Pick the Bubble: S&P500 or CRB?

I’ve previously highlighted some of the excellent technical work John Roque does. In this morning’s Up & Down Wall Street column in Barron’s,  Mike Santoli (filling in for the still MIA Alan Abelson) points to some of Roques’s recent observations:

It has become common to describe the soaring trajectories of commodities such as silver, gold, copper and other metals as "parabolic," a way of damning the moves and the buyers behind them with 10th-grade geometry. (For a reminder of what a parabolic chart looks like, a fly ball follows a parabolic path; whether a home run or an out, it always returns to earth.)

John Roque, technical market analyst at Natexis Bleichroeder, has been correctly enthusiastic about commodity and basic-materials stocks for years. These days, he is being forced to confront the bubble talk more frequently with clients.

Last week he was asking clients a question: Since October 2002, what is up more, the S&P 500 or the Reuters/Jefferies CRB commodity index? The clients must think to themselves, "OK, he’s been bullish on commodities, he’s a technician and technicians like whatever has been working." So they answer "the CRB," every one of them so far.

And they’re wrong.

Since Oct. 10, 2002, the bear-market low in stocks, the S&P 500 was up 58% through Wednesday after an 18-month bear market, and the CRB was up 53%, after a 20-year bear market. This return differential comes even after the keepers of the CRB last year reweighted the index in a way that has helped its performance.  (emphasis added)

That’s an utterly fascinating observation. And as we have mentioned previously, secular commodity rallys tend to be much longer lasting then the usual cyclical equity 4 year run; If we use history as a guide, then the commodity bull can last 10 to 20 years.

So is this a bubble? As Santoli observes, "when bubble talk begins to lather up around a
particular asset market, it usually means a few things. First, that
particular asset class is up a lot. Next, the folks who are quickest to
apply the bubble label haven’t owned any, or enough, of it. Finally,
there’s usually at least a shadow of truth to it."

I take it a step further, and hasten to point out that the track record of the bubble callers is pretty dismal. Having missed the greatest bubble in the planet’s history (the 1996-2000 tech/telecom/internet bubble), they now see bubbles everywhere else:

Can this be a commodity bubble if commodities as a class have trailed an unexceptional stock market for 3½ years?

Roque also points out that the basic-materials sector is now a mere 3% of the S&P 500. And even wrapping together the whole materials, energy and industrial sectors, these commodity-related groups make up less than 25% of the index, versus 34% for technology at the height of the tech bubble.

Without a doubt, several individual commodities, including copper, became wildly overheated on a short-term basis. As in all real bull markets, the corrections can and will be gut-shredding. Gold could easily fall well below $600 per ounce — from $654 now and more than $700 at its recent — without compromising its upward trend.

Actually, what the bubble watchers are seeing is the effect of the global, almost coordinated massive liquidity injection. Cheap money, half century low rastes, printing presses humming overtime. So of course hard goods — materials and commodities — become more valuable as the dollar loses more purchasing power. That loss of purchasing pwoer is also know as — say it with me — INFLATION.    


Smart analysis. Thanks, Mike, for pointing it out.



Farewell to the ‘Nineties
Barron’s, MONDAY, MAY 29, 2006

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What's been said:

Discussions found on the web:
  1. royce commented on May 27

    Barry, you always talk about inflation without putting a number on it. What’s your current estimate overall? 5% 10% 15%?

  2. DavidB commented on May 27

    I’ve said before that I think that if they hyperinflate then it will drive up all asset prices. I think this is what the market is showing. The S&P and the CRB are both up about the same amount. It is an indication the bubble is really in US dollars and not commodities. It is not that the value of these products is going up, it is that the value of the dollar is going down thus people need more of them to buy everything that has tangible value houses, gold and stocks.

    I think the truth of this will soon come out and as Barry’s column is pointing out, the truth already is beginning to be noticed

  3. Sourdes Menées commented on May 27

    Why is Rocque comparing financial assets to commodities anyway? The market price of risk does not apply to assets with use value.

  4. bt commented on May 27

    DavidB, IMHO, gold and non-dividend paying stocks have no tangible value. People buy them only because they think they can sell them higher. There is no tangible use for gold and non-dividend paying stocks other than the joy of owning stuff one thinks can go higher.Commodities with practical use and houses have tangible value. Gold is seen as an alternative to paper currency because one can print as much of a paper currency as they wish, but gold’s supply is limited. In that sense rise of price in gold is suggesting inflation. But the same can’t be said of stocks that don’t pay decent dividends. Companies can print as much stock as they want (and they do too) and the owner gets nothing in return for holding a stock unless it shares profits with him or her through dividends. So gold and commodities may go up in reaction to inflation, but stocks don’t have to go up along with inflation. Stocks are as much a part of the same problem as the US dollar — unlimited supply and easily manipulated.

  5. jab commented on May 27

    If you use the same formula for inflation that was in effect in the early 80’s inflation would be calculated between 5.5% and 6.0%.

  6. ndk commented on May 27

    “(For a reminder of what a parabolic chart looks like, a fly ball follows a parabolic path; whether a home run or an out, it always returns to earth.)”

