With the Boehner plan having failed in the House of Representatives, and less than 3 days until the debt ceiling deadline, our elected officials are still scrambling to come up with a grand compromise that will save the nation from default. While much of our conversation regarding the debt ceiling has revolved around its overall impact on the markets and on managed futures t-bill funding, an article from CNBC has prompted us to look at things from a different angle. The article, quoting Candadian Macroeconomic Research firm Capital Economics Chief International Economist Julian Jessop, makes an interesting point about the surge in the price of some commodities that this last week has born witness to:
“With the exception of precious metals, we still think that commodity prices will fall sharply in the event of an actual U.S. downgrade or default,” Julian Jessop, chief international economist at Capital Economics, said in a research note.
Commodities have risen since Standard & Poor’s put the U.S. on watch for a possible downgrade, but Jessop said not to read too much into those moves.
“We would be wary of interpreting such small moves as evidence of strong safe haven demand,” he said. “Crucially, other asset prices have been relatively stable over this period, with U.S. equities and government bonds little changed and the dollar down only 2 percent or so on a trade-weighted basis.”
In Jessop’s view, commodities are trading in line with equities and will continue to do so.
“The prices of industrial metals in particular remain as closely tied as ever to equity prices. Correspondingly, if equities fall in response to a U.S. downgrade or default, as they surely would, industrial metals prices should drop back too,” he said.
So it’s not just stocks that will take a beating if politicians don’t get their act together (and some are saying we’re in for a 75% drop in stocks, default or not). For investors who have been turning to long-only commodity ETFs in an attempt to diversify their portfolio, this could be very bad news. However, for managed futures clients, this is another example of how managed future’s historic crisis performance can truly impact a portfolio [Disclaimer: Past performance is not necessarily indicative of future results]. Even in a world where commodity prices do plummet along with equities, the ability of CTAs to go short gives them a unique opportunity to generate profit (or losses) in a volatile investment climate.
In other news, the government has made public that their first payments in a world post-default will be to bond holders. This may end up being good news for current managed futures clients concerned about the valuation of the t-bills they fund their accounts with, as the prioritization could stoke confidence among exchanges in their worth.