Do you know which major commodity has increased in price most YTD? It’s cotton. Cotton is up 96% YTD. The second-best-performing commodity is palladium. Palladium has gained 88% YTD. The big gains in cotton and palladium are not outliers, though. In Young Research’s Global Investment Strategy, we provide subscribers with a Global Investment Scorecard that shows the performance of all of the major developed and emerging equity markets as well as major fixed-income sectors, U.S. stock sectors, and all the major commodities. For commodities, we break out the performance of energy commodities, agricultural commodities, industrial commodities, and precious metals.
Of the 33 commodities on our scorecard, only four are down YTD. In the energy sector, gasoline prices are up 14%, coal prices are up 46%, and heating oil prices are up 16%. In agricultural commodities, I have already mentioned the price gain of cotton, and corn prices are up 33%, soybeans are up 24%, and wheat is up 35%. Sugar is up a mere 6.5%, but that follows a 128% gain in 2009. Coffee prices are up 51%, and live cattle prices are up almost 20%.
In the industrial commodities space, copper is up 20%, nickel is up 28%, tin is up 51%, iron ore is up 80%, and rubber is up 55%. Besides the 88% gain in palladium in the precious metals sector, silver is up 73%, gold is up 28%, and platinum is up 18%.
In the face of these gains, there are those who still contend that deflation is a problem. Look for Fed chairman Bernanke to bring out the deflation bogeyman when he makes an appearance on 60 Minutes this Sunday. If you don’t hear about deflation from the Fed chief, he will certainly justify his money-printing crusade by pointing to the high unemployment rate. But if he tells you the Fed can increase employment by printing money, he is delusional. Our latest featured video should help debunk that myth.
Those who are concerned with deflation are using backward-looking price measures. The core inflation index, which is the Fed’s preferred gauge of inflation, strips out food and energy, which happen to be two of the most price-sensitive components of inflation. Once you strip out food and energy, you are left with an index that is weighted about 50% toward housing. With an excess supply of homes on the market, real-estate prices will be one of the last Consumer Price Index components to respond to inflationary pressures. If the Fed waits for inflation to show up in home prices before reining in its ultra-accommodative monetary policy, the economic impact could be devastating.
What if the inflation we are seeing in materials prices doesn’t make its way through to consumer prices? That won’t be good either. If businesses aren’t able to pass on rising raw-materials costs, their profit margins will shrink. Shrinking margins will make a corporate sector that is already reluctant to hire even less inclined to add new employees. Slower job growth has never been bullish for the economy—especially when unemployment is approaching 10%.
Keep your inflation antennas tuned to sensitive raw materials prices. If inflation begins to accelerate, you will see it here first.
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