You probably heard the chatter over the past few quarters: “The Great Rotation” was about to unleash a new leg up in Equities. Bonds were going to be sold, equities purchased, and a new leg up was starting.

The story goes something like this: U.S. Treasury Bonds had enjoyed a 30 year bull market, and it was now coming to an end. Paul Volcker rebooted fixed income, taking rates to 20% to break inflation, and in the three decades since bonds have seen their prices inflate as rates normalized, then fell precariously low, then were driven to zero by QE. That cycle is over, we are told, as rates now have nowhere to go but up, and investors will soon become sensible and rotate into equities.

Except, of course, that it hasn’t.

Why? Perhaps we should consider an alternative explanation to the sector rotation story, which is rapidly being revealed as little more than wishful thinking.

The story that is not getting told nearly as much: The investment community noticed the success of Endowment funds (e.g., Yale’s David Swensen). The monkey-see-monkey-do community, ignoring valuations and prior gains, hired new consultants to shake it up. “Make us look like Yale” they pleaded to the mostly worthless community of consultants. No fools they, the overpaid consultants happily complied, and the next thing we know, these Whiffenpoof Wannabes are up to their eyeballs in private equity, hedge funds, structured products, real estate, and commodities/managed futures.

Gee, late-to-the-party investors in illiquid, pricey investments — who ever could have imagined that this was not going work out particularly well.

Time for a change: Fast forward a disastrous decade. As managers and consultants were replaced/fired, the new guys wanted to start unwinding the work of their priors. Since most of these alternative asset classes are illiquid, there is not a lot of wiggle room without severe haircuts (penalties for early withdrawal). What to do.

One of the few that is not are the Commodities/Managed futures bucket. My guess, based on prices and logic, is that these new managers are selling what they can — and that is commodities.

What do the charts (after jump) say?

Gold and Silver flat for 2 years. Energy for even longer. Agricultural products back to 2010 prices. Industrial metals near 2010 lows.

Commodities started the 2000s so promising — what with rampant inflation and the dollar losing 41% of its value, have since gone nowhere. So the new guys are sellers, and the money is going into less esoteric, liquid assets.

That means traditional assets: Munis, Treasuries and Corporates for the safe money, stocks for their risk assets.

The great rotation is already underway. Just not the way the stock bulls have been hoping for.

 

 

 

 

Agricultural Prices

 

Energy Products

 

Industrial metals

 

Precious metals

 

 

 

Category: Asset Allocation, Commodities, Fixed Income/Interest Rates, Investing, Markets, Sentiment

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “The New Great Rotation: Commodities into Bonds”

  1. TheNewNormal says:

    this is a bit of a reach (especially the part about endowments liquidating being a primary driver of flat to lower prices over the last few years)

    there are important fundamental reasons as to why commodities have flatlined the last few years, shale/fracking debunking peak oil theory and allowing the US to potentially be energy independent in the next decade being one of them; but the main reason is that prices got ahead of themselves in the mid 2000s, massively incentivizing producers/miners/farmers to maximize production – these guys are getting very rich

    in fact, there is more trading going on (as measured by volume of contracts transacted and total open interest) in commodities futures than ever, leading me to believe that investor interest in commodities in general has only been increasing (unless you believe the mix of investors/speculators/commercials has changed dramatically)

    • cowboyinthejungle says:

      “shale/fracking debunking peak oil theory and allowing the US to potentially be energy independent in the next decade being one of them;”

      good one. i hope you meant the perception of said quote.

  2. Derektheunder says:

    Hmmph, I was convinced, too. I came THIS close to buying a load of DTYS to sit on until rates skyrocketed to normalcy.

  3. Super-Anon says:

    Given the weakness in the global economy I think commodities are doing pretty well… especially oil.

    With oil at $93 with a weak global economy what’s it going to look like when things get booming again?

  4. b_thunder says:

    Are the commodities and commod. futures markets big enough in relation to the combined size of the treasury/corporate/muni debt markets that the reversal of not all but just recent “hot money” inflows into the former would cause a meaningful impact on the latter?

  5. [...] Investors are rotating out of commodities.  (Big Picture) [...]

  6. Doug of North Texas says:

    I am “selling: this explanation with humble respect as I see a different underlying source (see below) and cannot identify the sellers.

    I compared these 4 against the $SSEC (Shanghai Composite) – basically, from the second half of 2011 to the present, the comparison of EACH of these 4′s price action to the $SSEC is a flat line – ergo, so goes China, so goes these commodities as priced by the ETFs. I did the weekly; earlier in 2011, these 4 rose vs. the $SSEC. My rationale is that commodities are essentially priced by China demand – note the most recent 6-9 months of falling ETFs in relative terms I think says more about the leadership change in China and the amount of faith in new leaders and that vaunted transition to a consumer-demand economy. However, if the above explanation of the latest months is Barry’s hypothesis, I can understand that due to information I do not consider – I see the selling and know not who, but sellers may be doing it based on my hypothesis (unoriginal). How can we identify the sellers and their motivations?

  7. gflander says:

    I too, scratch my head – we “eventually” must face some combination of inflation and/or higher interest rates. Commodities and energy can be hedges for inflation (but not for higher interest rates with deflation and no growth – the ugly scenario I do not have an investment answer for – Do you all??)

    Munis – With Stockton CA going bankrupt – what is the future of Muni’s??

  8. socaljoe says:

    As the seller of a security “rotates” out of an asset class and into cash, the buyer, by definition, must “rotate” from cash into the asset class by an equal amount. There can be no net rotation.

  9. dkatsnelson says:

    There is rotation if the buyers of outstanding equity/debt are the companies themselves.

  10. Jeff Malec says:

    Sorry, Barry – Commodities Ain’t Managed Futures http://bit.ly/YNWSI6

    “Commodities” is to “Managed Futures”
    as
    “Buy and Hold” is to “Fusion Analytics”

    The ‘Commodities’ asset class is long-only commodity exposure – in other words, just going long commodities and hoping the price goes up… and managed futures despises that model. Managed futures is about going long and short commodity markets, timing entries and exits, and rotating between sectors – not just “buy, hold and hope.”

    • rick111 says:

      He meant that Commodities/Managed futures are both selling at this point. What is your problem with that? Barry knows what he is talking about. Do you think he needs a lesson?

  11. [...] theme was incorrect: It was not stocks into bonds, as is so commonly claimed. Rather, it was a New Great Rotation: Commodities into Bonds. Since then, Bond yields have plummeted and gold has collapsed. Had I followed my own insights and [...]

  12. LIquidity Trader says:

    Just got back into the US and catching up on my reading.

    Its 8 days later — Gold is down 15% and Bonds have rallied strongly, sending 10 Year yields down to 1.68%

    I’d say you were spot on

  13. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  14. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  15. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  16. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  17. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  18. [...] he sold all his gold. He has recently been writing on his The Big Picture blog about the “New Great Rotation” from commodities into bonds (versus the “old rotation” from stocks to [...]

  19. [...] Notably, this doesn’t rule out the possibility that investors could be part of a different great rotation—from commodities to stocks—which Barry Ritholtz laid out in April. [...]

  20. [...] and metals have all fallen in the last few years. It’s what Barry Ritholtz has called a “great rotation” from commodities to bonds and [...]