Pro Perspectives 1/8/20

January 8, 2020

We talked about the early 2000s analog for oil yesterday, and the prospects for another run-up to $100 for oil prices. 

As of about 7:00 last night, it looked like it may be on its way, sooner rather than later.  As the day ends, oil made violent move up and a more violent move down, same with gold.  And stocks did the opposite, rallying from a deep sell-off overnight, and back to record highs.

By the day’s end, markets appear to have priced OUT the risk of war with Iran.

Will Iran truly “stand down” from this point?  As long as they are being economically suffocated with sanctions, probably not.  But who knows.

The bottom line, the potential for continued conflict remains a catalyst for oil and gold – an often it takes a catalyst (some sort of event or trigger) to reprice undervalued assets.  More importantly, the underlying tailwinds for oil, gold and commodities are blowing north.

Remember, we talked earlier in the week about the catalysts lined up to unleash above trend growth for the year (and perhaps several years of above trend growth).  In addition to ultra-easy global monetary policy, the economic-boom cocktail includes the introduction of 5G, a reduction of tariffs, and global fiscal stimulus (including progress toward a $2 trillion U.S. infrastructure spend).

This should finally lift broad commodities out of the decade-long depression. And that will resuscitate the inflation heartbeat, which has been pronounced by many as dead.

As you can see in the chart below, the trend change in commodities prices appears to be underway, and in the very early stages.  In addition, compared to the S&P 500 (the commodities index/S&P 500 ratio) commodities have never been cheaper.