Jeeez!

[brewer12345]

DJ-AIG Commodities index is up almost 4 and a half points right now! Whether we have growth or not, we've definately got inflation. Its only a matter of time until we start seeing all of this trickle down to unit labor costs, or we get tipped into a recession. Not pretty...

 

[wildcat]

Do you think the wage cost increases are for real or do you think the 'global' economy will suppress wage growth below the level of material cost increases? China/other emerging markets are supposed to experience increases in labor costs so I imagine it could be a worldwide event.

 

[brewer12345]

Like it or not, wage markets are imperfectly connected. Yes, you can outsource certain jobs very easily, but there are an awful lot you can't outsource, either because you need feet on the ground or because there aren't enough skilled workers, or for other structural reasons. There are some signs that Chinese and Indian labor are getting bid up by outsourcing efforts. At some point, higher cost of living has to be reflected back into unit labor costs. If higher COL doesn't translate into higher wages, the consumer will eventually get baly squeezed and consumer spending will fall. That would likely trigger a pretty ugly recession.

 

[wildcat]

If higher COL doesn't translate into higher wages, the consumer will eventually get baly squeezed and consumer spending will fall. That would likely trigger a pretty ugly recession

That would be my concern but to me it is worst case scenario and not very likely.

 

[laurence]

For the uninitiated, would you go into the DJ-AIG index a bit, or maybe point to a link with an explanation of what it means? Is this a one day move, and is that significant? Or is this a periodic report like the consumer confidence number? Thanks much!

EDIT: DUH! Nevermind. D J stands for Dow Jones, sorry! All coming together now.

 

[wildcat]

It has been moving quite a bit lately but 4 1/2 is pretty big. It is the commodity index (like the S&P except it is commodities) that Pimco uses as a benchmark for the Commodity Real Return MF. So you wanna play it go with the Pimco MF.

 

[brewer12345]

Further to what Wildcat said, the DJAIG index is a useful gauge of commodity inflation because it includes 5 different categories (precious metals, energy, agriculture, indstrials, and livestock) and has all kinds of governors that prevent any one category or commodity from making up too much of the index. The weights are re-set every year, and every quarter things get cut back to within certain limits, IIRC.

 

[laurence]

ah, excellent, none of that "once we remove the volatile housing, energy, and every other component that actually matters, the core inflation rate of cheap imported electronics is...." . Thanks!

 

[wildcat]

it includes 5 different categories (precious metals, energy, agriculture, indstrials, and livestock) and has all kinds of governors that prevent any one category or commodity from making up too much of the index. The weights are re-set every year, and every quarter things get cut back to within certain limits, IIRC

That is why it is better than most nat resource/commodity funds. Most are too weighted towards energy.

 

[lazyday]

So you wanna play it go with the Pimco MF.

Is that a rap lyric?
At least you abbreviated... there might be kids reading

 

[Martha]

Is that a rap lyric?
At least you abbreviated... there might be kids reading

 

[Gone4Good]

  So you wanna play it go with the Pimco MF. 

Chasing the hot sector usually ends in

 

[wildcat]

Lazy -

Glad to see you noticed my skills

Chasing the hot sector usually ends in

Commodities have been in a bear market for approx 20 years

 

[Gone4Good]

Yup. And they're now due for another 20-year stinker.

Bonds pay interest, stocks pay dividends and hopefully grow the capital base, and a lump of gold is pretty much a lump of gold.

Makes a nice paper weight though.

 

[wildcat]

Hmm I just collected a payment from my Pimco Commodity Fund. It holds TIPS as collateral so you do collect payments + net the returns on commodity futures.

The point of holding a commodities fund is diversification.

 

[BUM]

Hmm I just collected a payment from my Pimco Commodity Fund. 

Hi wildcat,

I just collected the same dividend...very tasty indeed!

BUM

 

[brewer12345]

Yup.  And they're now due for another 20-year stinker.

Bonds pay interest, stocks pay dividends and hopefully grow the capital base, and a lump of gold is pretty much a lump of gold. 

Makes a nice paper weight though.

