A Commodities Bubble? Feedback…

by BWK ~ April 11, 2008

Apparently commodities are a hot topic these days…  My questions on a commodity bubble brought out a lot of great commentary.  Here is a response from Eric Fry, Editor of the Rude Awakening:

Byron,

Well, you are certainly right to ask the question about commodities topping out, but I keep coming back to the same basic thesis: Oil is the new dollar. By extension, so is wheat, cocoa etc. So maybe we are sitting here at August 1987, commodity-wise, but probably not March 2000. Corrections are always a risk, but the bigger risk will probably be trading out of an intermediate move and missing a much bigger one.

I don’t “know” anything, of course. I’m just guessing that commodities are still a long. My template for this move, in fact, is not 1987 or 2000, it is early 1994, when the stars seemed aligned for a big downmove in the stock market. The S&P 500 had more than doubled off of its 1987 lows and seemed very richly priced at about 25 times earnings, especially considering the fact that Greenspan initiated a new tightening cycle in February of 1994. Over the next 12 months, the Fed funds rate DOUBLED from 3% to 6%.

So what happened next?

The stock market sold off just like it was “supossed to”…for about 9 months. The S&P slumped about 10%. Then the market spent the next six years skyrocketing. From its 1994 peak to its 2000 peak, the S&P would TRIPLE. The Nasdaq soared 7-fold over the same timeframe.

In other words, I think it’s too early to be a seller of commodities. One thing I know, if we were to dig up this email five years from now, my expectations will have proven to be very right or very wrong.

Best,

Eric

I think there will be lots more to come on the commodities debate, stay tuned.

Until Next Time,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Additional Resources
A Commodities Bubble?
The U.S. Strategic Stockpile Is Gone…Now What?
Price of Wheat is Soaring - Are We Reaching “Peak Food”?
The Worldwide Resource War is just beginning