    That’s the worst analogy imaginable. A baseball’s path has a negative coefficient on the exponential part, and a price bubble(e.g. $IXIC 1990-2001) has a positive one. Not even knuckleballs drop like that. :D

  7. ndk commented on May 27

    BT, gold actually does pay a sort of “interest” thanks to the widespread proliferation of so-called bullion banks. Gold prices are permanently in a state of contango because it’s so easy to short now and buy later. The percent difference represents the implicit interest rate charged by these banks.

  8. VL commented on May 27

    Last week the markets had ignored important key inflation facts: high April CPI (0.3) (makes annual 2.3%) and high core PCE deflator of 2.1% – Fed’s favorite indicator of inflation and both were above Fed’s comfort zone of 1.0 – 2.0. The Fed will have to continue tightening and probably will re-ignite the fear of the Fed compromising the growth as the result.

    Global expansion is slowing and the liquidity is shrinking: The signs of the return of economic and financial health to Japan are bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks and commodities. The momentum in many of the world’s riskier markets was a result of ever increasing floods of cash — borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.

    We can afford $70 a barrel; this is what it is now. (How long will it last?) “The pain at the pump translated into a big drop in consumer confidence in May, according to the University of Michigan survey, which turned in a reading of 79.1, the lowest level in seven months.” Disposable incomes, the amount Americans have to spend after paying taxes, rose by 0.4 percent in April, but actually fell by 0.1 percent after inflation was taken into account. How much longer can the consumers keep borrowing? Can the economy sustain $80, $90, $100?

    Back to reality and back to sell off mode next week!

  9. DavidB commented on May 27

    DavidB, IMHO, gold and non-dividend paying stocks have no tangible value. People buy them only because they think they can sell them higher. There is no tangible use for gold and non-dividend paying stocks other than the joy of owning stuff one thinks can go higher


    I must disagree with you. Gold is indestructable. I seem to recall only the power of the sun can destroy gold or something along that line so it is a store of value if used in the proper context. It also has an aesthetic value similar to paintings (which can be destroyed) thus it will always be valued to humans.

    It is also gaining value in industrial uses especially in the tech and biotech sectors because of its purity, conductibility and malleability.

    It’s rarity and indestructability makes it the ideal medium of exchange for use in a currency but that is an arguement for another day.

    As for non-dividend paying stocks, they are (supposed to be) a share in a business and the unrestricted printing of the shares must be reported so they are not without a certain value and accountability as well. That is why shares often fall when share dilutions are announced. It is not a perfect system but it works

    I don’t know how you classify dividend paying stocks any different than non-dividend paying stocks. They are subject to the same management printing shenanigans that non paying stocks are. The only difference is the amount of cash coming out of the company in the form of dividends. That too can be manufactured by paying the dividends though borrowings.

    Quarterlies are there to reveal if both those things are happening(dilution and dividends via debt). Though a good accountant can appreantly get around both of those in the short term at least (….which brings us to diversification….).

  10. Big Al commented on May 27

    The commentators might be confusing “Parabolic “. with “Hyperbolic”, I wonder if the curve is more of a gaussian curve.

  11. algernon commented on May 27


    You state: “what the bubble watchers are seeing is the effect of the global, almost coordinated massive liquidity injection. Cheap money, half century low rastes, printing presses humming overtime.”

    I think it would be helpful if you could provide specific data to back up this statement. I believe most of the Asian central banks ARE generating increases in the money supplies well in excess of 10%/annum. However, in the US, M2 has only grown at ~5%/annum for the last 2.5 years (after growing ~8% in 2002-03). M2 growth a percent or 2 faster than GDP growth is not the stuff of hyperinflation.

    I actually think you are right. We inflated our money supply in 2001-3. The Japanese & Chinese & Indians are probably still infating theirs now. But some measure of global supply of money or liquidity compared to global GDP would be a helpful evidence of your strong statement.

  12. adam commented on May 27

    In 1982, one unit of the Dow (about $900) bought slightly more than 2 units of gold (about $400).

    Today, one unit of the Dow (about 11,000) buys about 17 units of gold (about $650).

    The massive deflation of gold (and most other commodities) relative to stocks is little discussed. If you’ve held gold all this time, you’ve lost approximately 94% on a relative basis.

    Why is this? The collective increase in the value of stocks, unlike gold, is a proxy for the growth of human capital. It is this quanity, human capital, which in the end makes us richer over time.

  13. powayseller commented on May 27

    If commodity prices are reflecting actual increased use, then we will see inflation. I think a lot of the commodity price runup is pure speculative buying. Since most of these commodities are in contracts and will never be delivered, you won’t see the higher commodity prices feed through to end products too much.

    Second, remember that in the 2000 downturn, when US capital spending declined, commodity prices fell. This will happen again when we go into a recession. Without housing appreciation to fund consumer spending, the export-oriented economies are going to face another recession, as they did in 2000-2001. They are completely dependent on the US consumer. Their countries are printing money to buy up all the dollar we send over there, and when that stops, expect the long-term yield curve to go up, as demand for Treasury notes is reduced. This will finally balance our account deficit and alleviate Greenspan’s conundrum.

