All commodities are rebounding, but it looks like a dead cat bounce. From oil to lumber to copper to agriculturals, commodities are in a major downtrend.
The role of the central banks has been expanded so much to make government statistics almost meaningless. They have distorted the meaning of market pricing.
Commodities, however, represent one of the few markets still responding to market forces. The bottom line is that they are saying the economy is not as strong as the Fed wants us to believe.
The importance of commodities is that they tell you the future of inflation. Inflation keeps declining as we have been saying for a long time.
The latest data on the broad consumer expenditures price index reflect prices slowing down even further to 0.7%. Wages of all employees, meanwhile, rose only 0.53% y/y. Inflation is declining dangerously close to zero percent.
The weak economy (see previous post) will cause commodities to remain weak. Weak commodities will cause inflation to decline further and become deflation.
Investment in commodity sensitive investments (such as XOM, MRO, CAT, GLD, ..) are unattractive. Yields - the price of long-term money - will trade in a range. Short-term interest rates will remain anchored to zero present.
George Dagnino, PhD
The Peter Dag portfolio
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