March 10, 2022

What Commodities Are Telling Us?

It's been 50 years since last I saw what's happening now. In that half-century, we've experienced market ups and downs. Inflation, deflation. Boom and bust. But it's been that long since all have aligned in just the way they're lining up today.

Back then, in the early 1970s, I was a cub stockbroker. Just beginning my career. And when I say stockbroker, that's what I mean. Stocks and bonds, that's what we dealt in. None of the fancy investment products of today. Just stocks and bonds.

Now imagine one of the most extended bear markets of all time. Take what's happening this month, and extend it out a couple of years, and you have a mirror image of the 1970s.

At least for stocks.

So, as you can imagine, stockbrokers weren't doing well.

But across the street was an old-line commodities firm, Clayton and Company. And they were going gangbusters. They were riding one of the biggest bull markets in history.

So I decided to visit them. Walking into the office, was just like most brokerage offices of the day, clacker boards, news wire ticker tapes, quote machines, and lots and lots of telephones. Just like the office I worked in. But this was all about commodities, not stocks.

Back in the corner was one old broker, who, as it turned out was updating all of his charts. Posting today's prices on his hand-drawn daily charts.

I asked if I could join him, and he said sure. We became friends, and for the next few weeks, he and I would spend the afternoons talking about the economy and the commodities markets.

We were out in California, and so the commodity pits and stocks exchanges all closed early in the afternoon.

During that time I learned that inflation was the futures broker's best friend. When inflation struck it was absolutely the best of times to trade commodities. Commodities prices rise, as inflation rises.

And almost always the driving force behind that inflation in commodities were shortages. Not enough winter wheat to meet demand? The winter wheat futures price can skyrocket.

And because commodities are traded on a low margin, your investment can rise dramatically. It's not unusual to see gains oftentimes, one hundred times or more, on invested capital.

It's also possible to see losses of that magnitude.

So, here we were in the early 70s, a time just about like this. A time of war, a time when oil was beginning to grab the headlines, and a time when the economy looked mighty shaky.

When all of a sudden commodities started to take off in price. Going higher and higher.

Shortage said, my broker friend.

You see the run in Winter Wheat. Crop failure. There's not going to be enough wheat come this fall. Bread prices will spike. Wheat is going higher and higher.

I was reminded of all this Monday when I saw that Winter Wheat has hit an all-time, historic high. And I remembered what the broker said so long ago. The price of bread is going to spike. In fact, it's going to be in short supply.

It is all happening again.

Then, I turned to Monday's market page. It was all there. All over again. All you saw was solid red for the stock markets around the world. Europe was red, so was Asia, and America. Just like the 1970s.

But commodities were all green. Commodity prices going up. The oil complex is green. The precious metals are also green. And, of course, the agricultural commodities are all higher.

A clear sign of shortage ahead.

Now, I've often said that I don't like to give advice on a podcast. I simply don't have enough information to know what's appropriate for your individual situation.

But here is a piece of advice, that I need to give. In fact, I'd be remiss not to.

Stock up. Please.

There are likely shortages in our future.

For your own sake, buy a few extra cans of food, dried goods like beans and rice and flour. Anything that will last for a while. I know we think that at any time we can always shop for more. But what if the store shelves are bare?

The commodities markets are telling us that they think there are shortages ahead. That supplies are likely to get tight.

If I'm wrong, you'll have a little extra that you can use anytime.

But if what I see in the commodities markets are right. I think you'll be very happy that you've put a little extra in the pantry.