About Me

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 !!!

Thursday, November 03, 2005

Commodities Inflation

As discussed in prior posts, I have pointed out that the
current surge in commodities price aggregates, although
not so broadly based, has been the most powerful we have
witnessed in over thirty years.

The historical record shows that grand commodities inflations
begin in sudden and dramatic fashion, almost "out of the blue"
as it were. They tend to follow upon long periods of price
stability and, on occasion, deflation.Thus, prior to a
sudden breakout of upward price pressure, there is usually a
long interval of underinvestment in the capacity to supply
the market which results in a jump in pricing when demand
does finally accelerate.

Grand commodities inflations can last for periods of up to
15 - 20 years. Commodities composites at wholesale can
easily triple and quadruple over such periods. Interestingly,
oil per barrel is now trading about six time above its 1999
low. In short, these are very powerful events, and when one
is underway, it will in a cumulative fashion have a pronounced
effect on the general price level, as measured say by the CPI.

I bring this up for a couple of reasons. first, the power of
the recent run in the CRB and wholesale commodities composites,
following a long dormant period, strongly suggests to me that
another grand bout of commodities inflation is underway.
Secondly, although run-ups in commodities prices can be
squelched for a while by rising interest rates and a tightening
of liquidity, the upward pressure on prices tends to resume
in a strong fashion when the rate / liquidity pressures are
relaxed. This occurs because of the long lead time necessary
to bring large incremental capacity on stream (Developing
small increments to capacity generally proves uneconomic.)

Thus, for the third time in the past one hundred years, we
may well have another major upleg of inflation to contend
with. I lay this out as a prima facie case, but one which
I think has some merit.

I did play the big 1968 - 1983 commodities cycle. I bought
some gold but enjoyed excellent fortune in the grain markets,
which as irony would have it, have yet to participate in this

Surprisingly, it is possible to make good money in stocks and
even a little money in bonds during commodities booms. But
to be successful, you have to re - equilibrate risk and return
assumptions and not use the more favorable profile that likely
obtained during the lengthy preceding period of commodity
price stability.

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