Thursday, October 9, 2014

Commodities And Producers Are Just Leading The Deflation/Inflation Cycle

A commenter on my crude oil futures post pointed out,

"Commodities and commodity producing stocks are the only stuff out there that is reacting to fundamentals! The resource sector is telling the truth. The cocktail stocks and momentum favorites are telling lies!!"
Commodities do seem to be the quickest to pick up on changes as we move through this cycle:
Inflation/mania -> tightening -> deflation/crash -> printing
This is a positive feedback loop. One would expect the oscillations to become wilder as people attempt to "get in front of" the next step, and that does seem to be what has happened over the past 15 years or so.

The alternative to cycling the printing on and off is to attempt to use "tawk" to keep the goldilocks economy:
"Wednesdays action was quite incredibly naive. The Fed is halting QE, it is no longer lowering rates. In short, the Fed is tightening, and at the same time successfully counteracting the market effects of that tightening with dovish talk at their conference in which they decide to remain on the tightening course. That is the whole purpose of forward guidance - to get the stockmarket to react to their words and speeches and to ignore what they actually do, or neglect to do."
But tawk and no printing makes people nervous. No one can afford to get left behind in a change in the inflation/deflation cycle. The way you make a lot of money is to get in front of it.

What happens if China loses the ability to build concrete and steel boondoggles at the same time the Fed is shifting into a tightening cycle? Well, commodities get crushed:

They're trading at a four year low, and the deflationary cycle has just started! The DBC index is heavy on energy (65% various energy products), the rest is agricultural and metal. But they are all falling.

A reason the oscillations could get wilder is that investors want to avoid drawdowns, and they get trained by experience as we go repeatedly through the loop. If the Fed doesn't "have your back", you don't want to own any commodity, producer, or maybe even anything at all as the deflation spreads. But when they stop tawking and start printing, there will be a violent reversal.


Stagflationary Mark said...

We Have Fallen and We Can't Get Up (Musical Tribute)

The following chart shows that natural log of the 3 month treasury bill yield. When using natural logs, constant exponential growth (or in this case, decay) can be seen as a straight line.

Advice for the Fed: Push on that string! Push on it!

CP said...

"If you want to feel confident that the Federal Reserve knows where it's going as it steers the world's biggest economy, then you probably should not read the transcripts of its 2007 policy meetings."

transcripts != "minutes"

Stagflationary Mark said...



CP said...

Right, I'm just joking about how the "minutes" are actually PR pieces, not minutes in the legal sense of what transpired at a meeting. Those are the "transcripts".

Stagflationary Mark said...


Whew! For a "minute" I thought we were not on the same page. ;)

Speaking of being on the same page, as someone (like myself) who is not exactly bullish on China (understatement of the year, lol), you might find the following amusing.

China's Miraculous Parabolic Growth Engine

Here's a teaser.

1. The parabola is upside down.
2. The parabola is lookin' toppy.

Oh oh!

CP said...

Yeah, we may have a tightening cycle hitting at the same time as Chinese boondoggles stop. Major deflationary.

On the other hand, slowing down Chinese resource consumption gives the Fed more room to start printing again.

The deflation/inflation cycle will continue.