Commodity Insight: Inflationary pressures favor commodities

If my work is correct that inflationary pressures for the U.S. commodity markets will rise sharply in 2021 and beyond, it will be interesting to see how stocks, shares and the Dow perform during the same period.

I mention those two broad groups of markets because the spread difference, the price difference between stocks and commodities, has never been as wide as it is today in favor of stocks.

Both markets have been pushed to extremes in recent years with stocks bumped to the upside and commodities shoved to the downside. Moving forward, we are about to enter a period when the spread narrows in favor of commodities.

If such a scenario unfolds as it did in the 1970s and 1980s, the money will flow out of stocks and into commodities will be subtle. It will be as Carl Sandburg described fog rolling in “on little cat feet.” It will happen inaudibly and over a long period of time, which could well last for years.

It goes back to that old saw, “Money goes where it is treated best.” It will be a period where commodities outperform stocks and be nothing more than history repeating itself.

Read carefully the words and analysis of Mark Hulbert who penned an article a few days ago on MarketWatch.com, entitled “Only two other times since George Washington was president has the U.S. stock market been as far above trend as it is now.”

Here are a few lines from Hulbert you may find of great interest: “The internet bubble in 2000, the 1973-1974 bear market — and the current market — are alarming outliers in the U.S. market’s 227-year history.

“Here’s some disturbing news for those of you who think you’re basing your investment strategy on history: The U.S. stock market must fall 43% in order to be in line with the longest-possible trend in its history.”

Hulbert ends his analysis with the following words of warning: “When you hear a conclusion about stocks over the long term based on anything less than the full 227-year timeline of the U.S. stock market, ask what the result would be if that entire history was counted.”

He is saying clearly that stock investors, stock traders and the general public should consider the entire history of the stock market before plunking down hard-earned money because your steely-eyed broker says, “Buy stocks, they are cheap.”

Hulbert is saying: Are things cheap based on history? Or cheap because values have recently taken a nosedive?

The CRB index is to commodities as the Dow Jones is to stocks. The CRB is made up of 39% energy markets, 41% ag markets, 7% metal markets and 13% industrial metals.

The CRB hit an all-time high of 470 in July 2008, but fell as low as 127 in April 2017. It is now trading around 158, down about 65% from its all-time high.

The Dow, Nasdaq and so on are less than 5% from their all-time high points. Stocks are pricey, commodities cheap.

The point I am trying to make is change is a process, not an event. And history shows clearly that history tends to repeat itself similar to the proverbial pendulum that swings back and forth to extremes before reversing.

The big story unfolding in the world of commodities is that inflation is on the rise for the first time in decades. The Fed is calling for, hoping for and looking for inflation.

The desires of the Fed are so great that it changed its monetary policy to actually encourage inflation, a drastic maneuver not seen in 40 years. The Fed is bound and determined to boost commodity values that are now trading far below historic highs.

When considering investing in the stock market, think carefully how overvalued stocks are based on history. When considering speculating — or hedging as a grain or livestock producer — think how undervalued commodities, per se, are based on history.

Keep it simple. Avoid buying stocks. Avoid selling commodities.

In 2021 and beyond, climate change, coronavirus, money flow and history repeating itself will spark inflationary pressures that drive commodity values higher. But for stocks and shares, values may move sideways or lower for an extended period of time.

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