Hi Sergio -
What about the inverse correlation of the U.S. Dollar and the CRB Index. By debasing the U.S. dollar through QE2 and QE3, the CRB index rose to new highs. Is this trend going to continue as the FED maintains it's quantitative easing policy?
I propose that the next decade will be similar to what occurred in the late 70' and 80's. The U.S. dollar fell while the CRB rose to new highs which eventually resulted in double digit inflation. Eventually, the CRB fell as the dollar regained it's value.
Based on the articles below, one can come to the following conclusion: (1) A rising dollar is bearish for the CRB Index, and a falling dollar is bullish for the CRB Index. (2) Turns in the dollar occur before turns in the CRB Index.
What is the best way for the Value Investor to benefit from this trend (assuming we are relatively early in the cycle)? Own undervalued commodity related companies.
EKS
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Are we bound to repeat past history?
Quantitative Easing: Was It Worth The Money
managementcanvas.iimindore.in
Creating commodity inflation Quantitative easing has a significant impact on the prices of the commodities. During the period of QE 2 the CRB Jefferies index rose by around 13 percent whereas Dollar index showed a similar sort of decline proving high degree of negative correlation between the two. The logic for the above behavior lies in the fact that all the commodities are valued in dollar and debasing the dollar automatically leads to rise in the price of commodities
Prevented Deflationary fears: QE2 has put a lid to all the speculations leading to the fact that US is going on the same lines as Japan whose economy suffered during the 1990s, sighting deflationary fears in the economy. Federal reserve was determined to prevent “Lost decade” and has pumped enough money into the system ensuring that deflationary fears are over for the time to come.
Areas of Concern
Plummeting Dollar: The dollar index, which is a measure of its performance against other currencies, has been plummeting since the Federal Reserve has started expanding its balance sheet, which stands at a whopping 2.9 trillion USD including the TARP program. The increase in the prices of commodities has lead to inflationary fears and also Fed is committed to keep interest rates low for an extended period of time. Now it is proving as a double edged sword as Feds’ action to raise interest rates to prevent inflation can again bring recessionary fears in the economy and also it cannot allow prices to hit the roof hurting consumer sentiments.
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Looking back in history - The 1970's & 1980's
Here is a paper I found that reviews the rise in the CRB and fall of the US dollar during the 1970's and 1980's.
oatscream.com
The Dollar Versus The CRB Index
The decade of the 1970s witnessed explosive commodity prices. One of the driving forces behind that commodity price explosion was a falling U.S. dollar. The entire decade saw the U.S. currency on the defensive.
The fall in the dollar accelerated in 1972, which was the year the commodity explosion started. Another sharp selloff in the U.S. unit began in 1978, which helped launch the final surge in commodity markets and led to double-digit inflation by 1980. In 1980 the U.S. dollar bottomed out and started to rally in a powerful ascent that lasted until the spring of 1985. This bullish turnaround in the dollar in 1980 contributed to the major top in the commodity markets that took place the same year and helped provide the low inflation environment of the early 1980s, which launched spectacular bull markets in bonds and stocks.
The 1985 peak in the dollar led to a bottom in the CRB Index one year later in the summer of 1986. I'll begin analysis of the dollar and the CRB Index with the descent in the dollar that began in 1985. However, bear in mind that in the 20 years from 1970 through the end of 1989, every important turn in the CRB Index has been preceded by a turn in the U.S. dollar. In the past decade, the dollar has made three significant trend changes which correspond with trend changes in the CRB Index. The 1980 bottom in the dollar corresponded with a major peak in the CRB Index the same year. The 1985 peak in the dollar corresponded with a bottom in the CRB Index the following year. The bottom in the dollar in December 1987 paved the way for a peak in the CRB Index a half-year later in July of 1988. Figures 5.4 through 5.6 demonstrate the inverse relationship between the commodity markets, represented by the CRB Index, and the U.S. Dollar Index from 1985 to 1989. Figure 5.4 shows the entire five years from 1985 through the third quarter of 1989. Figures 5.5 and 5.6 zero in on more recent time periods. The charts demonstrate two important points. First, a rising dollar is bearish for the CRB Index, and a falling dollar is bullish for the CRB Index. The second important point is that turns in the dollar occur before turns in the CRB Index.
FIGURE 5.4
THE U.S. DOLLAR VERSUS THE CRB INDEX FROM 1985 THROUGH THE FOURTH QUARTER OF 1989. A FALLING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX HIGHER. CONVERSELY, A RISING DOLLAR WILL EVENTUALLY PUSH THE CRB INDEX LOWER. THE 1986 BOTTOM IN THE CRB INDEX OCCURRED A YEAR AFTER THE 1985 PEAK IN THE DOLLAR. THE 1988 PEAK IN THE CRB INDEX TOOK PLACE A HALF YEAR AFTER THE 1988 BOTTOM IN THE DOLLAR.
FIGURE 5.5
THE U.S. DOLLAR VERSUS THE CRB INDEX DURING AT THE START OF 1988 WAS FOLLOWED BY A CRB BULLISH BREAKOUT IN THE DOLLAR DURING MAY BREAKDOWN IN THE COMMODITY MARKETS.
EKS |
