What to Watch: Where the Commodity Money Flows

Since oil broke its highs this summer there has been a huge sell in the oil/commodity/dollar complex.    Regardless of whether the egg (oil) or the chicken (dollar) came first and caused the decline, it's happened.  Below is the Reuters CRB commodity index (CRB).   You can see the selling pressure clearly, and billions of dollars have been taken off that trade.

OIl is down about $40 from its all-time highs this summer and gold is down by more than $200 from its peak.   

There is also an exodus of money from the BRIC nations, as indicated by the big drops this year in China's Shenzhen Index, the Sensex in Mumbai, the Brazilian Bovespa and the Russian RTSI.

 Even the multi-year bull market in the Euro appears to be coming to an end.  The dollar index is now at its highest level in 18 months.

This begs the multi-billion dollar question of just where the billions of dollars that once found a home in those investments are now going.

We know some has gone to the safe harbor of U.S. Treasuries.  Below is a five-year chart of the 10-year Treasury yield index (TNX).    In the past year, yields have fallen, indicating there are more buyers and money moving into government debt.  

But this isn't a perfect trade.   With inflation soaring and a sub-4% yield on the 10-year, it's a negative real return.   Your money costs you more than you are making.    So unless there is fear of a global geopolitical event or economic implosion, it's doubtful the so-called smart money would remain in the bond trade for long.

So by default there appears to be some renewed interest in the U.S. stock market.

This one-year chart of the S&P 500 looks like the market is trying to find a bottom.   I caution that we had a similar chart in the spring, only to leave investors disappointed as we sank to multiyear lows.   But the difference this time is that in the summer we had oil, commodities and the euro trade working well, so there was an alternative.    This time, those other trades aren't working.   And many U.S. blue chips pay a greater dividend that the yield on Treasuries.  

We don't know where the money will flow.  But we know its been flowing out of nearly everything that was working the past few years, and it has to find a home somewhere.