Agri Commodities Awake

I have updated all the models, on their respective pages.

Geomagnetism continues to be a good guide. Here I have highlighted the periods of higher geomagnetic disturbances corresponding to periods of correction for the stock market. The question is whether the most recent period if now over, or continues. Seasonality suggests we should experience fewer disturbances through to August, which if so, would be supportive of upside for pro-risk. That would fit with a period of mean reversion coming to pass away from recent extremes of oversold and overbearish in pro-risk.

The shorter term geomagnetic lunar models continue to perform. The last two lunar turns were on the nose and the cumulative geomagnetism trend has provided an overall route map for the markets. Here are the Dax and the CRB commodities index, with the tails showing the forecast for the next 3 weeks. As yet the model does not show a renewed upturn, but commodities, being below model, have room to pull up.

Which brings me to the title, as in the last week we’ve seen soft commodities wake up and put in daily gains of up to 7% in some foodstuffs, as the hot dry weather in key producer parts of the world comes into focus. Agri gains have been made despite other pro-risk assets pulling back. As I previously stated, whether the extreme weather continues into the end of July is likely to determine whether or not we see a run away rally in soft commodities to new highs in H2 2012.

I have previously shown charts displaying close relationships between the different commodity classes, so if softs do take off in a meaningful way, that should provide the impetus for precious metals to break out.

The all-commodities chart since 2000 doesn’t look too bullish:

Source: Bank of Canada / Reed Construction

Yet, take out energy and a secular bull appears very much in tact. Fluctuations and weakness in oil and natural gas have largely accounted for what some analysts have identified as technical weakness in the overall commodities picture. Commodities ex-energy:

Source: Bank of Canada / Reed Construction

As you know, I believe the secular commodities conclusion is ahead, following next year’s Spring solar maximum. Increasing sunspots inspire speculation and growthflation. The current window of economic weakness is providing the opportunity for another round of global central bank supportive and stimulative interventions. More needs to be done in this regard, but I expect the natural pick up in growth, speculation and inflation combined with the aid of the central banks to come to fruition.

Currently, we continue to see problematic levels for Spanish and Italian CDSs. Economic Surprises continue to languish. Chinese leading indicators came in better yesterday at +1.1% (Conference Board), but other leading indicators have been largely negative. I am not belittling these issues, but refer you again to the secular position and recent extremes in indicators, whereby we are more likely to see pro-risk rise on slight improvement in these areas, rather than fall again.

Here is someone else who shares my view that secular stocks bulls need redefining from the nominal lows, and concurs that the new secular stocks bull began in 2009, noting the similarities to the last two secular nominal lows.

Source: Federated Investors

And here is a chart from Scott Grannis showing how US housholds have largely completed their secular deleveraging, allowing the private sector to releverage from here (despite the increase in public debt). This also fits with US housing increasingly showing it bottomed already.

Source: Scott Grannis 

Evidence increases that we are into a secular inversion period. The timing is however critical – when to switch out of commodities and bonds and into stocks and real estate, in terms of longer term buy-and-hold. I maintain the blow-off top should still be ahead for commodities, which provides the best opportunity out of the 4 classes into 2013 – I believe. But that will be the final pop, as relative cheapness of stocks and real estate to bonds and commodities reach historic extremes.


24 thoughts on “Agri Commodities Awake

  1. Commodities are in a cyclical bear market and have been declining since 01st of May 2011. That means the bear market is about 13 months old. Blow off tops occur from an already overbought multiyear bull market rally just like Gold in late 1970s into 1980, Nikkei in late 1980s into 1990, Nasdaq in late 1990s and into 2000. If commodities were to spike into 2013, that would be the shortest ever blow off top and commodity conclusion in history.

    Highly unlikely in my opinion, but nonetheless still possible. History shows blow off tops run for at least a few years in major asset classes (Nasdaq 1996 – 2000 & Gold 1976 – 1980). This would also mark the first time price blow offs occur from extremely negative sentiment. Usually blow off tops occur from already bullish and greedy mood, where investors go bananas – similar to the way crashes occur from extremely oversold market and pessimistic mood where investors panic.

    Finally, this would also be the first time in history where supply does not exceed demand (over the long term) and yet a blow off top occurs. In late 1970s, Oil supply finally exceeded demand and yet prices went into a bubble spike due to a Middle Eastern War for the next couple of years. Today agricultural supplies are in shambles, metal shortages are occurring and visible as soon as a recovery returns. Excess supplies are only present due to anaemic economic growth at present.

