The pink bands represent U.S. recessions as reported by the NBER. Will a U.S. recession put the brakes on rising commodity prices? Or is it different this time? I would argue most of the big exporters to the U.S. are the same nations who are driving demand for commodities and energy, and a pullback in U.S. demand for finished goods will have an impact on commodity prices.
Sunday, April 6, 2008
U.S. recessions and commodity prices
The pink bands represent U.S. recessions as reported by the NBER. Will a U.S. recession put the brakes on rising commodity prices? Or is it different this time? I would argue most of the big exporters to the U.S. are the same nations who are driving demand for commodities and energy, and a pullback in U.S. demand for finished goods will have an impact on commodity prices.
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6 comments:
Maybe it is a bubble. Time will tell. At least for now, I'm gonna stick with Roger's thesis. Interesting short little video
http://video.msn.com/?mkt=en-us&brand=money&vid=21e3c168-f4cf-4f9d-bd1c-5efc3193d515&playlist=videoByTag:tag:money_top_investing:ns:MSNmoney_Gallery:mk:us:vs:1&from=MSNmoney_ticker&tab=s216
Differences of opinion are what make a market. :)
Let's try again :)
http://tinyurl.com/5wx79b
Don't want to beat a dead horse, but a thought on the chart as presented. I think it is really easy to look at that chart visually, see the magnitude of the move from 2001 to present, and say, of course it must be a bubble.
OK. Let's say we showed a chart of the S&P 500 from 1966-1987 without any further in-depth analysis at all. Wouldn't the move from 1982-1987 look just as extreme and appear as a bubble like the 01-present move in commodities? Now you had a nasty correction in 1987, but the S&P 500 continued to march much, much higher from 1987-2000.
Hi Mike,
There are several things wrong with this chart but it was the only decent one I could find illustrating commodity prices over a fairly long period. This chart isn't in log scale so the recent "bubble" looks more bubblicious than it really is. Ideally, I would have posted a 100 year, inflation-adjusted chart of commodities in log scale.
The point I wanted to illustrate in this chart is how commodity prices behave during recessions, not the magnitude of the current bubble.
The guy in the video says "we could see a 30% pull back" and "we could see commodities move sideways for some time". We might be arguing over semantics here. I would call a 30% "pull-back" a bubble pop. I'm definitely not saying commodities cannot begin a new bull market afterwards.
Speaking of the S&P 500, I still think we're in a secular bear that started back in 2000. The question is 'how much longer?'
Hi Tom,
Yeah, we are using different definitions of "bubble". :) Incidentally, I think the term is starting to get overused and there is a lack of precision as to what is exactly meant when someone says "bubble".
When I think "bubble", I'm thinking about a generational high where you have a 50 to 80% drop from peak, and that level is NOT exceeded again for a number of years, even a decade or two.
Gold/silver/oil in 1980. Nikkei in 1989. NASDAQ (even S&P 500) in 2000. Those were bubbles. Gold/silver/oil didn't take out the 1980 highs until almost 30 years later. Nikkei is still WAY BELOW the 1989 level 20 years later. When will the NASDAQ pass 5000 again? I won't be surprised if it is 10-15 years. When will the S&P 500 finally leave 1500ish behind as a distant memory (2000 peak)?
From that perspective, the CRB isn't comparable IMO. Unless the world slips into and stays in a global depression (unlikely), I'm confident the CRB will be higher 5 years from now then today, and higher yet 10 years from now. There will be some nasty short-lived 20 to 30% drops along the way which I would characterize as bull market corrections instead of a bubble popping.
The tricky part with that is that if you are following a trend-following system/200 DMA type system (which I do incorporate to a degree), you'll probably get whipsawed a few times getting into and out of commodities.
I suspect that eventually there will be a bubble peak similar to the 1980 peak, and at that point the CRB might be at a level that right now is difficult to fathom (oil at 200-300, gold at 2000+, etc.).
Mike, I'm in total agreement with you. The long term fundamentals; demand > supply mean commodities will likely do well over the next decade or longer. My previous comments on commodities were more short-term. I wouldn't be surprised if early March ends up being the high-water mark for the CRB index...this year.
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