March 04, 2024

Commodity Insight: If you are long, you are wrong

The last weekly column I penned in July was entitled, “A new era amid unprecedented volatility.” The final paragraph stated boldly: “We are entering a new era for food and energy prices that will not be solved until 2025, or later. A new era, highlighted by shortages of food and energy amid unprecedented price volatility.”

Over the past few days I was on the receiving end of a few phone calls with criticism about being wrong with such a bold forecast as above. I replied clearly with no hesitation.

I am firmly bullish on the food and energy markets moving into 2025 and later. I have not changed my market stance.

However, in the past few trading sessions, a host of markets have tumbled badly. Actually, there is nary a market of any kind that is not leaking to the downside and profusely.

In the world of finance and markets, when it is said about a market that prices, values, shares are “breaking out to the downside” it is a very bearish statement. It means that prices, values and shares are falling below levels in the past that supported the markets.

When a market breaks below support levels it hints loudly that the bullish trend has changed and odds are high that further red ink, further losses will be seen.

Most of this week, stocks, bonds, corn, wheat, cattle, hogs, gold, silver, copper, crude oil and most tropical markets posted “a breakout to the downside.”

And so did the major commodity indexes that are to commodities, per se, as the Dow Jones is to the stock market. Yes, indeed, this week virtually every market anywhere posted a “downside breakout.”

My bold forecast calling for a new era for the food and energy markets has not been even close to being correct. But also understand the Federal Reserve has been raising interest rates at the fastest level in 40 years and has been doing so since March 2022.

As of now, interest rates in the United States are the highest in 22 years. It remains to be seen if the Fed hikes rates further because there are clear signs that inflation is coming down significantly.

The reason there has been so much weakness with all markets lately is because the Fed is getting what it wants. It wants rates higher to dampen demand and push prices, values, shares and so on to lower levels.

And the reason that old saying, “Don’t fight the Fed,” is so true is because of all the red ink, all the hemorrhaging being seen recently with markets of all kinds. The Fed usually gets what it wants.

This week while the entire Big Four — stocks, bonds, currencies and commodities — did a huge nosedive, there were some interesting developments with monetary policy in several nations across the globe.

In Argentina, the central bank hiked its benchmark interest rate by 21% up to 118%. And, yes, those are accurate numbers.

At the same time, Russia’s central bank pushed interest rates higher by 3.5% up to 12%. But the Peoples Bank of China, in an effort to support their economy, cut interest rates from 2.65% to 2.50%.

I viewed the rate cuts in China as encouraging for the food and energy markets. Still, more needs to be done by the PBOC.

Since 1990, an old saw in the marketplace has been, “As China goes, so go commodities.”

As the Fed and all other central banks raise rates it slows or kills demand. Higher rates do not create “more stuff.”

The Fed can hike rates from now until the cows come home, but that does not create more food and energy. And from now until 2025 and later, all my work suggests a new era is at hand for those markets.

In the recent phone calls I have taken about my bold forecast from late July I said things such as “The Fed is hiking rates and pushing all markets lower.”

I said, “How can any one market go higher when all other markets are going lower?” I said, “Yes, lately, if you are long, you are wrong.”

But at the end of each phone call I also stated, “The food and energy markets are headed higher, but the path will be volatile.”