Category: Other

Commodity Price Cycle – 200 year view

Commodity Price Cycle

“We will not bet this company,” said BHP Billiton CEO Chip Goodyear this week, while presenting record group results for the year to June 30, 2005. The world’s biggest diversified resources company posted a bottom line profit of $6.5-bn for the year, a growth of nearly 90% on the previous year’s figure.

On the question of betting, Goodyear was referring to a graph which shows that despite the monster profits delivered by BHP Billiton, commodity prices are barely out of the starting blocks from 200-year lows.

Goodyear’s amazing graph was compiled from a variety of sources, including the US All Commodities Producer Price Index, US Consumer Price Inflation, US Bureau of the Census, Historical Statistics of the United States, and the Colonial Times, to 1970.

Goodyear stressed that the graph needed to be looked at “quite carefully.” A small move on the graph, Goodyear explained, “is actually several decades.” According to the graph, “today we find ourselves at a period of time which is, or rather close to it anyway, 2001/2002 when real commodity prices were the lowest they’ve been in the last 200 years which essentially puts them at the lowest price they’ve been in known history.”

Commodity cycle vs Major wars

Most important market moving indicators

What Are the Most Market Moving Economic Indicators for the U.S. Dollar?
By John Kicklighter (DailyFX) – 8 August 2006

It is irrefutable that news or economic data can elicit a sharp reaction from currencies and other financial markets. However not all economic data is created equal. The monthly Non–farm payrolls for example has had a far bigger impact on the US dollar than other perennial top market movers like consumer prices. Indicators rarely keep their same level of influence over a currency though; so it common to see major shifts in the top ranking from year to year. Continue reading “Most important market moving indicators”

Interdependence in World Equity Markets

By Ricardo Coelho, Claire G. Gilmore, Brian Lucey, Peter Richmond, Stefan Hutzler ( source)

 Over the period studied, 1997-2006, the tree shows a tendency to become more compact. This implies that global equity markets are increasingly interrelated. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification.

Developed European markets are at the global centre. Since 2000, France is central node of European markets (used to be Germany before 2000). US links a cluster of North American and South American countries (except Peru) to France, via Germany. Interestingly, US market dominates globally in market value, but has only a loose linkage to other markets. Japan only became linked to other Asian markets since 2001, before that it was more linked to Western markets. South Africa, Turkey and Russia cluster emerged in 2000 and stays reasonable stable since then.

Legend: Europe grey circles
North America white diamonds
South America grey squares
Asia-Pacific black triangles
Other white squares

Interdependence in Currencies

By A. Z. Gorski, S. Drozdz, J. Kwapien and P. Oswiecimka ( source)

Over the period studied, December 1998 – May 2005, the chart below shows the correlation grouping of around 60 currencies (including gold, silver and platinum) using the US dollar as the base currency. The distance between pairs represents correlation values where the smaller the distance the higher the correlation.

Gold intraday pattern

By Dimitri Speck (27 October 2006)

Since August 5, 1993, there has been a systematic attempt to administer downward impulse to the gold price through loans and sales of the metal. How do we know the date when the systematic interventions began? By observing their execution times. These actions are not divided evenly throughout the day, but instead tend to focus on important time points such as the PM-Fixing and the New York closing price. Additionally, COMEX trading hours are preferred. This creates an intra-day pattern that can be statistically identified and allows us to pinpoint the starting date of the interventions on August 5, 1993.

This intra-day anomaly existed for a very long time, but has weakened the last few years in the course of the continued upward trend in prices. The attached chart shows the average intra-day trend of all days for which there are high numbers of price fixings. The right axis shows the price, the bottom scale the time of day. The average is calculated by taking the minute by minute prices throughout the day from about 2000 days and consolidating them as a single day. Thus this so-called intra-day seasonal chart shows at a glance how intra-day prices behaved over the last eight years.

Clearly visible is the price decrease at the time of the London afternoon fixing. The minor lows near the morning fixing as well as the open and close in New York are all worth noting. Also conspicuous is that during American market hours the price generally trends sideways, in contrast to the rest of the time when it is moving upwards.

