May 21, 2024

Commodity Insight: A year without precedent

The big news this week was the Federal Reserve voting to keep interest steady near zero and hold them down for years. In addition, the Fed offered specific guidelines regarding how long to keep rates historically low until inflation increases.

They also stated that inflation should remain below 2% until sometime in 2023. All in all, the markets viewed the news as bullish.

But then the Trump Trade War with China was initially viewed as bullish, but that turned out to be a bust. From Aug. 20 on "Despite Trump's claim that 'trade wars are good, and easy to win,' the ultimate results of the 'Phase 1' trade deal between China and the United States — and the trade war that preceded it — have significantly hurt the American economy without solving the underlying economic concerns that the trade war was meant to resolve."

And from Business Insider by Linnett Lopez: “We can now say, officially, that Trump’s trade war with China is an unmitigated, farcical disaster.”

The trade war with China began in March 2018, and an agreement to end the conflict was not signed until January 2020. It was widely assumed that once a deal was signed, China would embark on a buying spree for U.S. ag goods that would also be bullish.

But that was also a bust because weeks after the trade deal was agreed upon by the United States and China, coronavirus became a pandemic across the globe and markets of all stripes did a nosedive.

The rub, however, was just as the pandemic began to push all markets lower, OPEC slashed the price of crude oil and that market also collapsed. Crude prices went from about $62 a barrel to less than zero.

At the time, I thought the cut in crude prices by OPEC was as important and bearish for all markets as the coronavirus. With the benefit of hindsight, that was a perfectly accurate forecast on my part.

But, as we know, stocks and commodities bottomed in March, took off to the upside and did quite well through and including this week. They did so even though OPEC is once more cutting the price of crude they sell because demand has been terrible.

Total driving miles grinds lower because people are working out of their homes. And when cases of coronavirus ratchet higher here in the United States and across the globe, as seen this week, demand for crude oil only gets worse.

The wild card when it comes to inflation likely rests with the pandemic that has blurred the outlook for consumer spending habits. Some are already dubbing the years ahead as “The Age of Disorder.”

From "Is it time for a New World Order? Ever since the double shock of collapsing oil prices and the advent of the pandemic six months ago, it has looked as though the existing order cannot hold. That order, associated primarily with the names of Paul Volcker, Margaret Thatcher and Ronald Reagan, was built around independent central banks and aggressive globalization and oversaw some two decades of impressive growth, then another two decades marked by repeated crises and deepening inequality and discontent. COVID-19 appeared to administer the coup de grâce."

There is no doubt the pandemic has blurred the outlook for consumer spending habits. From Deutsche Bank by Henry Allen: “For instance, already a majority of young adults are back living with their parents. The pandemic sent youth unemployment to its highest levels in over 70 years of recorded data. The majority of young adults are left to deal with the social ramifications of being priced out of the housing market, which includes living with their parents and delaying marriage and kids.”

Trade wars, collapsing markets, coronavirus, people working out their homes and young adults moving in with their parents because job prospects are so lousy is the environment in which we now live.

According to most experts, that environment has longer to run. And how it impacts consumer spending habits remains to be seen.

But I am in the camp that believes the long term impact of coronavirus will prove to be price positive for commodity values once the new year arrives.

This year, commodities, per se, are down about 11% from a year ago and far from pricey. The pandemic coupled with the Fed’s desire to spark inflation will likely lead to a period of “stagflation” as seen in the 1970s and 1980s.

In such an environment, paper markets languish while hard assets, commodities, head higher. But first we have to get past 2020, a wild and crazy year without precedent.