Commodity Insight: An august August

Wall Street legend Martin Zweig is known to have said time and again, “Don’t fight the tape and don’t fight the Fed.” The theory about not fighting the Fed is simple.

The Fed usually gets what it wants. Not always and not necessarily right away. But historically the Fed gets what it wants, which means don’t fight them.

A few weeks ago, the Fed announced a new monetary policy that I touched on a week ago in my column. This week, the Fed announced a new and historic approach to inflation and employment. The Fed is now going to tolerate higher inflation and welcome a stronger labor force. From Market Watch, "Support for strong labor markets would not have come from a central banker a generation ago. In the past, strong labor markets for Fed officials meant that higher inflation was just around the corner and a reason to 'tap the brakes' and raise interest rates — even if there was no sign of higher prices."

The Fed wants higher inflation and the odds are great they will get what they want. Investors, traders and ag producers need to understand fully what the Fed is trying to accomplish.

The Fed is going to keep interest rates at historically low levels while pumping more and more money into the economy via quantitative easing. Such a scenario, in theory, is bullish and inflationary.

If you doubt for one moment the power of the Fed, consider how stocks and commodities performed in August that just ended. The Dow Jones had its best August in 30 years while the Nasdaq and S&P rose to new all-time historic highs.

Soybean prices rallied $1 a bushel. Natural gas had its best August in 11 years. Hog futures gained $14 on cattle futures. Corn and wheat prices hit 6 month highs. Silver prices jumped more than $6 an ounce, $30,000 per futures contract.

And the strength, in my view, was due to the Fed pumping money into the economy in an effort to spark inflation. A host of other markets also rose sharply in August making the month flat out bullish.

Still, at this point in time and in light of the current environment, I remain ambivalent regarding the long side of most markets. After all, following the Great Recession of 2007-2009 the same fears and warnings about a jump with inflation were touted and loudly.

Yet, inflation never reared its ugly head. And by inflation, I am referring to the Fed’s own target of 2% on a sustained basis.

Consider: Not only has inflation remained below 2% since the Great Recession, it did so in face of the longest economic expansion in history coupled with the lowest unemployment rate in 50% of 3.5%.

The most recent data from the Labor Department pegs the unemployment at 8.4%. Two months ago, the rate was 14%, the largest in 90 years.

If inflation remained under 2% with the largest workforce in 50 years, it stretches my mind to believe with the current workforce so undersized that prices can do much on the upside.

Also keep in mind that September is the most bearish month of the year for stocks and commodities. Most believe that October is the most bearish, but data shows clearly that it is September.

However, many investors have heard of the October 1987 crash, as well as the Great Crash of 1929. More recently, in October 2019, stocks rolled over and dropped sharply with the decline ending just after Christmas.

What tends to unfold is weakness in September that, under certain circumstances, carries into October with sharply lower values making headlines.

Here is how I am viewing the current landscape regarding stocks and commodities: Both markets peaked out in January and February and dropped sharply into March before turning sharply higher.

But both markets are now facing September, a month that historically shows more weakness than usual. I seriously doubt upward momentum can continue in the face of the largest group of unemployed workers in decades amid the coronavirus pandemic that is far from being under control.

But I do tip my hat and salute the bulls that sponsored the huge gains in the month of August for virtually every market on the board. The price gains with some individual markets were simply breathtaking, enriching the bulls far more than I thought possible.

By any reasonable measurement, August was historically august.