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

I 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).

What 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.

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