Ultimately the original goal of this study was to determine firstly whether or not the commodities only related stocks had been behaving differently than the stock markets in general over the past dozen years and secondly, to determine whether or not the results of the study could be used as reliable evidence that might assist in determining the future direction of the overall stock markets. The answers to the first question was "yes they have and in jaw dropping fashion". And the answer to the second question was "most likely, since the ratio is very sensitive to the inflows and outflows of funds as a direct result of inflationary or deflationary forces".
In this installment we're going to zero in on a very recent development that seems to be pointing to the real possibility that after a year and a half of watching the commodities related stocks seriously under-perform the S&P 500 [for the first time in a dozen years], somebody has apparently lit a match to the bed of kindling otherwise known as the entire global commodities sector. I say that a bit facetiously because it's more than obvious that a good deal of the history of the flight of capital into the commodities markets certainly wouldn't have occurred had the central banks of the world not provided oodles of liquidity in the first place. But on the demand side there's no question about it, in certain sectors of the commodities industry there currently exist very real shortages that in itself would absolutely drive commodities prices higher... whether the world was flooded with new liquidity every week or not. In some cases that is definitely what's suddenly happening right now.
If history is to be considered a reliable guide we should trust that any time we see the $CRX rising and it's ratio with the S&P 500 rising, the stock markets in general have risen as well... every single time. So ultimately what we want to know is whether or not the ratio has indeed recently turned higher with conviction... and whether or not it is likely to be a sustained assault. So we begin with the monthly chart below which covers the entire duration of this study going back to late 1999:
|$CRX:$XPX ratio Monthly: Click here for a live and updating version. If I'm not mistaken, non-subscribers to Stockcharts won't see the annotations. If that's you, you can click here for a "print" version which will show them.|
The first thing that just jumps off the chart, the very reason for this article, is the fact that for 4 weeks now the ratio has been putting in an effort to find a bottom. True enough, it is entirely possible that it could be nothing more than a standard re-test of the yellow 13 year long rising trend line. However, fundamentally I think there are numerous reasons to doubt that's the case. For one thing, the central banks of the world have made it very clear, they are all going to print their own currencies in an effort to reflate the entire world. It's essentially an admitted no holds barred race to the bottom for the currencies. The second reason is that the overall food supply for all of humanity is deep, deep under water. And no I'm not talking about the fish supply because that's the only food source that should be deep under water... and it's not there. The food supply for all of mankind is in trouble and possibly irreversibly so. In other words we may never catch up from here, especially with the population of the planet continuing to grow relentlessly while the sources of food diminish every single day. It's a head on train wreck happening in slow motion right before our very eyes. Jim Rogers is no stranger to the scary implications these trends carry. I'd like to be able to claim that Mr. Rogers and I had a lengthy telephone conversation about the situation last evening but unfortunately I cannot. It seems that every time he calls me I'm busy putting a new roof on the igloo or something. In any case, here's Jim Rogers' take on the worsening food commodities story:
So we definitely want to drill down to a weekly chart in order to better investigate what's really happening "on the local scene" as it were... time-wise. Admittedly this is a big chart, but it provides a beautiful "one stop shopping experience" in that we can see all 4 components of this entire study and how they relate to each other, in one glance:
|$CRX:$XPX ratio Weekly: Click here for a live and updating version.|
It appears that what we're witnessing is that funds are beginning to flow back into the commodities only related stocks after 5 straight quarters of having fled that sector. Or at least seriously threatening to. As the original study showed, the ratio itself revealed that for over a decade liquidity had been more than abundant as witnessed by the fact that between 1999 and May of 2011 the commodities only stocks gained 6400% of the amount the S&P did. In other words over those 12 years the $CRX rose 64 times as much as the S&P did. How remarkable is that? After the recent 12-15 month correction in the ratio, we find that the commodities only related stocks are now only sporting 21 times the gains of the S&P 500. That really is a significant correction.
The most obvious recent development seen in the weekly chart above is that all 4 components of this study broke a major weekly trend line during the week of September 3rd. Note the number of "UH OH"s on the chart. In the case of the S&P 500 though, the break is not yet impressive. In fact it looks more like a relatively weak overthrow at this stage. Nonetheless, 10 days later, to borrow a sentence as reported here, "A third round of quantitative easing, a set of asset purchases designed to increase the money supply, has been announced by the Federal Reserve. It said it would keep easing until job growth accelerates, and continue a "highly accommodative" monetary policy "for a considerable time after the economic recovery strengthens."
"FOR A CONSIDERABLE TIME AFTER THE ECONOMIC RECOVERY STRENGTHENS".
Friends, that's a long, long way off.
