Commodity Insight: As scarce as hen’s teeth

The third quarter of 2022 ended historically bearish. Stocks as measured by the Dow Jones Industrial Average fell 22%, the S&P 500 dropped 25% and the Nasdaq hit the skids to the tune of 33%.

Bonds tend to hold up better than stocks. But this year bond prices did worse than stocks.

Some argue 2022 is shaping up to be the worst year for bonds since reliable recordkeeping began in the late 18th century.

As a result, a new economic era may be unfolding because stocks and bonds took such a beating in the first three quarters of 2022.

In early 2021, a few central banks began hiking interest rates due to rising inflation. Not many, but a few.

By the end of 2021 and into 2022, wealthier countries began lifting rates unlike anything seen in 50 years.

To understand how ugly the bond market has been this year, consider the thoughts of Jeff Sommer, author of Strategies, a weekly column on markets, finance and the economy for the New York Times.

He writes: “This year’s misery looks extraordinary on a much longer historical scale.”

Sommer noted Edward McQuarrie, an emeritus professor of business at Santa Clara University, has compiled U.S. bond returns going all the way back to 1794.

“You can safely say that through Tuesday,” Sept. 27, McQuarrie said, “U.S. bond returns are the worst ever recorded.”

Without hesitation I am quick to suggest to investors, traders and agriculture producers to remember one of the oldest sayings in finance, namely “don’t fight the Fed.”

The Fed usually gets what it wants and what it wants now is to slay inflation. However, this year is historic in that every major economy is jamming on the breaks to fight inflation at the same time.

Never in the past 50 years has economic and monetary policy by all the world’s major central banks attempted to fight inflation in unison.

From a recent publication of The Economist: “Maurice Obstfeld, a former chief economist at the International Monetary Fund, recently argued that central banks’ failure to consider the global effects of their policies puts the world economy at risk of a ‘historic’ slowdown. While any given rate rise may be justifiable, together they could have a greater effect than anticipated.”

In my weekly column last week, entitled “Canary in the coal mine for markets,” I wrote: “Fears are growing that the Federal Reserve is pushing interest rates too high too fast and the results will lead to a recession — a Fed-induced recession that could be far more severe than many expect.”

And deeper in the same column I stated: “More and more widely respected analysts and brokerage firms fear a hard landing with the economy as they believe the Fed is too aggressive in trying to slay inflation. A hard landing is the big threat in today’s marketplace.”

The big mistake in that paragraph is glaring. Yes, the Fed may be pushing interest rates too high, but the same may be said of the other major central banks of the world.

After all, never in the past 50 years has economic and monetary policy by all the world’s major central banks attempted to fight inflation in unison.

And one error, one mistake, or one rate hike too many could spark a hard landing across the entire globe.

Another quote from my column last week: “The Fed kept interest rates at zero for a decade while embarking on a policy of quantitative easing and created an asset bubble with stocks. Now, the Fed is not only ending that policy, but reversing it, as well.

“As a result, stocks, bonds and most commodity markets have been heading south, making the year 2022 historically bearish.”

When the Fed hikes rates, I shy from the long side of most markets. When the Fed hikes rates at a record clip, something not seen in 40 years, I turn ice-cold bearish on most markets.

When all the world’s major central banks lift rates on an unprecedented scale, as they are doing, I cannot keep up with the thoughts running through my mind and the pitfalls that lie ahead.

The central banks are trying to slay the inflation dragon — and there is no doubt in my mind they will kill it. But in doing so, will they slip, make an error and bring forth a hard landing?

Moving forward, there are a number of markets that are bullish, but only two commodities at this time I favor on the long side. The upside potential for both is high in probability and profitability.

Other than those two markets, I am picky about what I play on the long side of the ledger. I will not fight the Fed.

I strongly feel that a new economic era looms ahead that will be painful for investors, traders, consumers and agriculture producers. As a result, bull markets will be as scarce as hen’s teeth.