A few weeks ago, we reported on the conundrum of home-building activity skyrocketing, in both the US and Australia, amidst the greatest economic malaise of the past 200 years. You can read the initial report here, where Lumber prices received particular attention.
We reported on the meteoric rise of Lumber prices, resulting in significant upward pressure on finished home prices. It seemed that Lumber was an indicator, based on continued price-increases, that indeed the Fed’s prime-pumping via money printing would indeed result in inflation.
Well, it seems that the Lumber-Gods were none-too-impressed with being marked as an arbiter of the Central Banks’ inflation target success. 2 Days after the posting of our report, Lumber Futures proceeded with one of their most vicious falls in recent memory.
Traders who may have been caught long the ‘lumber story’ and entered trades at the 800’s have been ‘lock limit’ down for 5 consecutive days.
For those uninitiated in the foibles of the futures markets, this effectively means that any position you have, cannot be exited, as the contracts have traded beyond the allowable limit, as set by the exchange on which they trade.
Lumber has seen a 30% decrease in price, in approximately 10 trading sessions, with lock-limits undoubtedly delivering margin-calls to traders around the world. Inversely, home-builders and industries reliant on lumber supply have received a reprieve from the previously unheard of price pressures.
This brings us to a very intriguing correlation, which may suggest, oddly, that the global equity markets are due for a slump.
We’ve seen that Central Banks, as outlined in many of our previous reports, have juiced global equity markets to incomprehensible levels when measured against almost every marker for global economic activity. “Markets are not the economy” has been the new favourite catch-cry for talking-heads around the world.
As Michael A Gayed reported in Seeking Alpha in April this year, Lumber is an often disregarded, although terrifically effective marker of economic activity and eventual market performance.
“Some of you may be scratching your heads here wondering why in the world I reference lumber as a tell on the stock market. My focus has nothing to do with subjective reasoning. I co-authored the 2015 NAAIM Founders Award-winning white paper titled “Lumber: Worth Its Weight In Gold” which documents the predictive power of wood on conditions that favor higher or lower volatility in the equity markets.
The finding is relatively simple, and at the same time wildly powerful. When lumber, perhaps the most cyclical commodity of all, is outperforming gold, a non-cyclical commodity, it suggests we are entering an expansionary environment, and one under which risk-taking tends to increase. The opposite also is true – when lumber underperforms gold, correction, crash, and recession risks rise before the broader stock market sees it.
What’s the link? In a word – housing. The average home has about 14,000 board feet of lumber. As lumber prices rise, it indicates demand for a key component to US housing formation and construction activity, which is the primary driver of wealth for most households. The importance then cannot be understated given the economic link lumber has to building permits and economic activity more broadly going forward.”
With home-builders potentially getting a reprieve from price-rises, and traders beginning to experience lock-limit pricing, the never ending surge of market signals suggests one thing is certain, volatility is here to stay!
We strongly recommend readers take a close look at Michael Gayed’s paper, here. A wonderful insight to what may lay ahead, and a very useful indicator buried within.
Aside from this, and amidst record levels of homebuilding activity, there is still a very raucous set of ‘crash callers’, suggesting 2021 is headed for monumental falls. Our bet is that governments around the world, burdened with ‘covid-induced’ debt loads like no other, with launch an MMT program of money printing, infrastructure spending and immigration like the world has never seen. Any ‘crash’ is likely to be short-lived and rapidly juiced back to life by governments and their central banking compatriots.
See the video below for a unique, although not uncommon position, from the team at ‘Cooper Academy’.
Chart of the Day
How The 2021 Housing Crash Will Occur