COMMODITIES LIKELY A BIG STORY IN 2018
As the Bank of International Settlements (BIS) initially identified and Charles Hugh Smith and I laid out in the Macro Analytics video: "The Results of Financialization - Part III - The Big Reversal", we are at the beginnings of what could be labeled as the "Big Reversal". The era of deflation and low interest rates is potentially shifting to a new era of Inflationary pressures and rising interest rates. A preponderance of central banks are beginning to tighten monetary policy in varying degrees in preparation for this longer term, demographically driven shift. If BIS research is correct, Commodities are likely to begin emerging as a big story in 2018.
Major investment players such as Jeff Gundlach are now pointing out that commodities are just as cheap relative to stocks as they were at historical turning points. Gundlach was referring to the following chart when making this comment:
Once "you go into these massive cycles... the repetition is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy."Investors should add commodities to their portfolios. There is a really remarkable relationship between a market cap or the total return of the s&p 500 and the total return something like the Goldman Sachs commodities index. The cyclicality is really repetitive.
Gundlach also noted that commodities are just as cheap relative to stocks as they were at turning points in previous cycles that began in the 1970s and 1990s. The S&P Goldman Sachs Commodity Index is up 5% this year, versus the S&P 500's 19% gain.
There is also a fundamental case for investing in commodities, Gundlach said. He pointed out that
- Global economic activity is increasing,
- A tax cut could boost growth and
- The European Central Bank is implementing "absurd" stimulus policies in the euro zone.
CHANGING INFLATION EXPECTATIONS
This "Inflation Expectations"chart from my friend Prof Thorstein Polleit derived from inflation SWAPS, illustrates the shift that is slowly beginning to occur globally.
The ECB released its startling new inflation forecast on 12-14-17.
The US Producer Price Index has been steadily rising for some time. The falling dollar has been distracting investors from the underlying changes occurring.
POTENTIAL SUPPLY SHOCK
THE YIELD CURVE
The flattening US yield curve is historically closely correlated with soft Agricultural food costs. We should not be surprised to see downward pressures in agricultural commodities begin to reverse in 2018 as central banks slowly advance their tighten efforts and the Federal Reserve further increases it rate of the "normalization" of its balance sheet.
You can fully expect the central bankers to do everything in their power to stop further flattening or inversion of the yield curve! Commodities as a "Hard Asset" will be the likely recipient.
After 8 years of central banks inflating financial asset it may now be the 'time in the sun' for the reflation of Hard & Soft (Food) Assets.