    Today we are still running out of Oil in the long term at 6% per annum from Global Reserves, despite a shorter term glut of supply due to Saudi’s pumping more Oil and global economies weakening. If you do the maths, in 20 years we will have no Oil reserves left so Oil would i theory be more precious than Platinum. The world’s biggest finds in last 2 decades has been various multi billion barrel fields in Brazil, but these days the world uses about 86 million barrels of Oil a day. If you do the maths, that is nothing. What needs to happen? We need to find another Saudi Arabia or even two…

    I read a lot of different market views from technical cycle traders as well as from solar cycle traders. They both argue that a commodity spike is almost imminent into 2013/14 and yet history of price patterns, price blow off tops and demand-supply does not agree with that view. I remain long PMs and plan to sell only at the final euphoric spike, be it 2013 or 2016 or 2020. I also plan to accumulate more every time major sell offs occur. I do not expect a spike in 2013, but a bear market, therefore it is still possible for Gold and Silver to break down one more time, before I add to my positions in to 2013.

    1. Gold and silver are on track as per their last bull – see here:

      Yes a blow off top occurs following a powerful rally – the history shows that commodities accelerate 6 months before their peak and make their blow off top 6 weeks before. Stocks to top out first as in late 2007 then commodities to make their final surge as per H1 2008.

      Gold and silver are reaching towards historic expensive extremes versus real estate and stocks. One more big move up and they will be at the levels whereby historically money poured definitively the other way. If you aim to keep buying after they reach those levels then history is not on your side.

      Gold and silver supply/demand forecasts show supply exceeding demand as of 2014.

      Agri record plantings – supply is increasing – harvests decimated by the weather are the issue. Oil is more piecemeal – renewables, new gas finds in the US, slow switch. There will be no overnight resolutions – and there is likely to be a shadow bounce in commodities post 2015, per history – but not exceeding the 2013 high. In other words, a gradual process.

      Ignore solar cycles at your peril, my friend.

      1. We are betting on the same outcome in this asset class, which is a spike in commodities including PMs. The difference in opinion is how we get there, how long it takes (my view much much longer than 12 months) and that is what is so beautiful about the market. Everyone holds their own opinion and those opinions also change as facts unfold. Majority are always wrong and only a handful correct.

        I am of an opinion that majority of investors are way too bullish on risk assets right here. We are about to experience a bear market or even a crash post elections (or even earlier) and yet no one is expecting it because everybody has way to much hope placed on central banks. Bear markets slide on a slope of hope

        In my opinion, Eurozone is much worse than Lehman and we have a major contrarian outcome that will be obvious in hindsight, just like 2008 was looking at it today. However, right now no one believes it’s possible and is betting the other way.

        I remain long PMs because CBs will eventually print money. But I plan to hedge that position plus hedge with other shorts in Junk Bonds, Tech equities and some Asian & Commodity risk currencies in coming weeks or months. Why short those? I expect ca global recession where redit spread widen similar to 08, margins and earnings to drop a lot in US due to currency rising, and finally Asian CBs to cut rates making their currencies much less attractive.

      2. A bear and recession sometime after the US elections, i.e 2013 – that’s closer to my view. But first we need a push up in equities and then a even bigger push up in commodities. People are not too bullish on risk right now – it’s the opposite. The parabolic move into bonds we’ve just had, fund inflows/outflows, current putcall/bullish percent, oversold/overbearish commodities, overbullish dollar. We are ripe for a move the other way, and that’ll be the theme for H2 2012. A bear market and recession now, i.e. mid 2012, would be counter secular, solar and presidential cycles. If it happens it would be an anomaly against all three. Europe is no Lehman – Lehman was all about the unknown – we’ve had 3 years of understanding the Europe position. There will be no defaults. Just a mess that gradually gets less messy. Once it’s properly resolved, stocks will be far higher in already mature secular bull.

  2. NASA solar-cycle predictions are known to be inaccurate. According to some other predictions (sorry no link as for now, will provide later) solar maximum would be later then 2013 (towards 2014) due to cycle extension. This would leave some more time for really and blow-up. But it may be wish thinking.

  3. Re PMs I think there is little evidence to show the absolute high will be 2013.
    It is quite possible that the nominal low will be this year and from thereon in you will see lower lows. The relationship will not change until mid next year when the pace will pick up. The retracement we are seeing is not out of line with past moves. e.g. Gold fell by 40% in 1976 and it still went on to make a mania stage 1977/8/9.
    I am long gold at 1542 and hope it goes below 1500 to add.

