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.
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