Stock market investors have been getting queasy recently as the world’s main market indices buck around like a bullwhipped Brahma.
Commodity market investors have been there, done that too. The market doesn’t seem to know which way to go, so it’s gone both ways. Just ask anyone speculating in corn or oil futures on margin.
Farmers, after enjoying a bull market since harvest and hearing almost nothing but bull market predictions, have in recent weeks seen most crop prices weaken and some forecasts get softer.
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What does it all mean? Has the commodity market peaked? Or is it just a correction? Is the future coming up all rosy, or are those blossoms part of a funeral bouquet?
These days market gurus are in total disagreement, especially my favourite ones.
Jim Rogers, the world’s leading commodities market promoter and popularizer, thinks the weakness in some commodities, especially oil, in the past few months is just a correction, a passing phase.
The commodities market rally is nowhere near topping, he says.
“We are perhaps in the fourth inning of a nine inning game which began in early 1999 as far as the commodity bull market is concerned,” he said.
In his view, grain farmers’ financial bonanza that began in late 2006 has just started.
“Agriculture still has some very nice gains to come,” said Rogers.
“Few if any agriculture products have yet made new all time highs, yet nearly everything eventually makes new all time highs in bull markets, often well above the previous old highs.”
Well, that sounds great.
But if you listen to another analyst I admire, Bob Prechter of Elliott Wave International, it’s a different and dismal story.
Commodity markets aren’t inevitably moving higher as far as he’s concerned. In fact, they’re set to crash harder than Mike Tyson’s early opponents.
Both Rogers and Prechter are famous for having called long-term tops and bottoms of the markets. Rogers pegged the bottom of the commodities market in 1998-99 within a few months. Since then, his decision to pour his money into commodities and suggest everyone else do the same, has seemed brilliant.
Prechter nailed both the 1982 beginning of the historical equities bull market that ended in 2000 and the 1987 stock market crash. He was a few years early in calling for an end to the 1990s bull market but didn’t seem so wrong by late 2002, when many stock market investors had lost their shirts.
Both believe that the world’s stock markets have peaked and that the United States at least is already in a recession. They believe current problems in the U.S. housing market are just a taste of much worse things to come. And both believe a long and sickening bear stock market is underway.
But their outlooks on commodities are as absolutely opposed as their stock market outlooks are similar. The reason: their opposing views on the correlation of stock and commodity markets.
Rogers believes the long-term pattern shows that stock markets and commodity markets alternate in a 36 year cycle, with stocks generally gaining for 18 years and commodities going nowhere, then commodities gaining for 18 years and stocks going nowhere.
Prechter doesn’t see this pattern.
He believes commodities almost perfectly follow the stock market’s fortunes, even if they have a lagged response. Recently Prechter argued that the overall commodities market has almost always followed a significant stock market slump with its own slump.
So to him, anyone fleeing from stocks had better not park their money in commodities because commodities are just one step behind in the punishment queue. Prechter thinks investors should be cashing out their equities and resting inside the boring but safe money market.
Rogers thinks now is a great time to be piling more cash into commodities, especially money cashed out of equities, before the second half of the great commodity bull market begins.
How can they differ so much on this correlation, when they are looking at the same charts?
Well, it seems that they’re looking at different charts, or at the same charts in different ways. Rogers takes a very long view, ignoring corrections and seeing crashes often as the setting off point for an 18 year cycle. Starting from the bottom of a slump, as happened in 1998 with commodity prices, bull markets appear to follow an easily predictable pattern.
Prechter chops the charts off much tighter around crash and slump periods, and sees commodities following stocks within much smaller periods. Starting at the peak of the market and ending soon after a crash, no form of investment other than cash seems free from the trauma.
What does this mean for you, the farmer, trying to figure out what will happen to your crop prices if the stock markets stumble or tumble this year?
It seems safe to say that Rogers believes you shouldn’t worry too much, because a bad year or two will simply be a blip in an otherwise bountiful commodity market.
But Prechter warns that you shouldn’t assume you’re safe from a collapsing stock market, and all your dreams of high prices for years could be blown away by a nasty, if quick, storm.
How would I, a fan of these two gurus, fit these two conflicting interpretations together? I’d say you shouldn’t sell the farm because the end is nigh if the stock market falls. There should still be many years left of good prices for crops even if the equity market dies.
But I’d also say you shouldn’t take for granted next year’s good crop prices that are available through futures and forward contracts right now, because what to an analyst is a short-term correction or “blip” of a couple of years could ruin a farm’s balance sheet.
To paraphrase economist John Maynard Keynes: it’s fine to think about long-term projections, but remember, in the long run we’re all dead.
There’s not much point being right in the long run if you go bust in the short run.
