Our Commodity Diffusion Index Is At Its Lowest Level Since 2/2009 by Eric Bush, Gavekal Capital
One of the way we like to track commodity prices is by using a a diffusion index. A diffusion index is a simple way of tallying how many commodities are higher over the past year and how many are lower over the past year. If a commodity is higher than it receives a +1, if it is lower than it receives a -1. In the index below, we are tracking 20 different commodities. This means that the highest level for the index is +20 and the lowest level is -20. It currently stands at -16 so 18 commodities are lower over the past year against just two commodities that are higher. The current reading is the lowest since our diffusion index hit its max negative reading in February 2009.
In the second chart below, we plot our commodity diffusion index against our emerging market currency diffusion index. The emerging market diffusion index uses the same logic except that it only looks at 9 different currencies. It is currently at its max negative reading of -9. As you can see in the chart, EM currencies tend to move with commodity prices. It seems that EM currencies will continue to be in a period of weakness for the foreseeable future.
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More