Here in the final quarter of the year and viewing the entire Big Four — stocks, bonds, currencies and commodities — I wish to make some observations. Keep in mind, however, the year has another few months to unfold and a lot can happen in a short period to cause me to change my mind, or become more embedded in my reasoning.
Stocks: In September, stocks as measured by the Dow Jones from the high to the low fell 1,886 points. It was one of the most bearish Septembers anyone has seen in years. Here in October, with the month not yet over, the Dow from the low to the high has rallied 2,267 points, one of the most bullish Octobers anyone has seen in years.
Bonds: For some time now, stocks and bonds have been moving opposite each other and in a big way. While stocks rose sharply in October, bond futures fell to a four-month low and seven full points off the September high. The rub is this: stocks follow the lead of bonds. With bonds hugging a four-month low, stocks appear pricey.
Food for thought: The last time bond prices were down at today’s levels was on Oct. 12. But on that same day, the Dow was as low as 33,338 compared to today’s 35,600, or so. Stocks appear pricey.
If inflationary pressures continue to bubble up, the odds favor even lower bond prices and higher yields. In turn, that hints stocks are overvalued and poised to get a haircut.
The economy may be on the cusp of stagflation, a scenario of sluggish growth and rising inflation. But, frankly, few on Wall Street embrace such a theory. But I do.
Currencies: The dollar has been moving higher all this year until a few weeks ago. This week, the dollar rolled over and posted a new one-month low. Historically, when the dollar is weak, hard assets, commodities if you will, tend to rise in value. My lean is the dollar is headed much lower and commodities, per se, higher yet.
Commodities: The past year has been one of rising commodity prices. There is a shortage of just about any kind of commodity and values tend to rise when supplies are low. When supplies get historically low, commodities tend to rise to new all-time highs and lofty valuations. That is what history shows clearly.
Energy: Because of under investment in crude oil drilling going back years coupled with a shortage of coal and natural gas, the energy markets are skyrocketing upward. And the energy markets have always been a leading indicator for commodities, per se. A year ago crude oil was around $43 a barrel, but today, nearly $84.
Grains: In recent days and weeks, oat prices posted a new all-time high with soybeans, wheat and corn prices now at elevated levels from a historical viewpoint. There is a severe shortage of milling wheat flour that is likely to last into 2022. Cotton prices are at their highest levels in 11 years. Elevated valuations are everywhere.
More often than not, commodity values get caught in a domino effect where one market can influence another. The rise with crude oil and natural gas prices, for instance, has sparked sharp gains with fertilizer prices.
In five months or less, U.S. farmers will have to choose a grain to sow. With grain prices historically elevated and input costs such as fertilizer, gasoline, machinery parts and tractor tires rising daily, what will farmers plant that is profitable?
Fertilizer prices have gone parabolic in recent weeks. Such a scenario will be quite bullish if some grain producers are priced out of the marketplace and use less fertilizer than normal — think about that for a moment.
Here is the bottom line for the grain complex in 2022 and possibly longer: A fierce battle over the acreage mix will unfold by spring. Are there enough acres to plant all the crops?
Is there enough fertilizer available at reasonable prices for the crops? And what happens to fertilizer costs if crude rises to $100 a barrel?
Murphy’s Law may rear its ugly head, as well. With so many elevated markets, there is little room for a shortfall impacting ending supplies of a host of commodity markets from grains to the energy markets. A shortfall brought about by an unexpected event, a black swan event, will simply push prices higher yet.
Livestock: My work suggests the cattle market is on the cusp of a multi-year bull market that will unfold quickly in 2022. However, hog prices are likely to remain roller-coaster-like with a downward bias due to increased production and far less exports to China compared to recent years.
Moving forward, a supercycle for the commodity markets is unfolding. Inflation is going to be with us for a long time. While that scenario unfolds, bonds head lower, interest rates higher and stagflation becomes embedded in the economy. Looking around, I see inflation showing up here, there and everywhere and as far as I can see.