A Closer Look at Commodity Prices

Yesterday I took a sardonic look at commodity prices.  Let's dig in a bit deeper.

Update: In the original post I forgot to give a H/T to Krugman.  Better late than never.

There are cool graphs, and pointed opinions below the fold.

Here is a close up view of price movements through the start of the Gulf War.

I've added some Elliot Wave style channel lines.

Here are some normalized rate of change observations over the period.

OK.  Things go up; things go down.  Volatility looks to be increasing a bit, with extremes expanding and periods contracting.   Let's see what happened next.

Prices went up in what looks like a secular trend for a few years.  Prices bounced off the channel bottom in Jan. '07, then took off like a rocket.  The fall from the July '08 top is more dramatic than the rise  If you've ever wondered what a bubble looks like, it looks like this.

Here are the RoC values over the period.

After being bounded in the range of -8 to +8, RoC shot up to almost 40 before collapsing to almost -80.

This is the bubble popping.   What's next?

We see the Index crawling along the bottom channel line.  What about rate of change? You can see it in the bubble graph above, and here is a close up. .

RoC values are sliding.  This suggests two things

1) The bubble is well and truly burst. We won't be seeing commodity prices at peak levels again any time soon.
2) The RoC of the future will wander around in the range of pre-bubble values.

There are a couple of characteristics of bubbles to ponder.

1) the best approximation of post bubble valuation is pre-bubble valuation, or less. 
2) The slide to post-bubble lows is not a single straight shot.  There are several bounces to be expected on the way.  We are seeing the end of the current one.  For comparison, you can see a graph of the stock market decline into the Great Depression here.  Or here.  There were a number of counter-trend moves in the year following black Tuesday.

My crystal ball tells me that this bodes more for deflation than inflation.  The attack on the dollar - if there is to be one - will not come from commodity pricing.

That's my narrative.  What's yours?
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