the pathetic 14 recs it currently has, come on Fools! This is an important topic and whoever correctly navigates this will likely determine who is ultimately the "winner" in the coming decade.

The charts seem to scream that commodities are over bought; however, I do like the point that MoneyWorks (and other Fools elsewhere) brought up. That being, bc of the massive distrust in fiat currencies there might be more interest than "normal" in commodoties/PM/etc.

That's not to say I think thing "will be different' this time as I don't like that line of reasoning and if we have learned anything from the past 2 yrs it's that it really isn't different this time. Rather what I'm saying is that I could easily see this newfound extreme hatred of fiat money push commodities a tad higher, sort of one final massive blow off. There definitely seems to be a lot of momentum behind it these days. Of course this is assuming there isn't a China crash before we reach this point.

In the old paper by these guys weren't they predicting the commodities run to extend for several more years (~2015-2018ish)? Sorry I'm too lazy to go back and check :) If my memory is correct, what has made them essentially move up their timeline? I realize the above charts don't explicitly say that commodities are going to revert to their mean this year, but they sure seem to indicate we are at/entering an extreem valuation. This seems, to me at least, to be slightly different than their previous take. Any thoughts?

This could be used as an argument against guys like Binve and I, who offer that we are likely still in a long secular bear market.  It would be a strong argument against a late decade drop to anywhere near the 2009 lows or, in fact, any drop near them again. 

Valid point. Although I don't think the chart necessarily rules out another significant correction in say the next 2-5 yrs. While the chart seems to indicate that reaching the March 09 low again is out of the question, if you look at the 1970's as an example, it looks theoretically possible to have a few yrs of slow/moderate growth and thus a significant correction could be factored in there somewhere. Maybe my quick eyeballing of the chart is off, but that's what it looks like to me. So you may not completely off with your secular bear market theory, ha!

It seems possible that we could have a final push up in commodities for a bit and then a significant overall market correction when they come back down to earth. This might be able to fufill both the secular bear market theory and the eventual flip between commodities/equities.

Now seeing this new paper, does it chage your thoughts on whether we are still in a secular bear market or when the flip between equities/commodities will occur?

Sorry for the rambling, it's been a long day...But this is a fantastic post!


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#9) On March 29, 2011 at 10:28 PM, Option1307 (30.65) wrote:

Btw as I mentioned in several blogs back around X-mas time, I have sold out of all my commodity (mainly gold/silver) positions. While they were very very good to me, i just wasn't, and still continue to not be, comfortable with them at these levels.

Have I missed out on some recent gains? Sure. Will I likely in the near future, you betcha.

What it all comes down to for me is the ultimate risk/reward ratio and I honeslty don't feel it favors that trade anymore. More importantly, I would much rather sell a tad early and lock in some sweet gains instead of trying to holdout for the final push. While the final push in any asset class can be parabolic and create some terrifiic gains, you need to always remember that the reverse is also true and things can come crashing down in a hurry! See oil in the summer/fall of 08.

So I guess I am content to just sit this phase of the run out. If I'm worng and commodities go to the moon, so beit. At least I'll sleep better at night knowing I locked in my gains as is.

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#10) On April 03, 2011 at 7:21 PM, JakilaTheHun (99.92) wrote:

Great stuff, as usual, Checklist.

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#11) On April 03, 2011 at 7:40 PM, dsghtykyu (< 20) wrote:

Welcome to:

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== ( ) ==

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#12) On April 10, 2011 at 9:34 AM, TigerPack1 (33.61) wrote:

Clearly most investors are clueless about what to do in the early stages of HYPERINFLATION, that endless PONZI buying of Treasuries and ZERO forever market manipulation madness are creating, thanks to the Federal Reserve's stupidity and arrogance.

Increasing levels of anger and confusion by consumers and investors alike are the natural and guaranteed outcome of continued wild swings in asset pricing in 2011 and 2012.

When the next "bust" hits suddenly and with incredible pain, Americans will be begin to question the basic designs of our society, including our need for democracy and a capitalistic foundation for the economy.  While we haven't seen a truly free market in many decades, it will be blamed by many for our problems, when in fact our ever increasing push toward government control of the economy is to blame.

Until the government quits fiddling in the economy with massive money and loan creation each year, deflation in commodities is a pipe dream.  Soon all prices for things we buy (consume) at a store will be rising at double digit rates.  The incredible theft of money from savers and workers that is being transferred to the large banks and Wall Street elite is the type of foundation for real civil unrest and an overthrow of the government in other nations.

We will see if our political system survives in its present form over the next 2-3 years.  MAJOR changes in Washington DC, including a decentralized government and the withdrawal of most of our troops overseas back home look quite likely from my work, as the next bust hits harder than either the Technology Stock Bust of 2000-2003 or the Real Estate Bust of 2007-Present.

The increase in the Federal Reserve balance sheet from about $1 trillion four years ago, to about $5 trillion presently (unaudited estimate of course as $2.6 trillion is the fake number put out officially) is unprecedented in human history and will ONLY be allowed to happen once in our lifetimes (as its repercussions will necessitate it NEVER be tried again).

As witnessed by the difficulty in cutting even 1% of the annual federal budget the past week ($38 billion out of $3,800 billion for fiscal 2011), when a majority of Americans are either directly employed by Uncle Sam or get free money (entitlements), cutting spending is next to impossible for a politican wanting re-election.

It is quite likely that by the middle of 2012 (the fast approaching next bust is knocking this week as the Dollar's value swoons), we could have 40%-50% of our society at home watching tv (either unemployed or retired), while the other 50%-60% are enslaved expending ALL their wages as taxes to pay for free ride entitlements and the basics of food, energy and housing expenses for themselves.  Civil wars and revolutions may be the end result of such government policy on the present course, if you think through the problem and where we are headed!

-Tiger's Two Cents (Soon to be renamed Two Dollars)

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