That's why I wn PCRDX and not gold coins or bullion. The Pimco funds own TIPS plus long positions in commodity futures, not actual commodities. If you poke around Raddr's site, you will find some very well-written articles that do a good job of explaining the difference and the source of return from this strategy. In a nutshell, you get:

- The return on the collateral (TIPS in this case)
- Whatever the gain/loss on the underlying commodity is
- An "insurance premium" that commodity producers are willing to pay to hedge out their exposure

If you look at the historical record, the DJAIG index is significantly negatively corrrelated with both stock and bond returns. It makes a very nice diversifier.

 

[Dawg52]

Jimmy Rogers has been bullish on commodites. Here is his take on it.....
http://www.investment-u.com/ppc/splash_rogers.cfm?kw=XVVIU282

 

[brewer12345]

Jimmy Rogers has been bullish on commodites. Here is his take on it.....
http://www.investment-u.com/ppc/splash_rogers.cfm?kw=XVVIU282

FWIW, I dont own it because I hae a view on commodities. I own it because it tends to move in the opposite direction of equities and bonds while still having positive long term return potential. It lowers my overall risk without reducing return materially.

 

[Mr._johngalt]

Jimmy Rogers has been bullish on commodites. Here is his take on it.....
http://www.investment-u.com/ppc/splash_rogers.cfm?kw=XVVIU282

I assumed he was still living on the royalties from his records.

Just kidding! He is one financial guy I have read.

JG

 

[Dawg52]

I assumed he was still living on the royalties from his records. 

JG

You must be referring to the old country singer that is known to be the father of country music. Believe it or not, he is from my home town here in MS. We have a Jimmie Rodgers festival here every year. Always a good week for me to get out of town. 
http://www.jimmierodgers.com/

 

[Gone4Good]

Pretty interesting how many more people seem to like the idea of commodity diversification now vs. three years ago.

I like the idea of added diversification but commodity prices go in a pretty predictable cycle:

1) Prices are low - producers under invest reducing supply while users push up demand which leads to higher prices
2) Higher prices - producers reinvest to increase production while users cut back or find alternatives leading to lower prices
3) Rinse, Repeat.

Which phase of the commodity price lifecycle do you think we're in now?



PS. Famous last words "It's different this time"

 

[Cb]

Pretty interesting how many more people seem to like the idea of commodity diversification now vs. three years ago.   

I like the idea of added diversification but commodity prices go in a pretty predictable cycle:

1)  Prices are low - producers under invest reducing supply while users push up demand which leads to higher prices
2)  Higher prices - producers reinvest to increase production while users cut back or find alternatives leading to lower prices
3)  Rinse, Repeat.

Which phase of the commodity price lifecycle do you think we're in now?



PS. Famous last words "It's different this time" 

Wow! That sounds as easy as the Channeling Stocks guy's system!

 

[haha]

Which phase of the commodity price lifecycle do you think we're in now?

PS. Famous last words "It's different this time" 

You are certainly correct about the cycle. Cycles are real, but their periods and amplitudes vary.

In particular, the demand side growth today is quite unusual. Areas of the world with almost 3 billion people are for the first time creating modern middle class societies.

It can take a while to find an economic orebody, prove it, finance it, develop it, and get new supplies to a market that keeps growing, albeit at varying rates.

And with respect to crude oil-- and even more so natural gas within easy reach of US markets-- it may well be different this time. Ever see $14/MCF natural gas before? It will undoubtedly come off that level, but the fact that it is there at all is something that has to be addressed..

Ha

 

[wildcat]

Pretty interesting how many more people seem to like the idea of commodity diversification now vs. three years ago.

I like the idea of added diversification but commodity prices go in a pretty predictable cycle:

1) Prices are low - producers under invest reducing supply while users push up demand which leads to higher prices
2) Higher prices - producers reinvest to increase production while users cut back or find alternatives leading to lower prices
3) Rinse, Repeat.

Which phase of the commodity price lifecycle do you think we're in now?



PS. Famous last words "It's different this time"

Well,

A) Not much research was available to small investors about commodities several years back

B) Good ways to play the commodity markets like Pimco's MF were around

I don't presume to know the cycles of commodities & I don't know if it is different this time. If I knew either one I would be rich. But if stocks are in the crapper I would welcome some sort of exposure to an investment that could do well during that time.