Real Effective Exchange Rates

Source data: BIS

The BIS calculates effective exchange rate (EER) indices for a total of 52 economies (including individual euro area countries and, separately, the euro area as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The charts below are indexed at a 100 for the year 2000.

Princeton Economics Cycles

PEI Cycle High – 26 February 2007

Source: Barclay Leib, Len Wheeler, et al.

Although he has been much defamed, Martin Armstrong of Princeton Economic Institute did no doubt stumble upon a unique cycle in financial market analysis. He began with the simple procedure of adding up all the financial panics between 1683 and 1907, and dividing the 224 intervening years by the number of panics that he found, 26 of them to be precise. The result was an average duration between panics of approximately 8.6 years. Of note, 8.6 years also equals 3141 days, or the mathematical symbol of “pi” times 1000.Armstrong went on to do a great deal of further research into this preliminary “cycle,” noting that 6 individual 8.6 year cycles added together came to 51.6 years — or something akin to the famous Kondratieff cycle. He also noted that many of the 8.6 year periods represented shifts in public sentiment away from government control of the economy, and then subsequently back toward it when a “bust” cycle became overwhelming. He noted that “politics seemed to ebb and flow in harmony with the business cycle.”

Using the Crash of 1929 (1929.75) as his starting point, Armstrong was also amazed to find that his general 8.6 year rhythm worked in a remarkably prescient manner going forward in time — often almost to the day. We list these global business cycle dates on the table below, each cycle lasting almost exactly 8.6 years, and have added our own Elliott Wave labeling for those so inclined.

  • 1929.75: U.S. equity market crash — end to Wave I;
  • 1938.35: End of U.S. bear market — end to Wave II, beginning of 1 of III;
  • 1946.95: U.S. equity market high — end to Wave 1 of III;
  • 1955.55: U.S. equity market breaks the 1929 high — end to Wave 2 of III, beginning of 3 of III;
  • 1964:15: U.S. equity market high — end to Wave 3 of III;
  • 1972.75: U.S. equity market high — end to Wave 5 of III, beginning of protracted wave IV and inflationary spiral;
  • 1981.35: Last series of Fed tightening begin to squelch inflation, beginning the final descent of Wave IV into August 1982;
  • 1989.95: First global market to complete its Wave V topped on this day: Japan. End of Wave 1 of V elsewhere;
  • 1998.55: July 20, 1999 marked a significant high in both European and U.S. equities, preceding the August 1998 Russian debt crisis — the end of Wave 3 of V;
  • 2007.15: February 26, 2007
  • 2009.33: April 19, 2009
  • 2011.45: June 13, 2011

8.6 Year Global Business Cycle
PEI long term cycle

The last four major PEI cycle turns have been uncannily prescient, especially given how long ago they were prognosticated (back in the 1980s, I think.) But not all of them were direct hits:

  • The 1989.95 PEI major cycle top was predicted for Dec 12 1989. The Dow actually topped on that day and fell about 5%. Then re-rallied to a higher high on Jan 2 1990, 19 days later. That’s when the big drop came: -12%. Then the Dow re-rallied to an ever higher high by mid-July before dumping -22% into Oct.
  • The 1994.24 PEI major cycle bottom was predicted for Apr 1 1994. That was a direct hit. The Dow bottomed exactly on Apr 1 1994 after a 12% selloff. Then it rallied for another six years.
  • The 1998.55 PEI major cycle top was predicted for Jul 20 1998. That was also a direct hit. The Dow topped exactly on Jul 20 1998 and dropped -22% by Sept/Oct.
  • The 2002.85 PEI major cycle bottom was predicted for Nov 6 2002. The Dow bottomed on 10/10/02, nearly a month earlier. The next big cycle high is supposed to be Feb 26 2007, which the PEI predicts will be along the same lines as Jan 1990 and July 1998.

One of Armstrong’s last comments made in 2000:

“I view the world from a global correlation perspective and it just doesn’t seem possible to achieve a raging bull market in metals when stocks are the flavor of the month. Historically, bull markets are created when capital concentrates, and that focus is in the stock market for now. When that concentration breaks, capital will look around for the next great investment. That should be the commodity cycle between 2002-2007 and perhaps extend out as late as 2012. For now, the metals should make their final lows by 2002. Either way, they should be contrasted by a bubble top in stocks.”