What Mr. Bernanke is promising the world is that the Fed is going to hold rates down to zero pretty much at any cost under the guise of trying to save the world. The truth is that they're not "saving" but "enslaving" the world. In order to print they need something to buy. The debate seems to be about whether or not there's enough junk out there in the world for the Fed to purchase on an unending basis. Personally I don't think that's the only important question. I think the real question is "when is the world going to sit up and realize that the real goal is that they want to do just that, purchase every single debt in the world so that they have complete and total ownership of it. Of us. That is their ultimate goal, world domination by enslaving every debtor on the planet for eternity. At that point, who cares if the entire world defaults? Certainly not the central bankers, not as long as they have title to all things saddled with debt, which by the way includes most real estate on the planet and half the governments of the world. And of course, the governments are the people. And after all the smoke has cleared the bankers will be standing there holding title! This is exactly how they're carrying that objective right before our very eyes. We are currently in the end game no matter which direction the markets finally decide to travel.
Ok, in summary here's what has happened over the past 20 months. Early in 2011 we got the first signs of a top in the ratio. That signaled a major turning point in the business of "inflation". From that point forward it was starting to become abundantly clear that deflationary forces had indeed been creeping out of the bottle all over the globe, Over the ensuing 12-15 months it appeared that the great deflationary cycle had begun. I was certain that the great deflationary collapse was upon us. Tonight that no longer seems the case. It truly looks like the deflationary phase might over although another week or two will likely be required before we can be more comfortable that we know what lies in store for perhaps years to come. At minimum, the ratio is currently trying to bottom and is at least 'threatening' to rise back above that incredible 13 year old trend line. If successful, the implications are that the world has reverted right back to the old standard,13 year theme of "print, print and print some more. Deflation must be defeated at any cost". The implications would be very, very inflationary, especially if the banks even 'dare' to issue loans in big numbers. Stock markets don't tank in such a scenario. At least they haven't in the past. Which leads to one more horrible possibility.
THE WORST POSSIBLE OUTCOME: It is possible that in spite of their every effort, the central banks of the world might not be able to contain a bond market sell-off. In that case they would surely just crank up the printing presses even faster in an ever-failing effort to hold rates down. That would just feed into the inflationary theme, at least as pertains to the CRX. However, rising rates would be devastating for the bond markets and for the economies of the world. And if funds were to flow out of the bond markets, well... you know where they end up. At the end of the day if the bankers were to lose the bond battle the result would almost assuredly be an inflationary depression in many aspects of our lives, like in the cost of things we need but don't have such as food and fuel. Those items would soar. But deflationary in things we already have but don't necessarily need... like a piece of land to park our trailers on. The value of real estate would crumble. In either case, whether the central banks are ultimately successful or not, the outcome would probably be best described as stagflation. Which would ultimately lead to a depression of the most horrid kind. Because if the world economies are sputtering while rates are at zero, with unemployment already as high as 25% in some countries (Spain) imagine what would happen to them with rates at 4%, 6%, 8% and higher. I dare say that's one scary scenario we'd rather not walk into. Ultimately we may not have a choice. As of this moment though, thankfully that outcome is no more than just a mere 'possibility'.
So at this early stage of what 'could be' a major inflection point, we have to consider the inevitable question; "Is the ratio just back-testing the 13 year long rising trend line?". I dare say the answer is; "No, that prospect is exceedingly unlikely. The ratio is likely to break up through that trend line with inflation resuming yet again. Bernanke as much as promised that outcome." Nevertheless we need to respect that all options are still open and that the central bankers of the world might indeed fail in their quest. We have no choice but to simply monitor these charts in the weeks ahead. One thing we know with 100% certainty... they will not lie to us.
To that end, I've included a daily chart below so that we can watch these critically important developments over the coming days and weeks. Feel free to bookmark this chart as it will update in real time. What we're watching for is whether or not the ratio climbs back up above the rising 13 year old trend line. Beyond question the Fed's goal, if successful, would ensure that outcome. All that remains to be seen is whether or not they succeed.
|$CRX:$XPX ratio Daily: Click here for a live and updating version.|
From the Elliott Wave perspective, one important aspect seen on the daily chart above is that the current rise in the ratio could still just be a 4th wave higher which would imply that there would be at least one more thrust lower. But I have a rather difficult time accepting that as the likely outcome since it would also imply that equities would be falling fairly hard over the next few weeks. Right in front of a US presidential election that is only 6 weeks away? I don't think so! But stranger things have happened I guess. For example, as a teenager I had a friend who had a big wood screw in his belly button. I asked him what it was for. He claimed he didn't know so I suggested he take it out. So he unscrewed it and his ass fell off. But I digress.
So there we have it. We're absolutely at a critical inflection point. Either the $CRX:$SPX ratio is going to explode higher from here which would be the logical outcome if the Fed's policy succeeds - OR - the ratio is going to plunge in a 5th wave lower (at least) and the deflation genie will officially be out of the bottle. More than likely this ratio and this study are going to provide a concrete answer earlier than most other indicators out there. At least that's the goal.
On a final note, what kind of a father would I be if I didn't take this opportunity to wish my son a great day on this, his birthday. Happy birthday big guy. Can't wait until we can finally get together again and try out your sail boat. Love ya!
Thanks to all for reading and until next time... smooth sailing!