At this juncture, players are focusing on tonight’s watershed speech on budget issues by US President Obama and on the weekend’s upcoming Washington meeting of the G-20 nations. Mr. Obama is expected to lay out a course, a timeline, and specific figures that are related to trimming the federal deficit of the US. Certain ‘sacred cows’ are involved in the proposed cuts as well; among them, the military spending (still at the core of the problem percentage-wise) and certain entitlement programs. The President has kept most of the details of his presentation under wraps thus far, irking his GOP opponents. What else is new?
As for the G-20, the group will be attempting to come to grips with still-present global imbalances but is not expected to address currency exchange rates at this time. Markets expect the production of a finger-pointing list by the G-20; one that will identify the countries at fault for placing the global economy at risk via their trade balances and/or investment flows and domestic deficits. Thus, Mr. Obama’s speech could not come at a better time. The IMF has also (just yesterday) pointed out that the US needs to speed things up in the budget deficit-slashing department, lest it causes the bond markets to lose faith in the country’s ability to tackle the problem. Mr. Obama has stated that he wishes to halve the US federal deficit by the end of his first term. In order to do so, the US needs to trim its shortfall by 5% of GDP during 2012 and 2013’s fiscal years. The IMF did not single the US out however, and stated that “all advanced economies must make steady annual progress in cutting debt burdens.”
Now, for a moment, do take a look at the chart of the commodity “Himalayas” below:
The picture that “speaks” 1,000 or more words shows us that the all-time overvaluation in the commodities market took place in 1980. A recent article in Futures magazine by Shawn Hackett (a respected commodities broker and author of the Hackett Money Flow Report) identifies what is likely “wrong” with this picture as well, at this time. As the image shows, at the record overvaluation in 1980 the ten-year average return on commodities stood at 12.3%. Quite often, the most reliable measure of over or under-valuation in commodities is the ten-year average return of same.
The next such peak of over-valuation occurred in 2008 at just below the 10.75% level (and then the complex crashed during the summer of that year). Where are we today? Well, it turns out that the index is presently well beyond the 11.81% level that it touched back in February of this year. Mr. Hackett observes that “this suggests that commodities are currently near the most overvalued levels in 200 years.” The author also notes that “gravity always wins out in the end by bringing a particular asset back down to normalcy, no matter how bullish the fundamentals appear to be at the time.” Mr. Newton would be proud of that restatement of his famous Law. Today’s apple tree is loaded. Any investor wishing to be fully informed about all aspects of such markets might do very well to give Mr. Hackett’s solid work a read.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America