4/17/2013 7:45 PM ET|
Commodities crash, recession looms
Pullbacks in commodity prices preceded stock market reversals in 2011 and 2012. Something similar is happening again -- but this time the downturn will be far worse. Here's why.
Complacency is a tempting, yet dangerous, emotion for investors. It's easy. It feels good. And it's self-justifying. As in, if stocks keep going up, why bother trying to explain it? Why bother looking at such things as earnings fundamentals, technical strength or macroeconomic trends?
But complacency is what fuels bubbles in their final stages, enabled by the "cure-all" of cheap money. And when bubbles pop, the first indications of trouble are an increase in market volatility and a drop in commodity prices.
In the 1830s, real estate in America's newfound West was a sure thing, thanks to surge of cheap money and easy lending that followed the closing of the Second Bank of the United States. But it all ended as commodity prices, mainly for silver and wheat, crashed.
It was the same story with the panics of 1893 and 1896. And, most recently, the 2008 financial panic, which really didn't get going until commodity prices started to melt down in the second half of that year -- setting off a wave of stop-loss triggers, margin calls and forced selling.
Something similar is happening now. The PowerShares DB Commodity Index Tracking (DBC) fund has collapsed to levels seen during market scares in 2011 and 2012. But this time is different. Not only are overconfident investors unprepared for a dose of bad news, but the hard data suggest the decline will be more persistent this time. Here's why.
Back to reality
First, it's worth reviewing how quickly investor complacency is fading. The CBOE Volatility Index ($VIX) on April 15 posted its largest one-day surge since the mid-2011 market meltdown. And before that, it was associated with the end of the downtrend in volatility seen in early 2007, as the extent of the subprime mortgage mess became clear and many lenders filed for bankruptcy. A few months later, the stock market topped out.
Specifically, the VIX jumped out of a multiyear downtrend in February 2007 after former Fed Chairman Alan Greenspan noted that a leveling-off of corporate profit margins (as is happening now) was a sign that a recession could be coming.
Back then, stocks performed one last upward rush before volatility turned higher into a new, persistent downtrend that didn't end until late 2008, as stocks neared their bear-market low.
The takeaway: A surge in the VIX of the type we saw on April 15 was enough back in 2007 to shatter the bull market/housing bubble tranquility. No longer was housing a sure thing. No longer was pushing subprime loans, mortgage-backed securities, credit default swaps and all the rest a sure moneymaker for bankers.
That's what the April 15 decline felt like, punctuated by the horror of the bomb attack in Boston: The end of the tranquility.
Selling pressure has finally hit
Now, the selling pressure has finally hit the once-sheltered U.S. equity trade, with small-cap stocks, in particular, receiving the brunt of the damage -- the Russell 2000 Index ($RUT) has fallen below its early April lows and is trading below both its 50-day moving average and its lower Bollinger Band.
For months, financial markets have been too quiet. A flood of cheap money from the major central banks had squeezed out volatility and risk aversion, creating conditions for equities' slow-motion grind higher.
Sure, there were blemishes, including narrowing participation and pitiful volume. Emerging-market stocks have been sliding lower all year. But investors didn't care, preferring the lull into a dreamy state of complacency. Measures of market risk -- from the VIX to the credit-default swaps on eurozone bonds -- suggested all was well.
That's ending now. And it's not pretty.
Commodities lead the way
The recent dramatic plunge in silver and gold prices suggests that liquidity is tightening within the financial system.
Rumors as to the true cause abound.
Perhaps it's related to the Cyprus bailout and possible sovereign gold reserve sales. Or maybe Japanese banks, suffering from a dramatic increase in price volatility on Japanese government bonds, are selling gold to bolster capital reserves. Maybe a hedge fund is imploding, like Amaranth Advisors did in 2006.
But it's not relegated to just precious metals. Similarly dramatic pullbacks are underway in crude oil, copper and many of the industrial metals. The iPath DJ-UBS Aluminum TR Sub-index (JJU) exchange-traded fund is back to 2010 levels. Agricultural commodities are well off of their 2012 highs.
While we've yet to learn the cause of the acute sell-off, commodities have been under pressure as global industrial production has slowed. Economic data, both at home and overseas, have been disappointing lately. The pullback in China has been especially worrying for commodity traders, jeopardizing the main pillar of the resource-scarcity story that's driven raw material prices higher over the past decade.
Credit Suisse economists, who maintain the Credit Suisse Basic Materials Index, are worried that we're on the cusp of another global slowdown scare -- not unlike those that contributed to the midyear pullbacks in 2011 and 2012.
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The white house should give Tony Uncle Ben's job.He knows a lot more about how the economy works.Uncle Ben needs someone to show him where the off button is on the printing press.
Sorry Anthony, a simple observations of MSN's own market tools (compare DBC to S&P index charts) reveals that drops in commodity prices are not, in general, a prelude to stock market bubbles crashing. (sometimes they move together, but commodies is not a leading indicator for equities.)
Not agreeing with this article at all, except for one paragraph at the end about what happens when the fed reverses low interest rate policy... years from now.
As usual, Anthony seems to be in too big of a rush for doom and gloom. Market correction due? Yes. Massive bubbles, fear and panic? No.
"Meet Anthony Mirhaydari at the MoneyShow Las Vegas" one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas.
That about covers it!
No one can turn a headline and chart better than Tony. Hysterical headlines are the currency of guys like Tony. He needs our clicks and we fall for it every time. But the fact is, this guy's advice just comes off as more and more desperate. He has to be short this market well over 20% ago!
Stop with the absolutes Tony! Believe it or not, there is a middle ground. Why do use always ignore the useful charts that show this is nothing more than a healthy consolidation? Oh yea, cuz that would not make for a very sexy headline, and we all know you depend on our clicks. Good riddance Tone...until your next hysterical article...you're welcome ;)
These economic scenarios have played out since money was invented about 7,000 years ago to supplant the barter system that had prevailed since the dawn of humanity. During any given 'panic', recession or depression there's an anomaly in some basic law of supply, demand or 'perceived value' by producers, investors, buyers and sellers, and that paradigm will never change. Regardless of any of the governmental or institutional checks and balances the pendulum of volatility has been and always will be part of the overall equation. Yet another correction is likely in the works and after the dust settles the cycle will most assuredly begin anew. Anthony...keep your pants on.
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