Something doesn’t add up. Certain commodity prices—gold, copper, and oil—are up strongly this year. Yet China’s exports fells 25% year-over-year in February. It was the largest year-over-year decline since May 2009. And that’s when everything nearly fell apart.
Meanwhile, long-term bond yields in Japan have set record lows. Remember last week when I mentioned that Japan’s ten-year government bond sold at auction for a negative yield for the first time ever? It’s still negative, at -0.11. Japan’s 7-year government bonds also have a negative yield, at -0.23. The 30-year bond yields a paltry 0.458.
How can all that happen when gold, copper and oil have enjoyed a surprising bounce so far in 2016? How can commodity prices rally when final demand and exports are contracting? How can you have what looks an awful lot like a long-term depression in the real economy…alongside a barnstorming rally in resources?
I suspect the answer is what I’ve been banging on about all week: the ‘momentum crash’ described by Charlie Morris, after two decades of careful observation of capital markets. Commodities are rallying because they’ve already fallen so far and so hard. Everything else is falling in either absolute or relative terms.
The losers are winning.
Losers can’t win forever. But they’ve already lost so much that they look good on a relative basis. The only question—which I’ll ask Charlie about next time he’s in—is whether the ‘momentum crash’ presages a bigger crash in markets, or if it’s a temporary reversal of a long-term trend.
Obviously the difference matters. If it’s a ‘momentum crash,’ then 2016 will be a challenging year to make money in ordinary ways. It’s always challenging, of course. But a crash in what usually works will make things even harder.
If it’s a temporary reversal, then you’d expect some US dollar softness to go to with your commodity rally. The shorts would continue to cover in oil. Other bearish bets would be wound up. The dust would settle. And then?
Category: Market updates