Holidays are a great time to unclutter the mind and rediscover concepts buried underneath all the recent flotsam and jetsom washed up by the waves of news. Such as: linkage. Remember that concept? I remember thinking and writing about that a bunch last autumn, as the world’s markets collapsed.
Linkage was the phenomenon of equity and commodity markets appearing to be locked at the hip with a kryptonite lock. That confounded the argument of the long term commodity bulls, like Jim Rogers, that commodities and equities should be inversely linked, but they explained the phenom by saying that forced liquidation due to the financial crisis was behind the joint movement and once the financial situation was fixed the old relationship would appear.
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Right now the ag commodities have been acting in the old inverse way again, which isn’t great. They’re down while the equity markets are up, up and upper. Ag prices soared into June, but then slumped. Fundamentals – the state of U.S. crops – could be the source of the weakening in the ags. A lot of early worries have been recently alleviated by better conditions in the U.S.
So it could be an ag-only thing. Certainly other commodities aren’t showing the same reaction. Sugar, for example, is hitting three and a half year highs on worries about South American production. And Oil is back at $70, after slumping in early July. And other commodities have strongly risen, along with all the joy in the stock markets.
So it’s a mixed bag and certainly not proof right now of either linkage being reestablished or confounded once more. Linkage isn’t necessarily good or bad, but it would be nice to experience the phenomenon when equities are going up, rather than down. That was the situation from March to early June, but that’s over for the ags. Whether an even more profound equity rally would drag the ags back up remains to be seen. When the equity markets get better people begin to foresee lots more demand for crop products, so a fundamental reason for a rally can be dragged out of the closet to justify it.
Last year’s historic commodity rally reached levels far above those reached so far this year. The post March ag rally reignited hopes that another 2008 style rally would appear in the market, but that now appears to be a long shot. That reminds me of another concept from the past year, which I can now recall with the clarity of a mind resting on holiday: in volatile times for commodity prices, multiple peaks tend to occur, but the peaks tend to diminish in scale, never exceeding the first incredible rise. I spoke about that during a couple of presentations in Alberta and Saskatchewan this spring, and my conclusion at the time was that if we had entered a 1970s type situation of sluggish and depressing world economic growth and restrictions on commodity production but continuing demand, then there should be repeated price spikes that would offer great pricing opportunities – but they would have to be seized quickly, because as in the 1970s, those spikes would quickly turn into slumps and wipe away the gains.
Go back and look at wheat, soybean, whatever crop charts from the 70s and see what I’m talking about. Lots of high prices. Lots of low prices. A need to market aggressively into a rising market.
Of course, the other scenario I looked at and still consider as likely is a 1930s style depression, which crushes commodity prices and hammers crop prices down, regardless of how hungry the world’s masses are. When you don’t have any money to buy food with, you no longer count as demand. But the 30s were depressing, so for the rest of my summer holiday I’m going to ponder the glories of the 70s and leave depression-era speculation under the pile of detritus until Iget back to the office and feel like glummer thoughts.
