Hidden Commodities Signal Warns Of Recession

Written by Dennis Slothower
Posted June 29, 2018 at 8:00PM

The markets started Thursday in the doldrums but, by early afternoon, enough “buy the dip” traders started buying to achieve a modestly positive end to the day’s trading. The Dow and the NYSE managed to back-test up to their broken 200-day moving averages.

Friday saw the markets climb to make up for the week's losses as banks posted gains and the S&P 500 financial sector snapped a 13-day losing streak. Core Personal consumption expenditures in May hit the Federal Reserve's 2% target for the first time in six years, further boosting the bullish sentiment, at least for now. 

Traders chose to ignore new economic data that was not encouraging on Wednesday. The Commerce Department reported that first quarter GDP was not as healthy as expected, coming in at a weak 2% compared to previous estimates of 2.2%. It was fortunate that it didn’t fall below 2%.

The weaker than previously estimated growth reflected downward revisions to private inventory investment, consumer spending, and exports.

While we continue to expect a pretty good second quarter GDP, the estimates of 5% and more are likely to disappoint. And with broad weakness from consumers, particularly as we come to the end of the second quarter, the average GDP for the year is not going to be as good as everyone is talking about.

Another surprise, from the Labor Department this time, showed that initial jobless claims are growing and exceeding expectations. For the week ending June 23rd, jobless claims rose to 227,000 — an increase of 9,000 more than the previous week.

Real Commodity Prices In Bear Market

An unusual deviation in commodities has recently occurred that we have not seen before. With the fairly recent advent of ETF funds for almost any investment vehicle, the diverse speculation in ETFs as a group has hidden a very important economic signal — commodity price trends.

Commodity prices are some of the early signals that the economies of the world are about to shrink. When the demand for raw materials shrinks it is because manufacturer pipelines of finished goods are narrowing.

This heads-up signal has been somewhat hidden with the introduction of so many different ETFs — many for the largest commodities like oil and copper — but there are still a number of commodities that are not traded in sufficient volumes to warrant their own ETF trading vehicle. These commodities are broadly referred to as non-exchange-traded commodities.

Check out the difference between exchange-traded commodities and non-exchange-traded commodities:

Notice how commodities across the board (meaning both exchange traded and non-exchange traded) from 2013 through 2016 were highly correlated. But in 2017, the exchange-traded commodities rallied with equities and have recently corrected with equities.

This speculative participation in commodity ETFs with the broader stock market has hidden the real commodity weakness signal, which can be seen much more clearly with the non-exchange commodity price line — it did not rally with equities in 2017 but rather continued to correct, suggesting that global demand in commodities was on the wane.

While both exchange traded and non-exchange traded commodity prices are back in sync, declining with the broader equity market, we may have missed an important signal of future economic weakness because of the large volume impact from exchange-traded commodities.

This chart argues that a lot of money may have flowed into commodity ETFs even though demand for those commodities was dropping. This is a good reason why not all ETFs represent attractive options for diverse investment objectives. While you do get diversity, you may run the risk of missing the real supply/demand cycles.

The divergence in non-exchange traded commodities is signaling a coming recession.

Supreme Court Shakeup

Probably the most meaningful event of the week was the ending of another Supreme Court session, closing quietly on Wednesday morning. But in late afternoon, Justice Kennedy made a surprising trip to the White House and informed President Trump that he was retiring and would not return for the fall 2018 session, leaving Trump an opportunity to recommend another nominee to the Supreme Court.

This will certainly bring out enormous mid-year voting attention for Republicans. In order for Trump to maintain a conservative advantage in the court he must nominate and get confirmed another conservative Justice, much like he did with Neil Gorsuch.

While Gorsuch has been a good pick in the eyes of conservative voters, he has actually been slightly left of Kennedy since his presence on the court. Kennedy himself proved to be a swing vote in the court over the years, sometimes siding with liberal causes and sometimes siding with conservative causes.

I suspect there will be great pressure for President Trump to nominate a right-leaning conservative judge. And for this person to get confirmed, especially if confirmation gets filibustered past the mid-term elections, the Republicans will need to not only maintain control of the Senate, they may need to gain some seats.

The fact that the Senate will need a strong conservative majority to succeed with the nomination of a strong conservative candidate to the court means that there will be a stronger than usual Republican “get-out-the-vote” effort.

Some say that the biggest reason Trump was voted into the Presidency was to ensure a conservative nomination for Justice Scalia’s seat, i.e., Gorsuch. Will we now see a rare “red-wave” mid-term election to ensure another conservative Justice on the Supreme Court?

Everything seems to be falling “for Trump” rather than against him. Even rumors of a Middle East peace agreement via Jared Kushner’s efforts are beginning to show up.

A “red wave” mid-term election, a peace agreement with North Korea, some kind of peace settlement in the Middle East, and hard negotiated fair trade agreements could make 2018 a mighty successful year for Trump.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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