5Yrs ago I indicated that commodities were overpriced due to an excessive fear that the US$ would collapse with overheated inflation as a result of increased Fed Reserve liquidity commonly called “The Bernanke Put”. The Fed has actually tried to create 2% inflation to prevent what they saw as a deflationary tendency which they felt could go out of their control. While we did see the indicators register 2% inflation briefly, they have since fallen to 1.5% with further indications of lower inflation in future months coming from the Dallas Fed’s 12mo Trimmed Mean PCE core inflation benchmark.Voss Capital is tapping into the affordable housing shortage
The Voss Value Fund was up 11.6% for the second quarter, while the Voss Value Offshore fund gained 11.2% net. The Russell 2000 returned 4.3%, while the Russell 2000 Value gained 4.2%, and the S&P 500 was up 8.5%. Q2 2021 hedge fund letters, conferences and more Year to date, the Voss Value Fund is Read More
That inflation and a collapsing US$ have not resulted from the Fed’s liquidity enhancements have caused those who have bought heavily into commodities, real estate and collectables to have second thoughts on their earlier decisions. They have been faced with first a flattening in commodity prices while stock prices (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) rose and then, more recently there have been sharp declines in gold, oil (United States Oil Fund LP (ETF) (NYSEARCA:USO)), copper and etc as stock markets have risen more sharply. Recent stock market returns have forced a number of managers to sell inflation hedges to buy stocks. This in turn has acerbated commodity holding losses and forced others to do the same.
I have brought the potential of this type of investment shift to your attention many times over the past 5yrs. Although I may see the issues causing certain behaviors in the marketplace, what I cannot do is predict the timing when one dominant philosophy is likely to shift to another. Market prices and the belief in the unfolding of certain future events is over the short term a study in market psychology. And, market psychology is over the short term unpredictable even with the known direction and historical effect of economic trends on market prices.
Inflation has its roots in market psychology and the same is true for commodity prices. Prices can adjust rapidly as market psychology changes.
This story in Bloomberg today is quite good in describing the conditions causing large funds to adjust their positions in recent weeks. Link to story: Bloomberg Commodities Fall US Dollar Rises
“People have been told the world is going to end for five years, and it hasn’t, so they’re finally moving on,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees $325 billion of assets. “So even when crisis flashes now, you don’t get the same upside, and then in good times, you get more downside, and that’s what you’re getting in gold (SPDR Gold Trust (ETF) (NYSEARCA:GLD)) as the Armageddon premium is coming out.”