This is the Age of the Commodity, not shares
The chickens are truly coming home to roost. After many weeks of consecutive losses, the S&P 500 has lost just over 20% off its ATH since its 4 January ATH. Some would call that a bear market since they attribute an entirely random 20% figure to that label. And after five months of losses, investors in Netflix, Tesla, and even the ‘never sell’ Apple are starting to get the bearish message. But for the most part, investors remain bullish on shares, especially the retail crowd who seek solace from the many MSM pundits who exclaim: “Hold tight, it’s never a loss until you sell”. Hah!
But this is just the start of the crash of the Great Asset Mania built up over many decades. Have you noticed that gold, which is supposed to be a ‘safe haven’ in times of financial market turmoil has been in a hard decline along with shares in recent weeks? That wasn’t supposed to happen! But gold is part of the Financial Asset class of investments and will trade with shares
I previously noted the likely Double Top formed in March which has been confirmed by the 15% decline off it. The market now rests at a crucial spot as it tests the major uptrend line and a clear break would send it down towards the major support around the $1675 region.
So with Gold in decline, surely that is confirming that a bearish spell is being cast over financial asset prices.
On the other hand, commodities (which are not financial assets as they are real world essentials) are finally responding to the mountain of ‘funny money’ that zero rates and QE money-printing by the central banks has spawned.
We have been riding the first phase of the great bull markets since last year. I believed it was only a question of time before the great wall of money (which had early on found its way into Wall Street) would seek out the long-depressed commodity markets. And that is coming to pass.
But are we still in the Age of the Commodity? Or is this just a flash in the pan before prices right themselves and oil can go back down to the $50 region (as so many policy makers fervently pray for)? Or will oil reach the $200 mark (and possibly much higher) in the weeks ahead?
Here is an absolutely fascinating chart showing the ratio of stock prices (the ultimate financial asset) to commodity prices (the real word essentials) over the years. For years, we have enjoyed very low commodity prices (especially food) as supplies have been plentiful as farmers have skilfully increased yields and production. Consumers have until very recently enjoyed the lowest ratio of food prices to incomes in history.
But that is now suddenly changing – and is set to get a whole lot worse. The chart is in log scale
A ‘normal’ relationship in the period prior to the Great Monetary Inflation/Debasement by the central banks would be a ratio of perhaps 1 to 1. But now that ratio recently reached a peak of 20 to 1. But now the pendulum is swinging the other way and is in sharp decline with commodities starting to assume their ‘normal’ place. There is a lot more room to move much lower.
The great financial asset speculative mania of recent years has pushed shares up to their peaks in November and January. But there has not been the equivalent degree of speculation in commodity and commodity companies. After all, commodities are the basic stuffs we all need in our lives. We eat Corn, Wheat, Soybeans, Sugar, Coffee, Hogs and so on. And we need Crude oil and Natgas for our heating and transportation. We do not ‘need’ shares in companies! That is the essential difference.
The leader of the commodity pack – crude oil – is well worth following (and trading!). Despite the mountains of government subsidies for ‘renewables’ in the doomed New Zero fantasy quest, fossil is actually projected to maintain, if not increase, its share of global energy production in the years ahead It currently stands at 80% while renewables account for only 11%.
Until primarily India and China can be persuaded to reduce its increasing dependence on cheaper coal (unlikely), CO2 emissions into the atmosphere will continue to increase. Those nations are doing what Britain pioneered two centuries ago – vastly improving living standards for their poor using the cheapest and most efficient energy source available – fossil.
Until renewables can match those advantages (with zero subsidies), nothing will change barring Western governments turning totalitarian and banning all fossil by law. But economies will have totally collapsed long before that could happen.
Meanwhile as CO2 emissions have zoomed up, the average global temperature has been static (or slightly decreasing, according to some data) for at least eight years now. Hmm.
