About five years ago we started arguing that there was a similarity in the general themes through the past few decades. We suggested, for example, that crashes and crises tended to occur in the ‘7’ and ‘8’ year followed by speculative asset price recoveries into the start of the new decade.

With the benefit of a bit of hindsight... history seems to have repeated once again. The banking sector began to unravel during the second half of 2007 leading into a gut-wrenching collapse through the latter part of 2008. While most investors started storing canned goods and ammunition the markets responded to massive injections of liquidity by driving higher through much of 2009. While the markets always find a way to make each cycle somewhat unique the impressive recovery in cyclical asset prices during 2009 followed a historical pattern that included bubbles in metals prices into 1980, the Nikkei’s generational peak in 1990, and the Nasdaq’s eye-popping rise into 2000.

As we work through the first month of yet another decade we thought  it appropriate to take a look back in time. At right are three charts of the CRB Index from 1980, 1990, and 2000.

Commodity prices are one of many sectors that make up the broader cyclical theme. At present the commodity markets are trending with Asian growth as well as the weaker U.S. dollar. To the extent that China stumbles or the dollar finds a bid the CRB Index’s ascent should slow or reverse.

Our point, however, is that while there are always reasons to worry...  if the ‘decade trend’ repeats- even in a general way- then real pressure may not show up until some time towards the final quarter of this year. The chart at top right shows that commodity prices remained stronger into the fourth quarter of 1980 while the chart at middle right makes the case that commodity prices held fairly close to the highs in 1990 until early October. In 2000 the CRB Index continued to push upwards after the Nasdaq peaked in March with the absolute peak in October of that year and real weakness beginning early in 2001.

We mentioned recently that our general expectation is that this year will start off strong and end weak. We are still inclined to be positive on the equity markets although we expect that our enthusiasm will start to wane somewhat the closer we get to the dog days of summer.

Equity/Bond Markets

The chart at right compares the CRB Index with Japan’s Nikkei 225 Index from 1989 into 1991.

The fairly simple point is that the Nikkei peaked in price around nine months ahead of significant weakness for commodity prices. The Nikkei rose to a high into the start of the first quarter of 1990 while the CRB Index remained generally strong into early October of that year.

Below is a comparison between the CRB Index and the Nasdaq 100 Index (NDX) from 1999- 2001.

The Nasdaq reached a bubble peak at the start of the second quarter of 2000 while the CRB Index continued to rise for an additional three quarters until the trend turned negative in early 2001.

Below right is a comparison between the CRB Index and Hong Kong’s  Hang Seng Index from 2007- 2008.

Once again... the Hang Seng Index (as well as China’s Shanghai Composite Index) peaked early in the fourth quarter of 2007 almost exactly nine months ahead of the cycle peak for commodity prices in the summer of 2008.

If we take the comparisons literally then the argument would be that one should start to worry about weaker raw materials prices about nine months after the peak for a major equity market. Aside from the fact that it has been close to seven months since long-term U.S. Treasury yields reached a peak and almost six months since the Shanghai Comp. last made a new recovery high... we have yet to see the kind of divergences build within the markets to truly make us concerned. We will continue on with this thought on the following page.