    We really need a good recession to wipe out all the excess.

    And don’t bet on the global stock funds or commodities as a safe haven. Think cash, precious metals, any asset that can hold its value.

  14. DavidB commented on May 28

    The massive deflation of gold (and most other commodities) relative to stocks is little discussed. If you’ve held gold all this time, you’ve lost approximately 94% on a relative basis.

    I guess that proves you can do anything with numbers. If you had bought gold at $35 per ounce in the early 70’s you’d be looking at a 10% per year ROI 30 years later which is above the rate of inflation.

    If you had bought the nasdaq at the peak in 2000, as you would have bought gold at the beginning of a (some would argue government manufactured) gold bear market in 1982, you would be down over 50% yet had you bought gold in 2000 you would be up over 100% so your selective numbers argue more for market timing and diversification then they do for not holding gold, my friend

  15. john commented on May 28

    What is a “parabolic” rise defined as? I’d really like to know because I hear so many people throw this term around so often with absolutely no basis for comparison.

    Same for “bubble” – what does that mean? “Oh that market’s in a bubble – well that commodity is experiencing a parabolic rise” –

    As far as I’m concerned it is all BS and we know what the definition is for that.

    Point being – using imprecise terms and expecting them to lead to precise answers such as – “market is going down next week” is immature from any standpoint technical or fundamental.

    Can we all agree that the fact of inflation always attends a fiat currency (i.e. is a constant); it really doesn’t matter in either the long term or short term (and you can look that up I’m 62 years old and much better off than when I was 1 regardless of going through some times of awful inflation); and any “value” that is ascribed to it – 3% through 30% – is only valid until the next M3 drop (which occurs rather frequently).

  16. Leisa commented on May 28

    James Turk is interviewed in this week’s Barron’s. It was refreshing to see an article that I found understandable and sans some of the hyperbole that tends to surround discussions regarding gold’s attributes–ranging from a confirmed aphrodisiac to a revered signaler of inflation. It was the first article I’ve read (and I’m tagging myself as an average, mainstream reader) that gave a cogent discussion regarding gold, M3, dollar values and real interest. I don’t offer it up to debate the merits of the story–as an average, mainstream reader, I’m not equipped to do so–nonetheless, I found it interesting and it centered on some contemporary subjects on which there appears to be a dirth of discussion (except in robust, intelligent venues such as this!). Of particular interest is the discussion of real interest rates being quite low. I’ve seen this a few other places, yet it doesn’t get much air time–and I suspect it is because that such a discussion deflates the hopes of the nefariously optimistic “one and done crowd.” Frankly, I see no information that merits this hope; and what is really troubling are the cries of those that think that Bernanke needs to stop so the market can go higher.

  17. adam commented on May 28


    Nice try, but no dice. Gold was essentially pegged at $35 until Bretton Woods collapsed in 1971. So, this wasn’t a market rate. No matter how you slice it, gold has been a crappy investment.

    BTW: I stole my argument from Hugh Hendry, the brilliant and fascinating British hedge fund manager who occasionally guest hosts CNBC Europe. Next time he’s on, TiVo it. You won’t be disappointed.

  18. DavidB commented on May 29

    Why didn’t you pick $850 adam which was gold’s absolute top in the ’80’s? Then you could say that gold has been a losing investment for over 20 years

  19. davidw commented on May 30

    I don’t see the relationship between Dow growth and CRB growth. Why the fact Dow rises more than CRB during a certain period of time picked by the writer does ‘t mean there is a bubble for commodities?

  20. Travis S. commented on May 30

    Just look at a long-term chart comparison of gold vs. stocks (since 1920’s – I believe Stocks for the Long Run had this chart) and you can easily see which is the better investment….

    Stocks continue a large, continuous trend upward and gold is pretty much flat, only a slight bit of growth.

  21. juan commented on May 30

    The shape of the curve is irrelevant when speaking about a bubble, which has most to do with price rising well beyond what real economy fundamentals would dictate.

    Global growth has been unexceptional, if anything, lower than avg, yet primary commodity prices have risen dramatically. That is indicative of a liquidity fueled bubble, aka asset price inflation.

    Sure, there’s the ever present ‘China Story’ as well as assorted paraphenalia such as ‘peak oil’ – please check facts on the ground, not promotional mythologies.

    I will, though, give one advocate of ‘peak oil’ credit for ‘getting it’ when, in 1998, he wrote:

    “For all those that fervently believe price movement always reflects fundamental changes in physical markets, the discussion in this paper bears careful reading. Our work strongly suggests that large swings in the funds’ net position in oil contracts on the NYMEX have driven virtually every significant movement of crude oil since the MG position was unwound in early 1994. The single exception was a brief period in the fall of 1996 when physical tightness in the market itself set the price of oil.” (Matt Simmons, Simmonsco Intl, 1/27/98)

  22. Joe Lamport commented on Jun 6

    Peter Lynch may be a sage and original thinker when it comes to investment advice but his bon mot about economists being laid end to end is thinly plagiarized. The original quip was made by Dorothy Parker who said: “If all the men at the Yale senior prom were laid end to end I wouldn’t be surprised.”

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