Worst Market Ever???

Is this the worst market ever? The worst economy ever? The worst inflation ever? Well, lets look at commodity prices and see. Let's look at the benchmark Bloomberg Commodity Index since inception in 1991 to 6/30/2022:

BCOM ER =Bloomberg Excess Return Commodity Index
Source: bloomberg.com

The index price is UP from a 10 year bear market but way closer to its low than its high. So, thats the commodity index. Let's look at energy. (The following charts are all Bloomberg Excess Return Sector indexes.)

This chart clearly shows the pain at the gas pump (up 64%!) but interestingly the crude oil price and, to a lesser extent the heating oil price, don't reflect this entire gain. If the feedstock, oil, is not up but the wholesale unleaded gas price is up, this implies that non-commodity factors are affecting prices at the pump.

Mainly these are transport and labor. But wages are not up this much (roughly up 5% this year) so we are left with the same answer for everything in 2022, its the supply disruptions from the non-economic external effects of the double whammy of Covid and a brutal war. 

What about food? 

A lot of the same picture. For the food we eat, agriculture in general and to a lesser extent, wheat, do NOT reflect high inflation. Soybeans, on the other hand, with Ukraine a major world producer DOES reflect food inflation and, of course, this is due to war.

What about livestock?

The wholesale cattle market, as high as it is, is trending LOWER. Pork and corn (mostly used for livestock feed) are near all-time LOWS! While social trends can account for some of these declines, the livestock markets have always been a nightmare of supply variation, storage and transport. Again, if supermarket prices are high, its NOT because of commodity and labor inflation. 

Finally let's look at the traditional measure of inflation, precious metals and, for comparison, industrial metals:

While up, neither is at all time highs. While precious metals "should" reflect price inflation and industrial metals "should" proxy for the economy, they look more in lockstep now than in 2011. Neither reflects worst inflation ever.

While headlines cry wolf, we may have to realize that today's prices are more reflective of external factors, pandemic and war, than true economic mailise. The economy is fundamentally a function of demographics - the first world demographics of increasing retirements and too few young to replace them has not changed. Pandemic and war, hopefully, will!

Why use Bloomberg Commodity Indexes? The Bloomberg Commodity Indexes are the world’s premier DIVERSIFIED commodity indexes. The S&P GSCI index is heavily weighted to energy. Why the Excess Return index? Excess return indexes measure pure commodity futures price returns without adding Treasury Bill interest rates which the “headline” Total Return indexes do.

And, why cherry pick the 1/2/1991 start date and 6/30/2022 end date? These are not cherry picked, they are the index inception date and the current quarter-end.  Finally, why use index prices and not actual prices? Each commodity has a different price measure, prices are indexed/normalized by Bloomberg for valid comparisons. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal