Commodities Wrap and Take
Often times one chart emerges that speaks so directly to the global economic situation that after glancing at it, literally nothing else need be said. Today that chart looks as follows. It’s sixty years of employment info from the St. Louis Fed, describing the average length of unemployment over that span.
This is one of the most dismal items imaginable for market bulls. Folks who’ve lost their jobs have simply not been able to find new ones. To be more accurate, today’s unemployed are searching for work, on average, twice as long as their fellow Americans ever did in the worst job markets of the last half century.
That’s bad news for retail sales, bad news for the housing market – which looks poised any day to fall out of bed a second time – bad news for the materials sector, and likely commodities as a group, and probably bad news for bond bears, who had counted on an eventual need by the Fed to start tightening, at the very least to fend off a nascent inflationary wave which, at this point, looks unlikely to happen for a while.
If we needed any other indication that a potential contraction was upon us, the manufacturing sector may have just provided it. Here’s a chart of PMI readings for the last five years. Latest readings from both the Eurozone and China have also slumped alongside America’s numbers.
What’s most important for us is the leading nature of the PMI vis-à-vis commodities prices, which accurately foretold both the dip in the CRB Index in 2008 and its subsequent rebound (see black arrows, above). Given that history, the latest drop in Global PMI looks ominous for commodity contracts through the summer. What it means for the manufacturing sector is also plain, and that’s not going to help the job situation any.
Divide and Conquer
As a result of decreased demand, the commodities complex has ceased to rise as a whole, and seems now to be moving in truncated, helter skelter fashion, with items such as gold and copper maintaining their price support better than the more rapidly declining crude oil market, to take but one example.
To our mind that speaks directly to an unwind of the more speculative positions in the market and a refocusing on fundamentals, a development we look upon with great satisfaction.
Is oil going to continue lower?
Our earlier chart on unemployment, coupled with the relatively high price of gasoline, speaks to a genuine ‘demand destruction’ occurring stateside in oil. If not for the supply disruption in Libya, it’s likely prices would be sitting at significantly lower levels than they are currently. Here’s a graphic that speaks to the effect of record high gasoline costs:
Clearly, something’s gotta give. The American wallet is only so deep, and rising gas prices have led directly to curtailed purchases of other ‘stuff’, or just plain less driving, as the chart above clearly shows. We say the trend will continue until the price of oil comes off. And it’s very likely it will come off.
The real losers, however, in the commodity pits, will not be those who play the crude card. Rather, we see foodstuffs and silver suffering the most ignominious falls, given the gross volume of speculative contracts that drove them on their merry way higher.
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