COLUMNISTS US economic data continue to be unnerving, money markets keep tightening, financial groups’ earnings still show grievous damage – and nothing stops the march of commodities.
With oil reaching $115 a barrel and many other commodities showing gains, the commodity bull market roars on.
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John Authers on commodity bull run and bond yields
This is even more remarkable when compared with Treasury bonds. Research by James Paulsen, of Wells Capital, shows that real commodity prices tend to move in line with bond yields. This makes sense: bond yields and commodity prices are high in times of strong economic activity and fears of inflation, and low when the economy is contracting.
Yet the commodity bull market – which implies a fear of inflation – has co-existed with a flight to quality that has pushed bond yields sharply lower. How to explain this disjunction?
The likelihood is that it is temporary. Getting back to a normal relationship will involve someone losing money.
Either commodities are in a bubble and their prices must come down or the flight to quality has been overdone and investors will take losses on bonds as they return to riskier assets.
Most plausibly, there will be some combination of the two.
If neither of these scenarios is palatable, a third is much worse. There is a way to justify the disjunction. Maybe the theory that the world is now bumping against long-term capacity constraints in a range of commodities is correct.
If true, then real commodity prices must rise, to ration the limited supply.
Permanently heightened commodity prices would depress economic activity, thereby justifying lower bond yields.
The mere fear of this scenario, heightened by scenes of rice riots, has helped push prices up in recent days.
Some losses for bond and commodity investors would be much less painful.
