Performance of Commodities in Inflation

by: Mebane Faber posted on: June 27, 2008 | about stocks: DBA / DBB / DBC / DBE / DBP / DJP / GSG / GSP / RJI    
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The stock markets are very close to bear territory (one more day like Thursday and it will be an official bear market in the S&P 500).

Long time readers know I am a big fan of commodities. After Thursday's dump in stocks (and run up in commodities indexes), I thought I would write a very brief post that is similar to the post I did a few weeks ago on asset allocation and interest rates. I think this table speaks for itself.

It shows the average return to five indexes over two periods. 1972-1981 is characterized by rising interest rates and high inflation. 1982-2007 is characterized by falling interest rates and low inflation. Note the only asset class that performs better in the latter. In periods of low inflation and declining interest rates, stocks, foreign stocks, bonds and REITs all performed better, which makes intuitive sense because they are all capital assets and benefit from lower interest rates. Commodities, on the other hand, turn in much higher returns when interest rates are going up, which makes sense due to their correlation with inflation and unexpected inflation.

If you don't have commodity exposure (or your portfolio manager doesn't), why not? That is probably a hard question to answer right now. Some example ETFs are: DBC, GSP, GSG, DJP, RJI, DBA, DBB, DBE, DBP.

Click on the table to enlarge.

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Mebane Faber

Mebane Faber

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    ACEMAN
    Jun 27 03:16 PM
    My Website
    Y'all are closing in on the correlation but not the causes which drives inflation. Given the very same time frames, inflation in the US is directly related to the post Vietnam period. Often it is the sixth year after entering a war that inflation truly heats up for obvious reason and that can be tracked in the US right back to the Revolutionary war.Regarding Foreign Stocks and inflation, except for 2001 to the present, inflation in Europe for the same dates above was based on currency instability throughout Western Europe something that is not the case today. Also, if we look closely at the YEN during the time frames above against the dollar we have the USD devaluing against the YEN due to one-sided trade imbalances which was a precursor to the sinking USD against China and East Asian exports. Thus WAR and TRADE IMBALANCE (and its corellary--borrowing) are among the chief causes of inflation. Numbers don't mean a thing unless that got their proof.
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