Based on the performance of the stock and commodity markets this week coupled with the action and words of the Federal Reserve and a major voice on Wall Street, an inflection point is at hand.
In the world of business and markets, an inflection point is described as a time of significant change in a situation, a turning point. And the inflection point I am specifically referring to involves the commodity markets.
In the minutes of the Fed meeting from a week ago, officials signaled they will take a more aggressive approach to fighting inflation in the coming months.
To show how serious they are about fighting inflation, they will not hike rates at the traditional quarter-point increase, but move up to half-point increases monthly.
Rates have been on the rise for months and this week the popular 30-year fixed mortgage rose over 5%, the first time that threshold has been crossed — except for two days in 2018 — since 2011.
And over the past year, mortgage demand is down 41% in the past year. A dramatic cooling of the red-hot housing market is at hand.
From tradingeconomic.com: “Annual inflation rate in the U.S. accelerated to 7.9% in February of 2022, the highest since January of 1982, matching market expectations. Energy remained the biggest contributor (25.6% vs 27% in January), with gasoline prices surging 38% (40% in January). Inflation accelerated for shelter (4.7% vs 4.4%); food (7.9% vs 7%, the largest since July of 1981), namely food at home (8.6% vs 7.4%); new vehicles (12.4% vs 12.2%); and used cars and trucks (41.2% vs 40.5%). Excluding volatile energy and food categories, the CPI rose 6.4%, the most in 40 years.”
No doubt the Fed will aggressively fight inflation moving forward. That is no secret.
But one of the most respected voices on Wall Street rattled markets a day ago with a headline found on Bloomberg.com, “JPMorgan says be ready for 40% commodities rally in market shift.”
Investors see commodities as an inflation hedge. JPMorgan strategists wrote in an April 6 note that higher money allocations to the commodities asset class “would imply another 30% to 40% upside for commodities from here.”
So far this year, commodities have rallied amid supply constraints, exacerbated by the Russian war in Ukraine.
Commodities have room to soar by another 40% on top of the gains in recent months, as investors could pour more money into raw materials as a hedge against the highest inflation in 40 years, JPMorgan Chase & Co. says.
“In the current juncture, where the need for inflation hedges is more elevated, it is conceivable to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous highs,” the strategists wrote.
The last time the Fed was overly aggressive hiking rates — 0.5% rate hikes rather than 0.25% — amid an environment of rampaging inflation was in the 1970s. Back then, such a scenario was dubbed “stagflation.”
What unfolded was clear as gin. Commodities, per se, rose sharply, but the stock market fell 57%.
And if you doubt all that, do as Casey Stengel was fond of saying, and “look it up.”
But here is a problem that I see unfolding: With the Fed pushing rates higher and inflation possibly soaring 40% in the period ahead, a host of investors and traders may exit the stock market and embark on trading commodities.
Understand, commodity trading is not for everyone. Some argue commodity trading should be for no one because the risks are quite high.
Yes, the rewards can be huge. But the risks are just as high.
Trading commodity futures got so wild and crazy back in the 1970s there was a hit song written about the risks involved. I am not entirely certain, but the name of the famous song was, “Mammas Don’t Let Your Babies Grow Up to Be Commodity Traders.”
Deep in the song was a line that goes something like this, I think: “Let ‘em be doctors and lawyers and such.”
It was a huge hit back in 1978, I think it was. I also think it was performed by Willie Nelson and Waylon Jennings, I think.
This week ended with old crop soybeans up 43 cents at $16.89 while old crop corn picked up 11 cents to end at $7.68. Chicago wheat finished the week with a 33-cent gain and settlement of $10.58.
The week was wildly bullish and I expect further gains.
Here are my own personal grain forecasts I expect to be reached by Independence Day. I expect $8 corn, $18 soybeans and $15 wheat.
An inflection point for the U.S. ag markets is at hand. History is about to be made, I think.