02 December 2008

Commodities tell the story

These charts are some of the best I have seen which illustrate how our current economic contraction compares to past eras. The chart comparing the Dow to commodities is particularly interesting, showing that massive drops in commodity prices have accompanied every major depression since the 1700s. The charts inverting commodity prices are also very intriguing, by illustrating quite graphically that what has really been happening lately is an appreciation of the dollar.

Since the summer of 2008 we have seen one of the most severe crashes in commodity prices ever. These charts show how big price corrections in commodities have an uncanny correlation to downturns in stocks, and the economy.

By the way, Elliott Wave International (the group that put this data together) is my favourite bunch of analysts anywhere. They have been about the only ones out there calling for a deflationary bust, even during the height of the bubble.


  1. Ok, you've convinced me to subscribe to Elliott Wave Theorist newsletters, at least for 1 month so I can dig further into the deflation theory. I don't question if there exists deflationary pressure, the question is if government & fed intervention will be able to stop or slow it (it is obvious by their actions that they are trying). And how that would affect someone like me (late 20s, some debt, 401K, good job, renter).

  2. The best way to ride out deflation is to hold cash and have no debt. Anyone holding assets (e.g. real-estate, stocks, commodities) will see their investments lose a lot in value.

    Using the Japanese example again, the BEST investment since '89 has been Japanese government bonds. Japanese sovereign debt has outperformed stocks, real-estate, and everything else.

    Sure, the yields on Japanese bonds have been terrible over the last 19 years, but even the small return was better than the NEGATIVE returns that were being seen in other investment classes.

    When prices are falling, the best thing you can do is avoid making any purchases unless absolutely necessary, conserving your cash.

  3. The market will be confused for a while still, and there will be much volatility. The strategy seems to be to gradually exit the market by taking advantage of any short term gains and convert to cash - or if locked into a 401K convert to short-term reserves.