The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 56

No Place to Go but Up?

What are we to do now? Money market accounts no longer provide those juicy double-digit yields. The stock market is sky-high, and real estate has a negative cash flow. So where aren't prices sky-high? For an answer, as well as several other lessons, look at this chart. Just as movements straight up generally don't keep on forever (see Chart 18), most broad-based free-falling markets eventually stop falling and provide a chance to buy bargains almost for free.

The chart shows spot market prices of 23 commodities for the 5 years to mid-1986. These prices lost about 26 percent of their 1984 peak value. While that isn't the world's biggest decline, averaged out over the 23 different prices it's enough to raise eyebrows. Why? First, it argues strongly against the folks who, based on their lifetime's experience of ever-increasing inflation, expect still more inflation immediately ahead. As seen in Chart 51, inflation isn't a one-way street. Commodity prices are a key to measuring inflation potential. There has rarely if ever been a significant inflation that was not preceded by spiraling commodity prices. Why?

Commodity prices reflect the demand for the basic materials that fuel an economy. As goods are produced, inflation is built in via stages—starting with commodities, adding labor to create intermediate materials, and finally adding labor to create finished goods. It's a long way from the iron ore to a finished auto or tape measure. This chart reflects ...