ALL COMMODITIES RALLY|INFLATION OR RECOVERY?

20. Aug. 2020

As it is obvious from the charts and the title above , the prices of the unrelated commodities, that were presented in the selection above went up significantly from the lows of 2020.

It is possible that, with the exception of lumber, that is beating the all time highs for some reason, most of the current price increases are just the recovery to the pre-covid levels. One might argue that this simply reflects the fact that they were all oversold and that this behavior is just front-running the recovery.Keeping that in mind, let's explore if this could be a beginning of the inflation spiral.

The exploration:

There is essentially three types of the economic shocks:

1-Demand shock.Deflationary pressure. It happens when the economy is quite capable of producing the same amount of goods as before the shock, but the money supply has shrunk, and the consumers have less money to purchase the said goods. Less money is chasing same number of goods, and while the supply inevitably responds to the changed conditions and starts shrinking too, this takes time, and meanwhile you have deflation. This was the kind of shock/crisis we had the last two times. That is why the FED's QE did not create inflation, or rather is was locked up in the financial instruments, as it was filling up the hole in the money supply, created by the bust of the markets, a chain of defaults and deleveraging of the system.

2-Supply shock. Inflationary pressure. It happens when the consumers still have the money to buy the goods, the money supply is still there, but the production is not, so the classic inflationary scenario kicks in, where more money chases less goods. Prices rise.

3- Simultaneous demand and supply shock. That is a mixture of the two of the above. In that case, the two somewhat cancel each other out, as the money supply drops together with the production of goods. However, in reality, one happens faster than the other, which determines the kind of pressure it will have on prices.

Now, it was and is a massive challenge for us to figure out if the covid-19 lockdowns were a demand or a supply shock, or rather, which shock would be stronger, as It is obvious for everyone, that businesses closing up limited both the supply and demand for goods, so this is clearly the simultaneous supply and demand shock. And while the balance was not perfect, the two shocks were supposed to cancel each other out, yet the FED and the Federal Government stepped in and the first one provided the "unlimited liquidity", propping up junk bonds, stocks and other heavily levered assets, while the latter rolled out an unprecedented cash handouts to tens of millions of people to fill in the gaps of lost incomes.

These two actions clearly tipped the scales to the inflationary pressure side(supply shock) as millions of people were buying goods with the money they did not work for(i.e. did not contribute anything to the supply side).

Now, coming back to the commodities prices. As I said, one might argue that this is front-running the recovery, however, that can be countered by the fact that the recovery from any significant crisis takes at least 1,5 years and it took 3-4 years the last time to get back to where we were before, so getting prices of anything to the 2020 beginning levels, where the economy was growing fast and grew for 12 consecutive years before that is wildly optimistic at best.

The economy has not recovered, and the recovery will take 1-1,5 years minimum. Thus, I am making the case for that these upshots in prices are the early warning signs of the real inflation and that the further increase in money supply will accelerate this process. Besides, it is clear from the charts that many commodities stand or are reaching strong levels, while having massive bullish momentums, so should the levels be broken upwards, there is literally no ceiling for how high the prices might go.

And mind you- it is not a price increase of one or two commodities. The selection above is a representation of the cross-sector simultaneous price increases for the raw materials. I hand picked those with 50% or more increases, but the surges up are visible everywhere across the commodities, so even a 5-7% broad annualized inflation is something unseen by the western world in decades. So yes, this IS inflation. My congratulations to the FED: after 13 years of struggles, they finally got what they wanted- the real inflation, yet I am not sure that the people are as happy for that as the FED bosses are.

Guys, thank you for reading, I appreciate your take on the issue, so feel free to comment below. Also, don't forget to like and subscribe!

Have a nice day!