Does divergence of stocks and commodities tell us anything at all?

Chart Of The Day_ S&P 500 Vs_Page_1I read a blurb from Business Insider – entitled One Of The Biggest Arguments Of Fed Haters Is Getting Obliterated Before Our Eyes – discussing the adjacent chart (published on May 15th) that still has me confused. Here is a direct quote:

“Throughout the market rally, which started in early 2009, haters have argued that the whole thing is a Fed-backed Ponzi scheme, and that people are only jumping into stocks because of easy money and dollar debasement, not due to any fundamental reasons.
But that argument has been obliterated in recent months, as a divergence has grown between stocks and commodities.
If stocks and commodities move together, then you can make an argument that people are just putting their money in anything but paper currency. But when they’re moving separately, that argument falls apart, because it shows that there’s another fundamental driver.”

It seems to me that this divergence between stocks and commodities is exactly what we should observe if the rallying market is a Fed-backed Ponzi scheme, although describing it this way is far too simplistic. To me, it implies that the recent scramble to invest in equities is indeed driven by a lack of investment alternatives. If the economy were fundamentally improving, then demand (there’s no inflation to speak of) would also drive commodity prices. Clearly that has not been the case…..yet!

I am on record as believing the stock market is now artificially inflated by artificially low interest rates. As I’ve suggested previously, this will get fixed once stimulus wanes – could be next month or next year. But the availability of so much capital should continue to work its way into the real economy. No doubt Bernanke and gang are waiting as long as it takes for this to occur. There’ve been signs supporting this (housing stability) but also evidence that it is taking much longer than any of us expected (slowdown in manufacturing and stubborn unemployment).

TrainWhat we may next witness is a huge reallocation of bets….out of income and financials (what was hot) into commodities (what will be hot) when the economy gathers momentum. What will look like a correction in the overall stock market (panic selling whenever interest rates do get a bump) will coincide with a shift from yield to basic industry (oils, rails, mining, manufacturing etc.).

The old train (I took this photo at Lake Louise, AB a week ago) is bound to pull into the station in due course, and you’ll want to be boarded on the next one while there are still seats available.


About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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1 Response to Does divergence of stocks and commodities tell us anything at all?

  1. Vilis Miklasevics says:

    Paul’s attending Citywire Montreux this week. You may find recent previous presentations interesting.

    Date: Tue, 21 May 2013 17:55:56 +0000 To:

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