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As surprising as it might sound today, we believe the secular trend for commodities has higher elevations to travel, before eventually running its course – possibly as far out as early into the next decade. While in 2011 we became adamant that the thesis trade in commodities – specifically in its leading sector of precious metals, had become crowded and overhyped, those excesses have been wrung out of the markets over the past three and a half years and offer what we perceive to be extremely compelling long-term valuations going forward.
This idea remains supported by our research that implies yields are not headed materially higher anytime soon – despite the anxieties surrounding the Fed raising interest rates over the next few years. Moreover, we expect that real yields (nominal – inflation) will remain suppressed and eventually retrace the rise that began in the back half of 2011.
When the real yield cycle finds its zero bound and breaks below, commodities tend to outperform in the market over an extended period of time. All things considered, the death knell spike in real yields that has historically punctuated the end of major commodity booms in the past – has yet to appear for us on the horizon.
Over the years we have shown a long-term Hawking view of the nominal yield cosmos, which depicts an antithetic and gradual troughing, versus the violent and exhaustive secular peak in yields the markets experienced in the early 1980’s. While 10-year yields this year have retraced back to the mid point of our expected range (1.5%-3.0%), taking into account the symmetrical structure and mirrored return of the long-term yield cycle, an estimated secular pivot higher would not take place until early in the next decade.
When it comes to a roadmap for short-term yields going forward, we looked back at the last time 3 month Treasury yields broke below 0.5% in 1934 and troughed over the next 13 years until 1947. Notwithstanding the failed rate hike regime by the Fed in 1937, the current market has closely followed the historic comparative performance trajectory of that time. Interestingly, by normalizing a duration study to that period (see below), the estimated run below 0.5% would also extend early into the next decade.
From our perspective, the broader cycle takeaways are:
– Although the Fed may tweak short-term yields gradually higher at some point in the future, the expectations by participants of a one – and certainly two or three handle, in front of the fed funds rate – appear wildly optimistic over the next few years.
For the rest of this column, click here: http://marketanthropology.tumblr.com/post/102970861621/the-commodity-supercycle-aint-over-yet