A commodity’s spot price trading
lower higher than some given future contract is, in cases, normal (e.g. seasonality or perishable commodities). The backwardation we are seeing today is extreme by any standards.
[Sorry, typo. Backwardation is spot > future. Although this was clarified in the following sentence, the above typo may have confused some people.]
Physical commodities have a cost of carry that include risk premium, accounting costs, storage. For commodities like oil, this cost of carry adds a certain dollar amount to the cost of a barrel. WTI Crude today trades at a 10+% discount six months out from now. The discount 12 months out is nearly 20%.
- Breakeven Inflation
Markets are pricing in an average inflation much lower than 3% over the following ten years. This is not much further off from rates we were seeing in late 2021. The average 10y breakeven for Q4 2021 was 2.53% vs 2.74% today.
- US Dollar Index
Most world currencies are tanking, resulting in strong US Dollar performance. Paradigms can shift, so this may become old knowledge, but the past decade has shown that a strong US Dollar results in dollar scarcity and deflationary tendencies. Could a more compartmentalized global economy change this? It is possible although fully theoretical.
This is not all of the data at hand, and the data I have picked align with my beliefs. I believe the former three points are strong, and independently show a comprehensive waning of medium and long-term inflation.
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