Bear steepening; Steeper commodity prices

So this morning The Economist has waded in with a very interesting article on the steepening yield curve, with a good analysis of the danger of a bear steepening vs a bull steepening (in which both long and short rates fall, but short rates fall by more):

"... the worry is that we could move to a bear steepening, with the gap rising because long-term yields are increasing... If the markets get the idea that the Fed has become lax on inflation, then one would expect long-term yields to rise... Andrew Smithers, of Smithers & Co, a consultancy, points out that for 20 years, financial markets have benefited from falling inflationary expectations. This has allowed nominal interest rates to fall, which has in turn pushed up asset prices... But now inflationary expectations are at best not falling, and may well be rising... as a result 'asset prices need to fall relative to incomes and profit margins will fall as household savings rise'." (Is it OK to quote from papers like this??)

Yuck. And in the same article, at the end, addressing another of my recent (they're all recent!) topics:

"In economists’ jargon, higher commodity prices are a sort of trade shock for consuming countries and, however you spin it, the effect is always bad."

Double Yuck. Expectations appear to be building, though, that it's all gone too far and too fast, and therefore due for a correction. Maybe.

Since I quoted Credit Suisse last week, I thought I would stick with them - not as contrary indicators (!) but with a couple of interesting macro angles:

Kucukalic: "The key question for us is whether a US credit crunch is unfolding. If so, we would expect disinflation/deflation – a negative for commodity prices and exposures. On the other hand, if an investor believes that the credit crunch can be averted (e.g. because of aggressive central bank intervention), then one would expect that investor must also believe in inflation and strength in commodity prices." (Is it OK to quote from BROKERS like this??)

Wilmot: "(W)e are on the vertical part of the supply curve, where inventories tend to be very low and small shocks to either supply or demand can lead to unusually big price swings... Given the size of the recent price spikes across commodities and the disruptions being caused by them, we think it dangerous to assume that commodities are a one-way proposition. Expect more volatility, but some of it could be to the downside as well as the upside."

The Continuous Commodity Futures Price Index (the renamed CRB, I believe) had been in about a 200-250 index range for about 30 years (!) from 1974 to mid-2004... even now we're looking at a compound annual increase in the index of about 3%. So where does a reversion to mean take us... and which mean? Umm... US CPI has averaged 4.2% over the last 30 years (skewed to the '70s) which is oddly enough about where we are now. Okay, so how does a 30 year moving average help with a trading call? Pretty much doesn't on a minute/minute or day/day or week/week basis, but worth bearing in mind.

Some possible long or short direct (rather than indirectly via bread or noodle companies, for example) plays in Asia on higher agricultural prices, from a various brokers - list compiled a few months ago, prices as of today - all off Bloomberg:

(We may or may not have an existing position in some of these names. In fact, I don't even agree with some of these, so really really just FYI.)

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Ah... Gotta love those I-Bankers...