All I am saying is…let's give inflation a chance.
(with apologies to the late John Lennon)
OK, so I was wrong about the
$100 oil before $150 but $200 before $50 forecast. The commodity markets have been clobbered by this global economic crisis. The World Bank’s latest
forecast for commodities is “real food prices are expected to fall by 26 percent between 2008 and 2010, oil prices by 25 percent, and metals prices by 32 percent.” With the news that
China’s exports are falling, the
Baltic Dry Index in freefall and down over 90% from its peak this year and other
signs that the global growth is plummeting, is there any hope for oil and other commodities?
Amidst the devastation, there are numerous signs based on technical, sentiment, macroeconomic and fundamental analysis that the commodity super cycle is not over. There are enough positive indications for me to give the long-term commodity bull the benefit of the doubt. In this post, I focus mainly on oil because of space considerations, as this post is already too long. However, much of my analysis can be extended to other commodities.
Technical underpinnings of the commodity bull
The chart below shows the relative returns of the Amex Oil Index (XOI) compared to the S&P 500. The sector broke out of a multi-decade base in 2005. Given the length of the base, the sector is nowhere near its upside target and it’s likely that this is just a correction within a long-term bull phase.
The chart also shows that the relative uptrend is intact. The uptrend line as indicated by line A is still arguably in force despite the minor trend violation. Additionally, the relative return line could even decline to the uptrend as marked by line B and the bull trend could still be intact.
Sentiment is washed out
As well, excessive bearish sentiment is in evidence for the
CRB Index, which is contrarian bullish. When the likes of Macro Man writes little ditties about
commodities are a joke and invites his readers to contribute to the theme, you know that that investor sentiment is getting washed out in the asset class.
Blowing another bubble by turning on the printing press
I have already
written about the fiscal and monetary authorities stand ready to rescue the world economy. With
world trade seizing up because of frozen credit markets, any normalization of conditions should start to facilitate world trade flows again.
It seems the Powers That Be believe the solution to today’s problem is to blow another bubble. There are, indeed,
50 ways to beat deflation. It seems that every other day we hear about new proposals of fiscal stimulus around the world. A recent
FT article questions whether governments can actually pay for the rescue:
As governments around the world plan to issue hundreds of billions of dollars worth of bonds in the next year, bankers are questioning whether they will be able to meet their funding needs.
