Commodity Insight: Shocks and aftershocks

It is not unusual for markets to be blindsided by a shock of some sort. But lately, markets of all kinds are being caught flatfooted and hit with shocks and aftershocks.

Here are just a few that are more shocking than others:

• Federal Reserve Chair Jerome Powell recently stated that interest rates will be lifted higher and for a longer period than most expect. A huge shock, to say the very least.

• There have been only five instances since 1870, 153 years ago, when the U.S. money supply, or M2, declined at least 2% on a year-over-year basis. The fifth such decline of at least 2% in M2 over the past 153 years is occurring right now. And following each time, a severe recession unfolded or a depression.

• A few weeks ago, Silvergate Capital, one of the two main banks for the crypto industries, shut down operations and liquidated its bank. In late 2022, stock of Silvergate was around $227 a share, but now around $2 a share.

• A few days ago, Silicon Valley Bank, the 16th largest lender in the United States, was shut down. It was the biggest bank failure since Washington Mutual fell more than a decade ago. The collapse with SVB only took 48 hours. In 2021, stock of SBV was as high as $712, but around $34 a share now. Treasury Secretary Janet Yellen stated on Face the Nation that the U.S. government will not bail out Silicon Valley Bank: “The reforms that have been put in place means that we’re not going to do that again.”

• There was a historic drought in Argentina this growing season, the worst in 60 years. The crop losses are being estimated at 40% to 50% with further downgrades likely. Such losses for a major global grain producer are without precedent. The losses are so severe that it is now being estimated by a few private research groups that global supplies of soybeans have been sliced to levels that were lower than last year. And last year, soybean prices in the United States reached as high as $17.80 a bushel compared to this week of less than $15 a bushel for summer futures.

• Recent Cattle on Feed reports show inventories of beef cattle across the United States are at their lowest level since 1962, more than 60 years ago. With cattle prices within $5 to $7 of all-time highs and feeder cattle supplies on the decline, the long-term outlook for prices is higher. It seems there will be another three to five years until the beef cow herd is rebuilt. And between now and then, with the U.S. labor force being robust and growing amid inflationary pressure to the upside, I can easily envision cattle prices marching higher to the $180 to $185 level.

• In the article “Traders Brace for More Market Shocks After Week of Wild Swings” from Bloomberg: “In a week featuring the biggest U.S. bank failure in more than a decade and a stock drop eclipsing any in five months, the most jarring event may have been in Treasuries, where yields saw their biggest two-day plunge since the financial crisis. Rate traumas like that have a habit of forcing speculative money into evasive action, particularly in an economy where Fed angst made short-bonds a popular trade.”

• U.S. consumer prices through February rose 6%, with the nitty-gritty details showing inflation remains hot and stubborn. In normal times, such persistent inflation suggests the Fed would be very forceful with lifting rates higher yet and taking a more aggressive stand in defending its monetary policy. However, with the current banking turmoil in the United States and spreading across the globe, it is no longer a given the Fed will push interest rates much higher.

Not a shock: More and more investors and traders are singing loudly the Ray Charles hit from 1963, titled “Busted.”

Imagine for a moment Ray Charles swaying back and forth, with his head bobbing slightly and singing away with that inimitable voice the following classic song: “Yeah, my bills are all due and the baby needs shoes, but I’m busted. Cotton is down to a quarter a pound, but I’m busted right now. I got a cow that went dry and a hen that won’t lay, a big stack of bills that gets bigger each day. The county’s gonna haul my belongings away, ‘cause I’m busted right now.”

Anymore, a trading session without a shock is without a doubt a shock.