  4. This “recovery” is the worst on record. To say this is like all previous “tough times”, I am not too sure on that one. I get it, times have been tough in the past, but we are not experiencing real economic recovery. Maybe it’s around the corner… but I’ll stay with what has been happening – slow recovery, faster money printing. Long anything that I can physically touch, smell, and hold.

    1. At the end of the 1940s secular bear, government debt was excessive due to world war spending and we had stagflation. Yet, thereafter, a golden economic period erupted and even those devastated countries recovered well. It would have taken a leap of faith around 1947 to see that coming. Certain factors contributed to the growth – interest rates were kept low, governments intervened with various programmes of tax cuts, spending and reforms, but ultimately, a natural cycle of cleansing (the 1940s secular bear) gave way to a natural cycle of growth (the 1950s secular bull).

      The current secular bear is also a cycle of cleansing following the excesses built up from the 1980s into 2000. Yet governments do what they can to keep growth going in what would otherwise be a shrinkage period, for fear of social unrest, by intervening. What’s different this time around? The ‘jobless’ recovery to which you allude. Part of that is tech replacing jobs on a permanent basis. But also different on the plus side is that we have never had this degree of government intervention and monetary inflation.

      As the natural cycle of growth takes off, supported by low interest rates, government programmes, the fastest rate yet of technological evolution, money printing won’t be needed. Debts and inflation will be permanently ratcheted higher, but growth and revenues will increase whilst money velocity starts to tick up and make the massive monetary inflation of recent years is felt in the economy.

      Secular stocks bull markets start from a mess, but with stocks at historic cheapness and value. Once growth is properly entrenched and money printing is over, the secular bull will be already mature and stocks much higher. Multiple indicators reveal stocks to be close to that historic cheapness point: 10 yr rolling returns, p/es, stocks-bonds and stocks-commodities ratios.

  5. I think we have a good debate going on here so I thought I write out a decent massage back.

    I agree with the comment above by RyKnow. This recovery is the worst on record for a reason and it is because debt keeps getting higher and higher. The more defaults we have, the better it will be for the system in the long run to re-start another secular bull market. That is how capitalism works or at least it was meant to work. That is why I disagree with John and think that there is a 100% chance Greece will default sometime in the next few months or quarters (most likely after US / German elections). Politicians are holding it all together until they get re-elected.

    John said:

    “People are not too bullish on risk right now – it’s the opposite. The parabolic move into bonds we’ve just had, fund inflows/outflows, current putcall/bullish percent, oversold/overbearish commodities, overbullish dollar.”

    Those are only short term indicators, which can be worked off within weeks or months. So yes we are overdue for a mean revision rally, but I think the market is going to have heaps of trouble as we come into bad seasonal months of September and October and also come 2013 post elections. Don’t worry about put call ratios and Public Opinion on the USD, they swing every few weeks from one extreme to another. Investors are extremely complacent in “proper” long term indicators:

    – Earnings and margins are at record highs and will mean revert
    – Fund cash levels are as low as 1998/99 and 2006/07
    – Corporate credit spreads are very low and will widen
    – US GDP has grown 5 quarters at around 2% or lower which is stall speed
    – Recessions occur every 3 to 4 years of expansion during secular bears
    – No Western government default for over 60 years means we are overdue

    In 2002, recession was quite bad. In 2008, it was much worse because the debt level was higher. Now approaching 2013, while private sector has de-leveraged a bit, the debt is still overall much higher due to government deficits – so the recession that is coming will be even worse than 2008 and w haven’t even recovered from the previous one yet. Next time around, they will be no stimulus programs and no bailouts or TARPs!

    John said:

    Europe is no Lehman – Lehman was all about the unknown – we’ve had 3 years of understanding the Europe position. There will be no defaults. Just a mess that gradually gets less messy. Once it’s properly resolved, stocks will be far higher in already mature secular bull.

    Ok than, tell us what you understand about Europe, since you had 3 years? My opinion is that Europe is the biggest unknown. I personally think majority of investors don’t have a clue how bad the situation really is. We have had 3 years of this crisis and no one has figured anything out. It reminds me of subprime.

    In 2006 US housing market started to fall. By early 2007, Bernanke was saying that it will be contained within subprime. Market was still rising. By earlier 2008 it was spreading like fire and the market barley started to fall. Than it really hit us, and by late 2008 we a had a crash. It took 3 years for it to play out and end in 2009. And the whole time, people were saying… we already know everything about subprime, it is not as bad as people think it is. This EU crisis started in 2010 and it will play out all the way until 2013 or even 14 with some major problems yet to come.

