Market Catalysts: 1929 Wheat, 2008 Crude Oil, 2013 Interest Rates?

by: Larry Trefz

High wheat prices in the early 1920s helped feed the boom that became known as the roaring '20s. Prior to the Great Depression, the agriculture industry in the U.S. accounted for a very significant portion of the labor force (see chart below).

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As the economy boomed, so did the stock market and agricultural production. In 1928 there were 250,000,000 bushels of wheat that were carried over into 1929. In May of '29 there were 560,000,000 bushels ready for harvest in the Mississippi Valley alone. The massive oversupply caused prices to drop. In July, a drought in Canada and the Dakotas gave hope of higher prices but was soon crushed by news that Italy and France had a bumper crop. Farm incomes and the large segment of the population employed on farms were suddenly in trouble. By the fall of 1929 wheat prices were dropping rapidly and the sky-high over-levered stock market started to wobble. The rest is history.

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Oil Prices In 2008:

At the beginning of 2008 it was becoming clear that there were problems in some areas of the economy. Housing prices had already started their decline in response to tightening credit conditions and there were rumblings of larger issues in the credit markets involving subprime debt and deterioration in mortgage backed securities. The S&P 500 was near 1400 and showing signs of a correction after hitting all-time highs a few months before. All-in-all, markets looked like there were places that could cool off a bit but there was not yet a catalyst for an extreme market crash.

Enter crude oil. In January 2008 WTI crude was trading in the $85-$100 per barrel range. Suddenly, oil started to trade sharply higher, reaching almost $150 per barrel by mid-2008.

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Skyrocketing fuel prices proved to be the straw that broke the back of an already over-levered consumer and toppy markets. The internal details of the ensuing market crash do not need to be repeated here. Crude oil -- the catalyst -- fell along with stocks and housing prices.

Now Interest Rates?

At present we have the S&P 500 at all-time highs supported by an economy that is grappling with a high unemployment rate, nearly 50 million people on food stamps, the demographic challenges of a large number of retirees, a high debt to GDP ratio and stagnant to declining real wages.

The currently economic/market mix appears to be nearing the point where a catalyst of similar nature to the ones named above could deliver a dramatic change in market direction. The catalyst will likely need to have the potential of creating broad based financial effects on a large segment of population. Rapidly rising interest rates in the wake of an exit by the Fed could be the catalyst.

Watch interest rates for a spike similar in nature to the crude oil spike of 2008, this could be the catalyst for a major downturn in U.S. stocks, given their currently lofty levels in reference to the economy. I expect that a significant spike in interest rates would have a similar effect on stocks as in 2008 -- especially dividend stocks which have become bond proxies in the forcibly low interest rate environment engineered by the Fed.

In the event of this type of scenario, I would not look for interest rates to remain elevated due to the deflationary pressures that the U.S. and global economies face -- instead it is likely that interest rates would collapse after the spike, much like crude did after its spike in 2008.

Chart forCBOE Interest Rate 10-Year T-No (^TNX)
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ETFs that can be used to trade bonds include: (NYSEARCA:BND), (NYSEARCA:TLT), (NYSEARCA:TBT) (NYSEARCA:LQD), (NYSEARCA:HYG), (NYSEARCA:JNK).

ETFs that can be used to trade the U.S. equity indexes include (NYSEARCA:SPY), (NYSEARCA:SDS), (NYSEARCA:DIA), (NYSEARCA:DXD), (NYSEARCA:IWN), (NYSEARCA:TWM), and (NASDAQ:QQQ).

Disclaimer: Nothing in this article is to be taken as professional financial advice, nor is it a solicitation to buy or sell any type of securities. All financial decisions are your own, seek professional advice before taking action.

Disclosure: I am long TBT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Short SPY, IWM