Stocks, Bonds, Currencies and Commodities

By John Lansing

Technical analysis can seem very overwhelming when trying to understand the process and
behavior patterns of inter-market relationships and correlations. With technology today, we have
the ability to watch every currency, stock market average, commodity, and even the bond markets
around the globe.
Let’s simplify how commodities, bonds, currencies and stocks all interact and the consequences
they have on one another.
As commodity prices rise, the cost of goods moves higher. The commodity rise increases prices,
which is viewed as inflationary, so a natural response to increasing commodity prices is a rise in
interest rates because the price action in commodities requires a response. That response, more
often than not, is higher interest rates to keep the balance.
Now, because the correlation between rising interest rates and bond prices are inverse, bond prices
fall as yields rise, which simply means higher interest rates.
Bond prices and stocks are, by and large, interlinked. So, when bond prices begin to decline, stocks
will eventually follow suit and head down in the same direction. In short, as the cost of borrowing
rises due to inflation, a reasonable assumption is stocks will decline as a result of borrowing costs.
As with most inter-market relationships, we often see a lag between the “Yin and Yang,” (i.e. rising
rates mean bonds are falling). Stocks eventually follow and harmony is restored.
The fluctuating currency markets also have an effect on all markets and commodities. But the
largest impact that currency moves have on any asset class is commodities themselves, as they are
the primary beneficiary or, in the opposite case, the sinister target. Commodity prices also have a
direct impact on bonds and, subsequently, this all spills over into the stock market – sometimes in
bullish fashion and other times in bearish turmoil.
The U.S. dollar and commodity prices historically trend in opposite directions, but that in and of
itself should never be a reason to buy and sell anything. As one of the first advisory services I
followed said, “If you think the dollar is rising and you are bullish on the dollar, go long the dollar.
Conversely, if you think gold is bearish and is going down, short gold. However, as a rule of thumb,
it’s never been a good idea to go long one thing because another thing is falling or vice-versa.”
Bear in mind that the impact lags between how each of the markets react to the sudden fluctuations
that start from the left and move to the right. Not everything happens instantly and during those
transitions or response lags other factors could come into play, including intervention to divert the
natural response. When that happens, think of it as nothing more than an attempt that simply
delays and creates a larger lag in the “Yin and Yang” merely to disrupt the natural order in hopes of
achieving some pseudo realignment. It never works, but human nature is to think it will “this time
around.”
I’d describe deflation as good for nothing because when it comes to the stock market, just about
everything goes down. With huge swings in the currency market pushing commodities lower,
especially at the current speed, the potential for growth is limited when we have conditions that can
only be described as the “perfect storm.”
When the falling prices of deflation last long enough, they create a vicious cycle of some or all of
these negatives:
1. Reduction in the supply of money or credit, harder to get a loan
2. Decrease in government, personal or investment spending
3. Increased unemployment since there is a lower level of demand in the economy
4. Falling corporate profits, which can lead to the closing of factories
5. Decreasing nominal prices for goods and services
6. And the worst yet – it can lead to economic depression.
Finding the correct amount of inflation to offset deflation is a nightmare for central banks because
they have created the largest debt bubble in history. This is why we are always hearing about the fiat
money wars versus gold and other precious metals. Each time deflationary forces re-assert
themselves to offset inflationary forces, the Fed has to correspond with even more aggressive forms
of monetary stimulus to keep systemic failure at arm’s length.
With the rise and fall within all these asset classes discussed above, it’s become more important
than ever to watch how all these inter-market relationships affect the next to gauge the future trend
changes in stocks.

1 Connect the words with their definitions:

commodities A how prices change

bond B a way of calculating something which is not exact but which will
help you to be correct enough

bond market C bulk goods and raw materials

correlations D the rate of return on an investment expressed as a percent

stocks E buying or selling of a country’s currency by its central bank to

support or (rarely) to depress its exchange value

price action F the process of making connections between two or more things

yield G the supply and demand for the buying and selling of bonds

interest rate H different categories of investments

asset class I money that is not backed by anything other than a government trust

intervention J a certificate of debt issued by a government or corporation

a rule of thumb K to put something into a new or correct position

to realign L a financial security issued by a joint-stock company or by the

government as a means of raising long-term capital

deflation M the percentage of the face value of a bond

nominal price N initial price when a product has just been introduced

fiat money O the general reduction of prices and the level of economic activity

2 Read the statements and tell whether they are TRUE or FALSE:

1) Interest rates are a natural response to increasing commodity prices.

2) When the interest rates are rising, the bond prices are falling.
3) Inflation causes the costs of borrowing to rise.
4) Commodities have the largest impact on different categories of investments.
5) If you are pessimistic about the dollar rising, buy the shares to hold.
6) It is not a good idea to sell a contract on one product, because the price of another product is rising.
7) You should not think of intervention as merely an attempt to disrupt the natural order, hoping to balance
out the negatives with the positives.
8) Persistent falling prices of deflation may lead to economic depression.
9) The debt bubble exists because we always hear about the valueless money fighting gold.
10) As deflation aligns itself with inflation, banks have to become more aggressive to keep up the monetary
system.

3 Find the words or phrases with these meanings in the text (the paragraph is given in the brackets):

1) opposite in nature or effect or relation to another (P 4)

2) as a rule (P 5)
3) to pursue an example set (P 5)
4) having unpredictable ups and downs (P 6)
5) reach a point at which it can no longer be controlled or contained (P 6)
6) a state of excitement or uncontrolled activity (P 6)
7) with respect to its inherent nature (P 7)
8) a particularly bad or critical state of affairs, arising from a number of negative and unpredictable factors
(P 9)
9) to balance the effect of something, with the result that there is no advantage or disadvantage (P 12)
10) affecting an entire system (P 12)
11) judge tentatively or form an estimate of (P 13)