    There will be defaults – it is the way capitalism has always worked – and it will start with Greece first and most likely a few banks around Europe, including a German bank! This is not a mess, but a big debt problem. You cannot solve a debt problem with more debt, so your claim that it will get less messy does not make any sense to me, unless you mean we will have less debt. So how do we achieve that? A default of Greece, similar to default of Lehman. Just let them go bust, it will be better for everyone because we will have a major bottom at hand!

    Ok well to summarise… I will agree to disagree than. I am super bearish on the economy going forward and on majority of risk assets. I don’t know if I will be right or wrong. The market will decide.

    I am playing this by positioning myself long Agriculture and PMs especially Silver (large position in my fund), because I believe CBs will print money when something awful occurs. Having said that, on the other side of my book, I want to hedge my longs in commodities by being short US stocks (especially consumer discretionary and technology), high yielding risk bonds (especially emerging market bonds and junk bonds) as I think spreads here will widen dramatically and finally Asian / Commodity export currencies as I believe CBs will cut rates / print money all across the world. Whenever governments and CBs print money, bonds and currencies don’t benefit, but PMs do. As for stocks, I see earnings dropping and economy slowing meaningfully across the global, so I do not want to be long here.

    1. More defaults would be appropriate for the cleansing cycle, and would be in line with idealised free market capitalism. But politicians don’t want a deep cleansing because it would lead to social trouble and likely their removal from power. Both in words and actions, the European leaders have made it clear that they don’t want breakup or defaults. So Greece would need to be an inevitable default that they are powerless to stop. The history of country defaults shows that they are centred around near term debt commitments that they can’t achieve. With Europe and the world united on not wanting a Greek default, why would they let it happen when they can change the rules?

      I think you misunderstand the nature of secular bear markets. The worst point is the nominal low – in this case, the turn of 2008-2009, facing total system breakdown. Thereafter is a slow process of mending. 2008 was a house of cards because the complex derivatives involved were highly unknown. The Euro debt situation is much more known, and there has been 3 years to digest it. There are no easy solutions to it, but we have seen a piecemeal approach to it over the last 3 years – low rates, bond buying support, bailout programmes etc. Is it resolved? No. But my point again is that once it is resolved the secular bull market will be advanced and mature already. Secular bull markets begin from a mess but with extreme low valuations. You seem to expect that defaults are needed to clear out the problems. But that’s not in line with history, secular bears, or government intentions.

      I am looking for a medium term pro-risk rally for the second half of 2012, with commodities then leaving stocks behind in H1 2013. Medium term indicators support that – indicators that recent reached the levels of mid-year 2010 or mid-year 2011, such as insider buying, bearish ETF volume, absolute Nymo, parabolic spike in bonds.

      Ultimately we concur on the long commodities positions, and also that stocks will tip over, but not on the timing or the severity of the stocks declines.

  6. I must say, John is absolutely right here. The 2008-09 recession started after a seemingly benign minor crisis with banks in mid 2007. We had no idea it would all lead into the collapse of major banks within just a year. The banking problem seemed to come out of nowhere, this debt crisis had a more obvious point of origin.

    The EU debt crisis is far simpler to fathom. It is not benign and unlike the banking troubles, it involves more structural changes, which will have beneficiary changes in the long term. All that the banking crisis did was it rapidly deteriorated over the course of a year, causing a worldwide slump. The EU debt crisis is 2yrs old now and hasn’t caused a major slump worldwide. After all, the EU makes up roughly 20% of global GDP now, and the Chinese and Indian economies are far more representative of the global economy now, as it shifts from west to east.

    The debt crisis suddenly burst onto the scene around 2-3yrs ago, and we know what we’re dealing with. Economies grew too fast, and we’re going through a period of returning back to the level of GDP which we’re supposed to be at. The reason why growth disappoints is because GDP is meant to be at a far lower level, but policies have maintained the level of GDP. Check out what happened in Japan since 1990, they’ve had a debt crisis, but GDP has managed to maintain an uptrend, even though it was a far slower pace of growth.

    It could take a few years to return to a trend of sustainable growth, but it is all part of the healing process, to rid the system of the toxic excesses of the last great boom. The fiscal cliff in 2013 will probably be the catalyst which sends the US into another recession, as it will automatically introduce cuts to spending, which should’ve been made already. The US has simply been delaying the EU model, which is that we must all live within our means.

