The commodity bear market is now entering its fifth year. Not only has the decline been relentless, but it has accelerated in the last eighteen months.

Although it seems quaint now, when the Federal Reserve initiated the first Quantitative Easing program, investors rushed into commodities to protect themselves from the “inevitable” inflation. I managed to dig up this Reuters article from 2010 that summed up the mood at the time:

QE will favour most commodity investments in comparison with low-risk assets such as cash and bonds.

A rising tide of easy money will lift all commodities, but not equally. Differential impact from QE will provide perfect conditions to test the claims of a new generation of dynamic commodity indices (such as the SummerHaven/U.S. Commodity Funds Commodity Index) as well as fundamentals-based relative value active managers (such as VOC Capital Management and Curium Capital) that they can generate enhanced returns.

For the first couple of years of QE, commodities followed (and in fact often led) most risk assets higher as the Federal Reserve expanded their balance sheet.

But in 2012 something changed. Commodities started to slump. And when the Federal Reserve introduced QE3 (dubbed QE infinity because it had no set amount nor an end date), the stimulus didn’t lift commodities, but instead went straight into the stock market.

Commodities went sideways as the Federal Reserve was expanding their balance sheet, but the moment the Fed stopped, commodities quickly collapsed. It has been all downhill since then.

So far stocks have been impervious to the lack of Federal Reserve balance sheet expansion. Absent QE they haven’t been able to rally, but neither have they collapsed.

With the commodity rout and the stubbornly high stock market prices, the ratio between commodities and stocks has pushed down to lows we have not seen since 1998!

This ratio was almost 0.30 in 2011. It is now ticking at around 0.09. Now I am not foolish enough to say there is no way we can go lower. Markets often have a habit going beyond levels that seem “unreachable.” But at the same time, these sorts of moves offer the long term patient investor opportunities.

I don’t know if this extreme reading will resolve itself with a decline in the stock market, or a bump in commodities. All I know is commodities are the most hated investment since the “Admirael van der Eijck” tulip market crashed. The least you should do is keep an open mind to the fact we are due for a bounce…

Thanks for reading,

Have a great week-end,

Kevin Muir

the MacroTourist