Commodities remain the best performing asset class for 2014.
Its noteworthy that hedge funds have recorded a poor quarter’s performance but especially in the last month.
To the long side, stocks tracked by Deutsche Bank AG with the highest concentration of hedge fund ownership were down 4.5 percent from March 7 through last week.
To the short side, Goldman Sachs Group Inc measure of hedge funds’ favorite stocks to bet against has risen almost 3 percent this year.
On both sides of the bargain the hedge funds have struggled ‘chart chaos’ as AG called it last week sets in to confuse the market’s pro participants.
In the mean time, the CRB Index from the 10th of January 2014 to the 31st of March is up 11% as the market’s 2013 worse performer becomes her top performer in the quarter.
Cycle wise commodities are usually late cycle performers and so five years into this bull market we should not be surprised to see commodities perform here.
The detail within the commodity recent run up is more complex however as its appears a monetary asset class demand rather than economic demand that is driving prices to move again, unlike the economic metals demand we saw in 2004 to 2007.
Monetary demand for commodities can be much more powerful a bull trend creator than economic demand. Let me please take you back to 2007 and compare the Dow Jones index to the oil prices, as an example.
Never forget what occurred here top down as it was top down that drive prices in either direction not and issue of bottom up supply and demand.
The Dow Jones Index topped out as earnings began to drift and the economic data struggled. The Fed responded by slashing interest rates. They sought to arrest the economic malaise by encouraging even more liquidity into the system. They succeeded as interest rates went to zero but far from the additional liquidity reaching the man in the street and transmission into lower rates the hot money went into speculation and commodities as the ultimate end cycle monetary safe heaven. Oil surged by approximately 50% over the period whereas the Dow index collapsed by around 50%.
The two asset markets were almost perfectly inversely correlated! Participants algo hedging systems went haywire for a time creating further stress on capital within the financial system.
This is all history but its worth brushing up on this recent price history as the mantra of easy monetary conditions lulls us into believing more is always better. History is littered with the evidence that ‘more’ eventually leads to unintended consequences. And these unintended consequences step outside of historic correlations. In a system of limitless leverage, a breakdown in correlations leads to systemic crisis.
From a distance it’s all very straight forward this and entirely brought about but political and central bank interventions. Will we ever learn? I doubt it, unfortunately, due entirely to vested interests.
As always the current situation across asset markets is ever so slightly different to the 2007 set up.
In 2007 economic indicators were starting to turn down as inflation turned up, globally. At present, deflation appears more the threat rather inflation as yields compress across the yield curve and asset world. The lack of supply of hedges for monetary debasement is clear but the inflationary ‘teeth’ to create the fever for needing this hedge is currently lacking. Technically price has moved but is it a corrective bounce or something more meaningful?
For my own book i lack conviction on the issue so its an allocation increase and a move to cover for a surprise by allocating to out of money options. But no more than this at present. The soft commodity price need to be watched and the contango, backwardation curves.
To the reports:
And here DB:
And here BarCap
If we are on the verge of a commodity renaissance it seems more likely to be a monetary renaissance than a consequence of economic demand at present.
It is finally worth also recalling that historically geopolitical tensions leads to increased monetary demand. Historically if geo-poltical tensions then erupt in armed conflict this usually creates a super bull secular trend as you usually see the triple event of monetary debasement alongside war time commodity demand and supply interruption.
Wars are always create the very best price scenario for the commodities.
All the best
Rich