    1. No one is absolutely right here right now, because it has not happened yet. The market will decide what happens over the coming quarters and into 2013/14. We will either get defaults and a EU banking crisis, which I think is coming – or we won’t have defaults at all like John thinks. By the way John is not on his own. Every single person I have emailed on my mailing list (including John) and there are 30 or so good traders, thinks there won’t be a default and that CBs will keep printing. Everyone is so certain it will all hold together! Hmmmm….

  7. While it is cool to look at charts and indicators and sentiments reads and analyst reports and so forth and so on, the best indicator of what is truly happening in the economy is to get out from in front of your computer and go outside, visit malls, restaurants, shops, etc.

    I can tell you this (from doing such), things are not disastrous but they are definitely not good. The market is more manipulated now than ever before. Period. Therefore a read on the economy via asset prices is not a true tell of anything except for how far the manipulation has taken us. This also includes some data figures that come out – did we already forget how housing sales had to be readjusted for a three year period?

    I don’t know how this will end and neither does anyone else. But based on getting outside and visiting the places around me, I can make a pretty good projection on what I believe is to come.

    By the way, I don’t live in Michigan or California of Florida. I live in Texas. A very wealthy (but not me) part of the State. When I see the upper-middle class slow down their spending as I have in the last two months… well, you get the picture.

  8. So if the Dow goes from 14,000 at the end of 2012/beg of 2013 to 8,000 in 2014, is that the result of a crisis or default in Europe??

    Just wondering, because that is what we can most likely look forward to in terms of this potential recession/correction….

    In that case, I am wondering where money will flow to, PM’s or Treasuries…??? It most likely won’t be both….

    1. I don’t see the Dow going as low as 8000 in the next bear circa 2013/4. I expect the associated recession to be brought on by the parabolic ending move in commodities. I expect PMs to be the worst performer in that bear, as they reverse their blow off top.

  9. Solar cycle 24 should peak early 2013, but the planetary cycles that “cause” the sunspotcycle suggest it could be a long flat top, perhaps a double top. Maybe the top could be as late as autumn 2014.
    So if we expect a commodity-peak at solar max, it could be some years ahead. We could first see more weakness, and the the commodity-pop… and then the solar-max recession.
    When looking at my Norwegian fourier-projection it could suggest something like that.

    It suggests depressive markets until summer 2013, but looks like the QEs may have pumped up equties and neutralized the cycles.
    The next major peak from the fouriers is Oct 24 2014. Then mostly bearish until June 16 2017

  10. funny to look at the US household debt burden chart, why not put US government debt chart next to it? Looking at household one miss the big picture: government assume a lot of debt/spending to make sure the household number not go to moon. In another word, the debt burden is just transferred, but NOT organically reduced, which is the base for real growth. Please!

    1. Yes I’m aware it’s been transferred. But the point is that the private sector is the engine for the economy, and the ratcheted higher public debt is manageable – through keeping rates low, inflation eating at it and growth and revenue offsetting – as happened in the 1950s.

      1. in 1950, world is different, where rebuilding after WW2 is driving the growth, and many new military technology converted into economic acitvities that significantly improved efficiency.

        Right now, look around the world, almost all sovereign is buried under huge debt. they all are busy plugging holes with their moeny. The dislocated the capital usage, money used to save bank, to save housing.. how much you think really go to the core technology development that helps develop breakthrough technology? capital is wasted, no breakthrough coming.

        the game goverment play is to buy time, to hope some breakthrough comes, like everything else, you are paying for the time, if no breakthrough, it only pays back more. This strategy would NOT always work.

        look around, Euro, Japan, China, US all get serious trouble. nothing has been addressed or even close to be addressed, how could one be so optimistic?

        Appreciate your work anyway.

      2. It’s unsustainable exponential trends in population, growth, inflation, resource usage, climate change and species extinction – versus – exponential technological evolution. That’s a big ask for the agents of tech evolution. But, the crunch point in most of those unsustainables comes further out – 2030-2050 (see my Timeline). So, I believe there is room for a further secular stocks bull market before then, and it will be accompanied by the fastest rate of tech evolution, the greatest density of tech paradigm shifts. But those tech shifts have to address all the problems I listed for us not to reach crunch point. Whether that’s achievable I’m not sure it is. War cycles suggest a mid-century war period and I think that could be about right. But for now, I believe there is ‘room’ for tech-enabled growth to resume with those issues further up the curve. So optimistic now, less so further out.

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