So where are we with crude? Here is the long term mthly
The move off the below-zero aftermath of the Corona Crash has been truly record-breaking. The market is still on course to attain the $150 target and possibly a lot higher. It seems production and demand is signalling tight immediate supplies and only a slight disruption in production could send prices shooting much higher. As we know, many governments are facing both ways at the same time.
(Also of note is the NatGas market which remains in a strong uptrend despite reducing demand as the Northern hemisphere is needing far less for home heating as we move into summer.)
They urge us to buy EVs, install heat pumps and stop flying, yet are demanding oil companies pump, baby, pump to lower the pain when consumers get their ever-rising electricity and gas bills – sure vote-loser. It is a circle they cannot square and is a stark reflection of the upside-down Alice in Wonderland world we currently live in – and a world in turmoil (that will get a whole lot worse).
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Will house prices crash this time?
Many are expecting house prices to start crashing now that mortgage rates are climbing. Yes, the South-East has insane house prices with mortgage payments to income ratios over 10 and declines now would be a normal reaction. But since at the medium to upper end, many transactions are for cash with interest rates having at most a minimal effect on prices. We still have a large housing shortage and until that is corrected (unlikely soon), I see prices only dipping slightly if at all.
Over in the US – a slightly different market – prices have been sent even further into space. But the same upward pressures apply – here is why
Low availability with more people chasing limited supply. Is this a formula for a lasting bear market in housing? And in both the UK and USA, governments are falling over themselves to keep the first-timers sweet with all sorts of stimmies. They know that if they don’t the domestic economy would collapse (it will anyway).
The other factor is this – with much medium to upper end housing with no mortgage attached, a drop in prices will simply encourage the owners to stay put and availability will drop even further putting upward pressure on the smaller available stock.
A reflection on market sentiment
There is a one-to-one correlation between market behaviour and sentiment. But what is sentiment anyway? Of course, it cannot be measured directly but we must infer the state of sentiment or mood from various measures. One very useful tool that I regularly follow are the MSM headlines. Basically, when there are many that spell gloom and doom, I start to look for a low of some kind (vice versa also applies).
As the great Mark Twain remarked: “When you find yourself on the side of the majority, it is time for me to think again”
And on Thursday, I noted Bloomberg had this: “The Crypto Death Spiral” and “$300 Billion Wiped Off Crypto in One Day”. Other MSM outlets also had extensive gloomy pieces on how the crypto world had been rocked by the ‘meltdown’ of one crypto currency losing 99% in one day. And this was a so-called ‘stablecoin’ linked to the value of the US dollar! Not terribly stable, was it?
I have long used the markets in Crypto (particularly Bitcoin) and Tesla as tell-tales for the state of general sentiment towards financial speculation with reference to the share markets. So did those headlines roughly mark a low?
Bingo! After a freefall off the March high (to align with shares), the low arrived right on cue on Thursday when the MSM (and by extension the majority) had enough courage to call the market a disaster area and in ‘meltdown’. Of course, it would have been more helpful for traders if they had pointed this out before!
Not only that, but the share indexes also put in a low at the very same time! This my friends, is herding in action. It is the unconscious correlation of human mood that sweeps across the globe. It is not planned or organised in an exchange of telephone calls between Goldman Sachs and JP Morgan! It is entirely spontaneous.
And knowing that, we traders can use this knowledge to our advantage. When there is crypto blood in the streets, it is time to buy (or especially cover shorts).
So with the index bounce into Friday, is this the start of a major rally phase? The macro signs remain negative and so many pros are expecting shares to fall again soon. And many investors will take a bounce as an opportunity to unload at better prices, I am sure.
But with shares deeply oversold, unless an almighty crash is in the works, I expect the relief bounce to extend a few more days and this is my suggested short term roadmap n(note the similarity in the waves to the Bitcoin chart above)
Thursday’s low occurred on a decent mom div and with a slight overshoot of the excellent trendline. That suggests a three up is playing out taking the index up to the upper line in the 4100 area after a pull-back early this week. We shall see. But the main trend remains very much down with huge downside potential over the next few months (with upside potential in commodities).
