Three times a day the Blackberry on my hip buzzes as a commodities market report drops into it.
For the past few months, I’ve been able to make a simple assumption: if Chicago corn, wheat and soybeans are all up, or all down, the equity markets will have moved the same way.
Almost always my assumption is correct and the Dow Jones Industrial Average has moved in lockstep with grains.
Sure, there are days when a big fundamental supply and demand event happens that breaks the relationship briefly, but after a couple of days the crops are back tracking the stock market, or maybe it’s the other way around.
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This could seem weird in light of the Long Term Commodity Bull Market theory that I’ve often written about and that oodles of market gurus have embraced, after seeing it generally work for years. The theory said that stock markets and commodity markets are inversely related, which means that when one is going up, the other is most likely to go down.
Oil, especially, delighted commodity bulls by steadily gaining in value from 1998 on, while stocks slumped and then recovered much more meekly. And after the stock market rolled over in August 2007, commodities experienced their biggest rally ever.
But then the theory went to Hades after July 2008, as the stock markets slid into a collapse and sucked commodities right down with them, step for step.
Last year at this time, I wondered whether 2009 would see a return to the inverse relationship, or a continuation of the apparently direct relationship. My simple little Blackberry test taught me anecdotally that the two asset classes seemed to be tightly connected.
And in a 2010 grains market outlook, DTN analyst Darin Newsom provided statistical and analytical backing to the phenomenon I thought I’d been witnessing: From 1999 to 2007 the Commodities Research Bureau index had a 56 percent correlation with the Dow. In 2008, that increased to 86 percent. In 2009, it increased more, to an almost perfect 93 percent.
That’s not just bad news for those trying to trade commodities like grains and oilseeds on the Long Term Commodity Bull Market theory, but also a problem for those who try to trade crops based on real-world supply and demand factors.
“This is troublesome to those still trying to trade on fundamentals,” Newsom said. He, like a number of grain market analysts I’ve spoken to, think the huge flood of government money poured into the world economy in stimulus spending has poured into commodities as much as stocks and made their prices barely reflective of supply and demand.
For instance, why have wheat prices not collapsed?
I have written in this space and on my blog about my favourite hobbyhorse question: are we reliving the 1970s or the 1930s?
I think that’s still an open question.
The slump of 2008 was like the beginning of the depression, when commodities and equities became married for years.
But the recovery of the markets and financial system could suggest we’ve fallen into a weak range for equities, but one that could bode well for commodities, especially since money fleeing inflation tends to end up in hard assets.
I don’t think the book on the 2008-2009 collapse is complete. The recovery we’ve seen to this point could be the proof that we’re just in a lingering recession.
But if it turns down hard and breaks through March’s lows, the depression scenario comes back.
I hope by this time next year, the question will be resolved and it’ll be easier to know if commodities and equities are still married or have divorced. It would make it easier to trade crop commodities. And it would make it easier for farmers to get some sense of what the trends in the next few years will be.
Until it’s resolved, I’ll be playing my little Blackberry game, hopefully looking for the present trend to break.
