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Livestock & Stock
July 2000

Livestock and the Stock Market
In the previous issue of TSR I had several ratio charts comparing the DJIA to particular commodities.  Most of those charts were only 30-year charts at best.  That perspective is too short to make a real point, so my super long-term DJIA to Livestock ratio charts will do a better job.
Briefly, I’ll review my theory for the relationship between commodity prices and stock prices.  It also underscores my belief that stock prices can’t increase relative to commodities forever.  It starts with a question:  “How can valuations for companies that produce commodities, transform commodities, deliver commodities, and service the companies that do all of the above climb higher and higher when commodities fall lower and lower?”  If the relative valuation trends continued up for stocks and down for commodities, at some point in time publicly held businesses would have astronomical valuations for producing, transforming, delivering, and for servicing companies that do all of the above, yet the commodities they worked with and that gave their businesses meaning would be worthless!
That’s impossible, of course.
So there is a relationship between the valuations of the companies that produce commodities, transform commodities, deliver commodities, and service the companies that do all of the above and the commodities they require in their businesses.
Comparative Analysis
I dusted off my data files and came up with monthly prices for the DJIA, 450-pound calves, and all cattle (fats, heifers, and cows) that date all the way back to 1909.  Then I calculated ratios between the livestock prices and the stock market prices by dividing the DJIA by a multiple of the cattle prices.
For both ratios I adjusted the multiplier to establish a 1.0 baseline that appeared to be an appropriate balancing point.  For the baseline in the DJIA to Calf ratio chart I multiplied the calf price by 1,500.  For the DJIA to All Cattle ratio chart I multiplied the cattle price by 1,800.  These assumed multipliers may be all wet in terms of absolute valuation relationships.  Nevertheless, when the ratio data are plotted they make a very interesting chart.  And no matter which multiplier one uses, the cycles on the charts will be the same.
[Both charts presented below are logarithmic (ratio scale) in order to appropriately illustrate deviations from the designated baselines.]

There has been two and a half major cycles between cattle prices and the DJIA in the past 80 years.  And in 1980, just 20 years ago at the bottom of the stock market cycle, the ratios were just about the same as they were during the extended bottoms of 1920 and 1950.  Those years were also associated with low DJIA prices.  (The ratios in both charts also made very brief bottoms during the darkest moments of the panic of 1929 to 1932.)  Based on the obvious power of the two completed cycles in the twentieth century, I expect the DJIA to Calf and the DJIA to All Cattle ratios to bottom out and complete their current cycles early in the twenty-first century.  If the return trip takes 10 more years, then we’d have three complete cycles in 90 years.  The bottoms would be 1920, 1950, 1980, and 2010.  Pretty neat fit, eh?
Economic Volatility
Another interesting aspect of the ratio charts is that the swings up have been increasing in amplitude following each move down.  The 1929 peak was not as high as 1966’s peak, which was not as high as today’s peak.  Yet, by and large, the swings to the downside seem to bottom out at about the same depressed levels.  This illustrates accelerating economic volatility.  That volatility is a product of instability.  And economic instability is due to the overextended credit structure.
Our current level of “prosperity” has been fueled by debt--consumptive debt.  Today’s frenzied consumption, which is financed by debt that grows faster than incomes, is unsustainable.  Yet on the upside it propels economic activity to great heights and people are excited and live a fast-paced life.  In time, though, today’s frantic consumptive binge will burn itself out.  When it does, sales of goods will slow, stock prices will fall, and people will return to earth and gain a better appreciation for the more mundane things in life--such as survival.
Since everyone needs food to survive, food will gain a higher relative value to all other things such as bottled water, SUVs, and stock certificates.  Yes, markets have always cycled and they will always cycle.  To ignore that fact is folly.  Therefore, we must expect the DJIA to cattle price ratios to drop below their long-term baselines within 10 to 15 years.  The reasons for the changes will be complex and unfathomable from today’s blissful perspective.  But change they will.

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