My primary inflation pressure gauge, which measures broad arrays of commodities prices and
production facility operating rates, made a cyclical peak to date in mid 2011 and has declined
sharply since then. With plant capacity utilization in the US remaining on the rise, the decline is
entirely a result of a substantial erosion of commodities prices. $CRB Composite Measured yr/yr,
the CPI has dropped from 3.9% seen for Sep. '11 to just 2.3% for Apr. '12.
What is unusual here is that sharp declines in commodities price composites tend to reflect falling
US output and operating rates. However, this time out, the weakness in commodities is much more
a reflection of a sharp loss in global economic growth momentum -- think the EU and China -- as
well as selling pressure generated by financial players who are reducing exposure to commodities
because of slower global growth. It is also likely that the sharp positive runs in the CRB in 2009
and then again from mid - 2010 through mid - 2011 reflect the two large QE programs by the
Fed, both of which encouraged traders to step up cyclical risk exposure. The upshot here is
A falling CRB no longer automatically renders the US economy immediately suspect.
However, decelerating inflation will, net - net, reduce business pricing power both here and
abroad and that development will eventually crimp profit margins to the eventual detriment of
the jobs market as employers look to cut costs. So, ultimately, falling commodities prices and
inflation will work to diminish US econmoic recovery.
Without a sharp recovery of commodities prices, the US CPI may stay in a range of 2.0 -2.5%
measured yr/yr, and if additional weakness in the EU surfaces along with some further moderation
of GDP growth in China, then the CPI could head down to 1% if the CRB continues to falter. In
fact, a break in the CPI below 2% yr/yr could trigger another sizable QE response from the
Fed as they would become anxious about the return of deflationary pressure (It is empirically
possible to have a "virtuous" or non-harmful period of deflation, but this is not at all likely to
occur in economies which carry sizable debt leverage as does the US. Then, deflation can be
The CRB is trading down around an important support level. Traders have trimmed long
exposure to commodities and are waiting to see if global economic growth momentum keeps
decelerating. From my perspectice, the CRB is quite reasonably priced at current levels.
Moreover further significant weakness in these markets could bring new damage to the
major commoditiy producing economies such as Canada and Australia. Toronto Comp.
The US CPI is on a trend track that would take the yr/yr monthly rate down to 1% by the
end of this year provided the CRB breaks materially below current rough support around the
290 level. Since a veer toward deflation could be devastating here if not globally, I am on
full alert and looking for new monetary and fiscal initiatives from the majors, including China,
which also needs to guard against too much of a growth slowdown.
- 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 !!!