Bruce Pile

Ben Bernanke's Tightrope Act

Investor enthusiasm for commodities is nothing new. It didn't start with the current monetary stress over the housing problems. It is, in fact, a large scale bull market that began about 6 years ago (about the same time the housing bubble began). What's new is the added steam the commodities bull is receiving from the basic paper vs hard asset revolution that is taking place.

If you were to plot the relative valuation of the CRB and the S&P 500 over the last 15 years to look at this paper/real thing, you would have the chart shown recently in an article titled "Commodities Secular Bull Continues into 2008" (http:marketoracle.co.uk/Art...). This tell-tale chart shows that, even with the current runup, we have come way down in valuation of commodities relative to paper in general and stocks in particular over the last 15 years and that we probable aren't at the end of the commodities bull, but are entering a new phase of it (commodity bull markets historically run at leat 15 years and we are only about 6 years into this one). After a huge descent from the mid 90s, the chart shows a consolidation pattern over the last 6 years with 3 major runs at a resistance level. The first was in early '03 at the end of the last stock bear market. The second was in the middle of the stock bull market in May '06 when both stocks and commodities got clobbered together. Both of these runs failed to break the resistance. The third is happening now at what may be the beginning of a new stock bear market and this powerfull run has just now broken the resistance level and has a very long way to go before we approach the paper/real levels of the mid 90s. Think back to that time when stocks, intangible intellectual property rights, and complex debt leveraged deals were our preoccupation while we ran around in gas guzzling SUVs not giving a thought to real assets like oil and food. Now the preoccupation is what to do about oil and food and how to clean up the CDOs, CDSs, and other paper messes we have made.

The current "spike" in commodities can't really be compared to say the mid '06 run. There, the stock bull market was intact, the housing problem wasn't upon us yet, and the Fed was in the driver's seat. Now, it is a vastly different market condition. In addition to a strong investor turn away from paper in general and the Fed debased dollar in particular, we have emerging some very strong basic supply/demand forces coming to the aid of commodities like peak oil, peak food, and the combo of the two - the fuel crop frenzy.

Investor enthusiasm = sell is a concept that works well with individual stocks tied to an individual company story or even with a hot sector. But it's not so true of the more large scale, rare bull markets that tend to involve many sectors and have the legs to run well past initiating enthusiasm and attention. It is precisely this kind of more investable bull area that you want to find, not avoid.