S&P vs CRB

S&P vs CRB

May 2000

The S&P 500 and the CRB

For most of the twentieth century these two charts trended in opposite directions. Will they continue to trend in opposite directions in the twenty-first century?

Look at the two charts printed below. The Standard and Poor’s 500 stock index has gone up since 1974. The Constant Dollar Commodity Research Bureau (CRB) index has gone down since 1974. For a fact a whole generation of folks have been conditioned to put their money in stocks.

But what the masses don't realize is that the winds of change are blowing. The massive buildup of consumptive credit is peaking. Stock market valuations are in the throes of secular change. And as the credit that was created to fire up the economy tires of chasing stocks, won't it then chase the tangibles like it has before?

If you try to tell the masses these trends will change, they'll laugh you off the stage. The masses know what's ahead. It's more of the same. So let the good times roll.

I've drawn a downtrend line on the constant dollar CRB chart. It connects the peaks starting from the top. You'll notice it's been broken, and the long-term trend could now be UP!

Also, you know about human behavior patterns, so you'll notice that the S&P chart is in a rising parabolic, blow-off type formation that is indicative of an emotional climax. In other words, the snowballing emotion of greed that has driven people to invest in stocks has reached a point where it has, or nearly has, used up all the energy people can muster. It's like an airplane in a steep climb. It eventually runs out of fuel or the exponentially-increasing energy requirement, needed to sustain the climb to ever greater heights, can no longer be met.

The S&P chart depicts a typical climax move. It's an unsustainable move; therefore, it's a classic reversal formation. Stock market tops are always deceiving. That's why tops are tops. They occur when everyone is convinced prices must go higher and right when they've put in the last dime they can scrape up or borrow. Nobody knows that a top has been made until long after it has passed. Yet pass it will.

Maybe the S&P index didn't make a final peak on March 24, maybe it did. We don't know now, but we'll know in time. Then we'll also know a new era is upon us.

In a new era expect the trends for both charts to be in the opposite directions they've been in for the past generation. And a minimum time frame for the new trends is 15 years. In constant dollars (that's inflation adjusted) I'd expect stock prices to fall about 90%. I can hear folks scoffing at that last sentence now. But they don't realize that from 1974 to 1999 the constant dollar Commodity Research Bureau price index fell 78.5%. So if commodities can fall that much, overinflated valuations for stocks in a good economy can fall more--as they make a transition to discounted valuations in a poor economy.

History Says Big Stock Drop Probable

Following the peak in February 1966, in constant dollars the Dow Jones Industrial Average (DJIA) fell just shy of 80% by the time it bottomed out in 1982. Looking back a little further, we see that the DJIA fell 89.4% between 1929 and 1932. So there's precedence for big price declines.

The masses don't agree and won't even ask the question.

Yet while the masses slumber contentedly, some of the Canadian resource stocks are acting better than they've acted in several years. Oddly enough, some of the smaller companies are outperforming the seniors. Is that due to the seniors’ penchant for hedging production. Unbelievably, many seniors have hedged their gold production for less than gold's “normalized value.” I calculate normal value by adjusting the gold price in 1900 ($20.67) with the government's CPI. That puts gold's normal value at $425 today. So gold's value is below normal just like nearly all commodities. And if tangibles can trade below normal, can't they trade above normal?

One junior resource stock I own and like is Mercator Minerals Ltd. It trades under the symbol ML. (Do you think I'd mention a stock I don't own?) I first acquired a position in ML in February 1989 when it first came public. So I've been involved for some time now. I guess you could call me a long-term investor. For the past 24 months ML has moved sideways, only to break out a few days ago. For sure it broke out of a “Ted Warren” style chart formation. The last time ML broke out like this (early 1996) it soared to C$2.80. I expect a more modest rate of rise in today's market. Management is aggressive in its quest for new projects of merit. So I look for more announcements as the year unfolds.

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