Thread: Adjusted Money Base

Interesting article.

Perhaps congressman/convict Jim Traficant was right on the money with his rant about China....LOL

****heads up on Lew Rockwell: never ever give that guy your e-mail addy...he is a "KING OF SPAM"I must get 7-10 e-mails a week from his organization.

Commodity Returns:
Commodities vs. stocks and bonds

For our Jan. 7, 2005 broadcast, Karen Gibbs sat down with well-known investor Jim Rogers, who currently has his eye on commodity investing. One report that Rogers cites is from Yale International Center for Finance, which released a June 14, 2004 working paper, "Facts and Fantasies about Commodity Futures."

Authors Gary Gorton of the University of Pennsylvania and K. Geert Rouwenhorst of the Yale School of Management compare commodity futures to stocks and bonds. Here is an excerpt from their study:

Risk and return of commodity futures compared with other asset classes

The historical risk premium on commodity futures has been positive at about 5 percent during the 1959-2004 period, and significant in a statistical sense.
The historical risk premium on commodity futures is about the same as the risk premium on stocks (S&P 500), and more than double the risk premium of bonds.
Commodity futures and stocks have about the same average return, but the standard deviation of stock returns is slightly higher.
Both the return distributions have positive excess kurtosis, that is, they are “peaked� relative to the normal distribution. The slightly higher variance of equities, and the opposite skewness, together imply that equities have more downside risk relative to commodities.
Correlation of commodities with other asset classes

Over all horizons -- except monthly -- the equally-weighted commodity futures total return is negatively correlated with the return on the S&P 500 and long-term bonds. This suggests that commodity futures are effective in diversifying equity and bond portfolios.
The negative correlation between stocks and bonds tends to increase with the holding period. This suggests that the diversification benefits of commodity futures tend to be larger at longer horizons.
Commodity futures returns are positively correlated with inflation, and the correlation is larger at longer horizons. Because commodity future returns are volatile relative to inflation, longer-term correlations better capture the inflation properties of a commodity investment.
During the 5 percent of the months of worst performance of equity markets, when stocks fell on average by 9.18 percent, commodity futures experienced a positive return of 1.43 percent, which is slightly more than the full sample average return of 0.88 percent per month.
During the 1 percent of months of lowest performance of equity markets, when equities fell on average by 13.87 percent, commodity futures returned an average of 2.32 percent.
It seems that the diversification benefits of commodity futures work well when they are needed most. Consistent with a negative correlation, commodity futures earn above average returns when stocks earn below average returns.

Commodity futures Returns and Inflation

First, because commodity futures represent a bet on commodity prices, they are directly linked to the components of inflation. Second, because futures prices include information about foreseeable trends in commodity prices, they rise and fall with unexpected deviations from components of inflation. This is exactly why futures do well when stocks and bonds perform poorly.

commodity futures have an opposite exposure to inflation compared to stocks and bonds. stocks and bonds are negatively correlated with inflation, while the correlation of commodity futures with inflation is positive at all horizons.
In absolute magnitude, inflation correlations tend to increase with the holding period. The negative inflation correlation of stocks and bonds and the positive inflation correlation of commodity futures are larger at return intervals of 1 and 5 years than at the monthly or quarterly frequency.
The negative sensitivities of stocks and bonds to inflation stem mainly from sensitivities to unexpected inflation. The correlations with unexpected inflation exceed the raw inflation correlations.
Commodity futures are also more sensitive to unexpected inflation, but (again) in the opposite direction.
Stock returns and (especially) bond returns are negatively influenced by revisions about future expected inflation. Revisions about future inflationary expectations are a positive influence on commodity futures returns.
Unreported results show that these patterns in the exposures to unexpected inflation are stronger at the quarterly horizon than at the monthly horizon.
Commodity futures returns are negatively correlated with stock returns. commodity futures have opposite exposures to unexpected inflation from stocks and bonds. It is tempting to put both together and ask: does the opposite exposure to unexpected inflation account for the negative correlation between commodity futures and stocks and bonds? Preliminary findings suggest that this only part of the story behind the negative correlations.

Commodity returns over the business cycle
During the Early Recession phase the returns on both stocks and bonds are negative, -15.5 percent and –2.9 percent respectively. But, the return on commodity futures is a positive 3.5 percent. During the Late Recession phase the signs of the returns reverse, stocks and bonds are positive, while commodity futures are negative.
The diversification effect is not limited to the early stages of recessions. Whenever stock and bond returns are below their overall average, in the Late Expansion and Early Recession phases, commodity returns are positive and commodities outperform both stocks and bonds. The last two conclusions are not evident if the sample is confined to the period 1990-2004, a period which does not cover enough business cycles.
There are a number of commodity futures that perform well in the Early Recession, but not well in the Late Recession. In particular, crude oil futures, unleaded gas future, and heating oil futures display this pattern. Thus, an equally weighted energy futures index shows a positive return of 5.4 percent in the Early Recession, and a negative return of 7.8 percent in the Late Recession.
But, this pattern of strong performance over the Early Recession phase, followed by weaker performance over the Late Recession phase, is not confined to energy futures. For example, Industrial Metals also appears to have strong cyclical features. This subgroup returns 15.7 percent on average over the Early Recession phase and –29.8 percent over the late Recession phase. Similarly, the index of Other Food Futures displays this pattern quite strongly.
Without energy, the equally-weighted nonenergy commodity futures return is still positive over the Early Recession phase (1.8 percent), and it is also positive over the Late Recession (0.5 percent).
That energy is important for the commodity futures business cycle result is not surprising because the oil crises of the 1970s and 1980s are associated with major recessions. Many researchers argue that oil shocks disrupt economic activity. That is, unexpected increases in oil prices are associated with declines in the macroeconomy, as measured by output or employment. Essentially what happens during the Early Recession phase, generally speaking, is that oil and energy-related prices unexpectedly increase, causing a windfall gain to long futures investors. However, as noted, the results do not depend solely on energy futures. Also, keep in mind that energy futures are somewhat recent contracts, e.g., crude oil only started trading in 1983.

The fact that industrial metals and other foods are very cyclical is also interesting. In fact, the cross section behavior of different commodity futures over the business cyclical is an interesting subject for further research.