MARKET MESSAGES
2/24/13 . . .
Last week I noticed most, if not all, commodities were falling. In fact commodities have been falling since February 1st. This “might” be pointing toward sequestration and its effects.
Commodities are like the canary in the coal mine for the economy and certainly they point towards inflationary expectations. Commodities can also be a good indicator for interest rates.
Congress kicked the can down the road on January 1st and perhaps around February 1st, investors began thinking that sequestration was a reality in some form.
Just like January 1st, I believe sequestration will go into effect and deep cuts will actually take place (but only technically). The difference this time is Congress might not kick the can down the road. Meaning somebody (or everybody) is going to get hurt with a compromise spending bill.
A lot of the sequestration cuts don’t take place immediately (the government can’t do anything immediately, big surprise there). After some mean-spirited wrangling (perhaps several weeks of this), Congress will likely pass a compromise bill that both parties hate (that’s called a good compromise). This compromise will entail lowered spending (higher taxes are likely too) and that could/should mean a slower economy. How much slower depends on how deep the cuts and how high the taxes. All of this points to a whiff of deflation.
To Edson Gould deflation was the ugliest of words. It was something that was intolerable to investors. He lived through the depression years and saw how ugly it could become. Certainly something like that isn’t possible today without a completely collapsing economy (like the 1930s). I reserve judgement of any of that until large step 3 down is finished (see chart #10.0 on my charts). It would be nice if large step 3 never takes place because I do fear it. I fear it only because 2008 taught me that things “could” go wrong in ways that I didn’t anticipate. I had always anticipated something bad, but it never had a face to it.
Looking at a longer term view of the following chart shows that all commodities peaked in early 2011 (commodities charts begin at #50.5 below). Now that’s NOT the normal commodity/economy cycle. Normal calls for commodities to peak after stocks. Looking at the second chart will show what is normal for stocks and commodities.
The glaring fact that is hard to miss is the U.S. economy is addicted to money. Like all addicts, it takes more and more addiction to keep the patient functioning. When the addictive substance is cut off or reduced, the addict suffers withdrawal. In 2008, the economy suffered from a credit addiction that collapsed, almost overnight. The objective is to cut the patient off in such small amounts that he doesn’t become deathly sick. That never works because there really aren’t any soft landings on large addictions.
The next chart is the normal timing cycle for bonds, stocks and commodities.
In 2007, this chart was dead on correct. Commodities didn’t start breaking down until well after the stock market peak. But presently we have a definite commodity peak in 2011. What happened? Something different, that’s for sure. There is always the possibility that the economy will strengthen in the months or years ahead and a true commodity peaks lies ahead (we’ll see???).
Presently all of this doesn’t mean much, but it deserves closer scrutiny in the weeks and months ahead. The implications are great and can keep you ahead of the curve.
Worst case scenario is that we have peaked in the stock market and we’ll have a significant correction. This would correlate well with the breakdown in July 2007. This correction would be followed by a recovery to new highs (like October 2007). All of this would fit with the net new highs telling us that we have not seen the ultimate high. Internally, a future recovery high would probably have lots of problems.
Best case scenario, we will drive to a new high later in 2013. Late 2013 has been my target date for some time and it still remains. We’ll see.
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