August 20, 2018
In choppy trade so far this month, the S&P is up about 1% and is less than 1% from its all-time high achieved on January 26th, 2018. The 10-year treasury yield has fallen 3.7% month-to-date, to 2.84%. The dollar is the major story with the index hitting a high of 96.98 breaking out to a new 52-week high and causing commodities to apparently crash in price.
Commodities all around the world are priced in dollars. What this means is that when you ask someone, “How much does a barrel of oil cost?”, they will give you the answer in dollars. This is true whether you ask the question in the USA, China or Zimbabwe.
To keep this concept simple – let’s swap dollars for donuts.
Let’s say that commodities including oil, gold, silver and corn are all priced in donuts. We are saying 1 hot, glazed Krispy Kreme® donut is equivalent to $1, and there are $14.148 Trillion donuts in the world today. So, 1 barrel of oil costs about 65 donuts.
What would happen to the price of oil if all of the sudden there were only 10 donuts left on the planet?
Well, each donut would be substantially more valuable if there were only 10 of them on the entire planet and Krispy Kreme® wasn’t making any more.
So, that same barrel of oil that used to cost 65 donuts, may only cost 0.065 Donuts or something like that. On the surface, it looks like the “price” of oil has crashed - but it actually stayed exactly the same – what changed was the value of a donut.
While this is not the exact situation in the commodity markets today, it is pretty darn close. Beware the strong dollar as it distorts the reality of prices and value around the globe and therefore on your trips to the grocery and gas station.
Thursday is an important day on the global growth front. Markit releases its preliminary global Manufacturing PMI data. This will tell us if the trade stand-offs are starting to have an effect. Friday, Fed chairman Jerome Powell is the keynote speaker at the Kansas City Fed's annual Jackson Hole Central Banking Symposium. This year's version is expected to be a yawner compared to years' past, but any time Powell speaks it's worth listening. In the recent past, the market has reacted negatively to his hawkish nature.
Shane Fleury, CIO
Elevate Capital Advisors
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