Trade in broad swaths of the commodities markets this week
is extending recent gains. Raw industrials have also re-
joined the party. As many an old hand in these markets can
tell you, trader discipline is starting to break down as
the folks chase after rising prices. Broad composites such
as the CRB were cheap in relative terms for many years
following the bust in the 1980s. Now, these composites are
getting expensive on a relative basis although they are not
yet at extremes. It is clear that the strong industrial
economies of Asia are playing a major role in fostering the
boom, but it is equally clear that there is a horde of
speculators on board as well.
Commodities booms carry the seeds of their own destruction,
not just because they coax out more supply, but because central
banks are eventually forced to contract liquidity to stem the
inevitable inflation surge. In full, such enforcement actions
have been tepid so far, leaving the field still open.
As discussed previously, in larger, more stable economies where
wage rates are more settled, a commodities driven acceleration of
inflation punishes real incomes and can result in deteriorating
economic growth. This corrective process is not fast moving,
but should not be ignored.
The yields on longer dated Treasuries are ratcheting up now as
markets adjust to faster inflation. The increased inflation
pressure also tends to suppress the market's p/e multiple even
as commodities producers may experience outsized earnings gains.
The global economy is slowing, and some economies such as China's
where inflation has topped 7%, may have to tighten more aggressively
at some point.
For now, There is not a strong fundamental case to say the broad
commodities market is headed for a fall. There may be seasonal
weakness in the spring, and there may also be greater volatility
reflecting the risks of inventory hoarding. The main factor to
watch short term may well be trader sentiment, especially given
the growing intensity of speculative activity, and the fact that
many of the sub-sectors are very overbought.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!