Which take is true?
1) The world has experienced 10 years of growth and is on the verge of a major market-killing recession.
2) The world is experiencing slowing growth but is only part way through a continuing economic cycle with lots of room for prices to run higher.
There are lots of advocates for each position and the outcome will have a major impact on the price of commodities like crops and livestock.
They can’t both be right. But we will only know which side has it right when we get to the future.
“There are so many reasons to be bearish,” commented hedge fund operator Erik Townsend during the Feb. 14 edition of his MacroVoices podcast.
He noted that many of the smartest analysts he has talked with on the podcast, which focuses on the major economic underpinnings of stock, commodity and bond markets, have focused on ideas of “end-of-the-business-cycle, late-cycle dynamics, which means many signs” that suggest a “multi-year bear market” might already be underway, beginning with the late-2018 selloff.
That would be bad for prices of almost all things.
The opposite view came from the Goldman Sachs commodities lead, Jeff Currie, who looks at the market troubles in 2018 and recovery in early 2019 as signals that the worldwide economic expansion of recent years has plenty of room to run.
“You’ve got a lot of tailwinds to these markets,” said Currie, offering a bullish forecast for commodities in 2019 in Goldman’s Jan. 22 edition of the Exchanges podcast.
“Everything is really kind of boring right now. This has been a long, drawn-out cycle without much variation around it.”
The market tempest of 2018, which led to both new stock market highs and a jarring correction, is more likely a “classic mid-cycle pause” than the prelude to a recession and bear market.
In fact, to Currie the fact that commodity prices in early 2019 had returned to levels of late 2017 suggested the bull market was still intact but was at a less advanced stage than Goldman analysts had believed.
“We got hoodwinked by too-optimistic sentiment,” said Currie. “The market got too excited over the term global synchronous growth.”
The selloff was just a washing away of the “exuberance” and a return to the more sedate progress of the 2010s bull market.
Rather than being late in the cycle, with strong growth and booming commodity prices occurring just before stalling into recession, 2018’s continued but slow growth was “much more mid-cycle.”
That leaves time and room for commodity prices to rise as the world economy grinds higher.
Townsend sees everything differently, as have many analysts he favours.
“We have seen the first big wave in a new bear market,” said Townsend, unconvinced that the stock market recovery of January and February means that the bull market continues.
“Bear markets are punctuated by vicious counter-trend rallies.”
I found Currie’s and Townsend’s discussions of the macroeconomic outlook refreshing, not only because they offered clear and reasonable opposing views, but also because each seemed to relish going over their own forecasting mistakes.
“We got hoodwinked by sentiment in 2018,” said Currie, who seemed to have enjoyed figuring out why he had been too bullish last year.
Townsend noted the challenges of trying to peg market peaks and profit by shorting the market.
“There have been several times in the last few years that I was sure the bear market was on, and to my own astonishment we ended up with new all-time highs,” said Townsend.
Is commodity demand going to go boom or bust? Is the world’s economic expansion over or are we still in its midst with the most exciting patch still to come?
There are good answers from people like Townsend and Currie to those questions, but they don’t agree.
It’d be nice to have consensus on the outlook, but this is a confused time in the markets and I hope this comparison of two market thinkers highlights the complexity of today and lets you see how even the best and the brightest can get some of their calls wrong.