For those who continue to insist that the 3 year long spike in commodities is only a passing phase, consider the following:
The world’s oldest
regularly published price index comes from The Economist. Since October 2001, their dollar-based
industrials index has risen by 76%, mostly fuelled by Chinese demand for raw
materials and, in large measure, the weak dollar.
In real terms,
industrial commodity prices are a mere 30% of their value in 1845:
The Economist’s industrial commodity-price index
This raises an intriguing question: Seen from a longer term perspective, is the recent rally merely a counter-trend move within the longer downtrend channel? Or, is this the start of a secular bull market as competition for scarce resources, with 2 billion people in China (along with a billion people in India) as the key competitive drivers?
The Economist notes:
"Over the years our index, published among our economic indicators each week (see article), has been revised many times, with new commodities being added and others dropping out. This week it has again been rebased. The index now takes 2000, not 1995, as the base year and the weights for each commodity are based on the value of world imports in 1999-2001 (treating the European Union as a single market). The index, made up of 25 commodities, excludes oil and precious metals."
Hence, this shows the inflationary impact of demand from China, without Oil and without the doomsayers accumulation of Gold. While these commodities are priced in dollars, the claim that inflation is contained seems disingenous. Unless your definition of contained inflation, like some Fed Governors I could mention, merely means "not runaway 1970′s style hyper-inflation."
The Economist’s commodity-price index
Foods now account for 56% of the all-items index, slightly down from before, while the share of industrials has risen to 44%. Wheat and coffee still have the biggest weights in the food index. But thanks to falling prices, sugar now accounts for only 6.6%, half its previous weight. Aluminium makes up almost half of the metals index. Here are the new weights and back figures (monthly and quarterly) for the indices.
One caveat, however: Recognizing that significant inflation exists does
not auomatically require action from the Fed. Indeed, they have a hard
enough time managing the U.S. economy; I am less certain they would be
any better at managing China’s economy, either. Especially ocnsidering that China is simulataneously the source of the World’s Deflation and Inflation — at the same time.
How can one country simulataneously cause both Deflation and Inflation? The source of Deflation is due in large part to the labor arbitrage China has engendered, along with a commensurate extremely low cost production of goods. Call it the Wal-Mart effect. Inflation is simply due to the insatiable appetite China has for raw materials, as they industrialize what was a mostly agricultural nation of 2 Billion people (2010 projected, present: 1,298,847,624) into an industrial power house.
160 years on: It is time to rebase our commodity-price index
The Economist print edition, Feb 10th 2005
Joe Granville is a
very well regarded technician (now in his 80s) who has had some terrific calls in his career, and a few duds as well. On Bloomberg, there was a story on his most recent commentary, but I cannot seem to find it now; It more likely got moved than disappeared for nefarious reasons.
Anyway, Joe just got Bearish big time. Here’s an excerpt:
"Joseph Granville, who accurately forecast in 2000 that U.S. stocks’ bull market would end, is at it again. He expects the Dow Jones Industrial Average to suffer its biggest annual loss this year since the Great Depression.
“We’re in the critical portion of a coming collapse and the market’s screaming to get out,” said Granville in an interview from Kansas City, Missouri. “Everyone’s bullish. There’s going to be a tremendous surprise and it’s going to be to the downside.”
"Granville, publisher of the Granville Market Letter since 1963 and a technical analyst for almost 50 years, also foretold a stock-market decline in 1976. He misfired in 1982 and 1995 by calling for losses before share prices surged.
The 81-year-old analyst expects the Dow average to retreat to at least 7400 by year-end. The forecast amounts to a plunge of 31 percent. The last year in which the benchmark fell that much was 1937, when it lost 33 percent.
As a technical analyst, Granville predicts the market’s direction by using criteria such as trading and price patterns, rather than earnings and economic growth. He started developing his stock market theory at what was then E.F. Hutton & Co., a New York-based brokerage, from 1957 to 1963."
That bodes well for my 2005 forecast, as Joe tends to be early. I’m still looking for one last strong move up — Dow 11,700, Nasdaq 2600 — before it all heads south. Note that also gives me the opportunity to stay long if the uptrend remains in tact.
One of the key mistakes to avoid – call it the peril of predictions — is to never marry a forecast, especially your own. People wrap up too much ego in what is essentially educated guesswork. If you start with the assumption that your prediction is going to be wrong, its real easy to reverse yourself when necessary . . .
If you are interested in learning more about Granville,start with this article — Just Like Old Times as Joe Granville Yells `Sell’ — it gives some background on him if you are unfamiliar with his work.
Some more background on Granville:
Timing the Market
Joe Granville, father of the On Balance Volume (OBV) and its analysis
Bibliography of Published Books
UPDATE: March 18, 2005 7:09 am
Mark Hulbert provides the details on Granville’s track record. Not impressive (unless you are a fan of the Black Swan event . . .)
UPDATE: I still cannot find this anywhere, but a friend captured the text. Here it is for your enjoyment: