Why is the Price Action in Commodities So Extreme? (w/ Raoul Pal & Peter Brandt)
RAOUL PAL: When I read a chart that way, I then often start to look around at other supporting evidence that that could be the case. If you're looking at anything within equity world or sector world, are you picking up similar things that's saying, huh, okay, this fits in with that point of view? PETER BRANDT: Not necessarily in terms of sectors, because generally, there's way too many sides. I'm a futures trader. I'm a forex trader. When I try to put together a mini narrative, so to speak, on a more composite basis, for me, I don't wander all the way into sectors because that's just too deep a water for me. Rather, I'll tend to look at what's going on in a composite of other markets. Yeah, I think I can create the story because a significant downside move in the equity market makes sense to me. For instance, when I look at metals, when I especially look at interest rates, all of a sudden, a mosaic comes together that says if this happens, then that would make sense to what I'm seeing, for instance, over and the 10-year, the 5- year, the 30-year, the Eurodollars, all of a sudden, that would tend to line up and then indeed, I think it's what we're seeing. RAOUL PAL: I looked at-- I do a similar process as you by seeing how things evolve across all asset classes, and the CRB index and any of the commodity based index, big, huge top patterns, big, massive monthly head and shoulders tops and stuff like that that I've never seen in my career, I've never seen them on the charts in history before, tops of this size. I look at that and think, wow, oil is obviously playing itself out. How do you see that commodity complex right now? What's interesting to you in how you're reading it? PETER BRANDT: I have mixed emotions there. I started as a corn trader, I understand the corn market, I look at the price of corn, and with the decline that we're seeing in corn as we speak today, we're down in an area that we haven't seen in a number of years. As a matter of fact, when I started trading corn in 1974- 1975, corn was trading not adjusted for inflation, but trading at approximately the same price it's trading today. We're seeing corn prices right where they were in 1975 and 1976. That's almost a 50-year period of time, corn prices haven't gone up and of course, American farmers would be the first ones to remind us all of that. Corn is a perfect example. We have a potential huge head and shoulders top on the weekly continuation chart of corn, but I'm split between what's the basic value or at least value relative to what my experience is and just the pure chart pattern itself. Pure chart pattern itself in corn tells me that corn, that raw material prices can go substantially lower but yes, there's a value investor part of me to that goes, wow, I've a chance to own corn at 50-year lows. That's a pretty cool deal. RAOUL PAL: Yeah, and that's not the same in metals I guess. Metals are still more elevated overall. PETER BRANDT: Yeah, they are. They are, and of course, crude oil is getting back there too. Crude oil is back in areas where I traded crude oil back in the low teens in the past. It's been a number of years, but they're getting back in there, but their raw material prices are very weak. For instance, when we look at data adjusted sugar prices, which go back and adjust prices to take away the role charges we have from going to one futures contract to the next, we're at all-time lows. We have never had sugar prices as low as they are today on a back-adjusted price chart basis. There's a number of commodities that look that way. Same thing with some of the livestock markets, its cheapest can be. There's part of me though, particularly in some raw materials, where I go even on a global macro basis, I can't really become a bear. I think wheat prices are a perfect example. People are going to have to still eat. There is the basic necessity of human beings to consume food. If I'm looking at wheat prices and saying we're already done in the area of the same level of where I traded wheat prices back in the mid-70s, maybe I can just get all buried up. There's a better place to be a bear, I guess is what I'm telling you. If I'm going to be a bear, it's not going to be on raw material prices. I'll be a bull on interest rate futures. I'll be a bear on equities. I'll look to trade the grain. RAOUL PAL: Commodity prices are telling you that it's consistent with the equity market falling further is the fact that commodities look weak, whether they rebound, whether ags rebound or not, okay, but it looks weak as a structure.