when i said multi-year bottom, i meant the uptrend will last for several years, not that we would have to wait for several years to see it begin. (at least i hope!) even though commodities tend to trend lower over time, they can have periods where they are in a bull market or general uptrend for ten years or more.
for instance, after WWII when commodities topped out in the early 1950's they trended down for about two decades until 1971. after bottoming in 1971 commodities were in a bull market until almost 1981, or about ten years. once again just like after the top in 1950 or 1951, we've had a couple decades of declining commodities prices and they are historically cheap. i believe it is time for another bull market in commodities and the difference is, i believe it will not be like recent commodities rallies we have seen. those were rallies within a bear market. they were not the start of a new bull market. consequently they were relatively short in duration, and they petered out. commodities made a significant bottom around 1982, 1985-1986, 1993, and 1999. of course none of those rallies lasted for much more than a couple years, and they were not powerful rallies. (none of these rallies were more than 30-40%)
what i am saying is that i believe the bottom forming in the commodities is shaping up to be like the one in 1971 rather than those examples i just listed. this time after commodities rally for a couple years, they will consolidate their gains and then push higher throughout the decade instead of falling back to new lows, just like in the 1970's. or you could look at 1932. commodities bottomed in 1932, rallied for several years before pulling back around 1936-1937, just like stocks and the economy had another setback in 1936-1937. but commodities were still in an uptrend, they didn't even come close to making new lows. in fact they merely retraced some of their gains off the 1932 bottom. after that pullback around 1937 they continued to rally all throughout the 40's until they peaked in 1950-1951. you could analogize it to the bull market in stocks i guess. stocks started a bull market in 1982 but had a serious correction five years later in 1987. well commodities bottomed in 1932 and had a serious correction five years later in 1937. but it was a correction within a bull market, not the start of a new bear market.
all i am doing is looking at history, and expecting it to repeat itself. commodities bottomed in 1932 and rallied until 1950 or so. after that long bull market for commodities they fell for two decades heading into 1971. then they rallied for a decade heading into 1981. then it was time for another two decade decline and that's where we are in 2001. well if the cycle holds, it's about time for another long bull market in commodities, meaning ten years or more. the bull market for commodities in the 1970's was shorter than the one that started in 1932, (approx 10 years vs 18 years) but it was sharper. perhaps this time the commodities bull market will only last 6-8 years and be even sharper. the point is, i believe this time when commodities bottom (perhaps we just saw it), they will not be making new lows a few years later like we have grown accustomed to over the last two decades.
of course these cycles aren't the only reason to be bullish on commodities. most everything else is falling into place as well. the dollar has been rallying for eight years or more and is getting ahead of itself, central banks are printing money like there is no tomorrow, interest rates are at historic lows, stocks are losing their luster as an investment vehicle, etc. these are all things that seem to be lining up in the right order for a change in trend.
does it seem all that strange that the dollar could plummet, interest rates could bottom and head dramatically higher, inflation could flare up, war could escalate, etc? these are all things that have historically benefited commodity prices. of course commodities have one more thing going for them as well. they are at prices not seen since the great depression or even earlier.
gee, what were valuations like the last time we had a big bull market? well in 1982 stocks in inflation adjusted real terms were at levels not seen since the great depression. the dow was at 1000 in 1966, and it was at 777 in 1982. interest rates were at historic highs just prior to the bull market in 1982. inflation had been rampant. the dollar had been on the decline for several years. the dollar had gone from 120 in 1970 to 80 in 1980. look what has happened recently. the dollar has done the exact opposite, going from 80 to 120 in the last 8 or 9 years. now interest rates are at extremely low levels. people talk about deflation now the way they were worried about inflation back at the end of the carter administration. just prior to the bull market in stocks volcker said he was going to change fed policy to target the money supply. look at what greenspan and company are doing. they are targeting the money supply all right, but in the exact opposite way. they are pumping it up with all their might. do you see how everything has flip flopped?
common sense would dictate that everything has lined up for a big bull market in commodities, not stocks.
what was sentiment like prior to 1982? were people salivating at the prospect of a new bull market in stocks? nope. they were all yapping about gold and silver, and oil, etc. right at the top. what are people doing now? i went to a wedding this summer and when people found out i invest for a living they loved to ask me what i thought of the stock market. people that had just recently gotten interested in stocks. they all wanted to talk about fiber optics junk like jdsu, cien, etc.
they weren't interested in commodities. mentioned the word inflation and they gave me a blank stare.
that says it all... |
