Summary of Key Points
Recently, there has been a global trend of price increases across all categories of physical goods, which is rare in the past decade or so. It's no longer just the situation where only oil prices rise; energy, industrial metals, precious metals, and agricultural products have seen widespread increases. Indexes tracking these commodities have reached their highest levels since 2012, with some even setting new all-time records. Senior strategists on Wall Street are issuing warnings that these price increases are not a short-term fluctuation but will directly erode the profits of real enterprises. The U.S. stock market, which currently appears strong, is likely to face significant corrections due to inflationary pressures.
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Detailed Explanation of Each Point
1. The Price Increase Is No Longer Just About Oil Prices
Many people's perception of commodity price increases used to be limited to higher fuel costs. However, the current market coverage is unprecedented in the past decade. Of the dozens of major traded commodities since August 1st, only a few—live pigs, cattle, nickel, and orange juice—have seen price declines, while almost everything else has risen. For example, European natural gas has increased by 34% in over a month, and gasoline by 22%. The costs of copper and zinc used in manufacturing electronics and phones, as well as gold, silver, and platinum for investment, and everyday staples like sugar, cocoa, and corn, have all gone up. This means that not only do you spend more on heating and fueling your car in winter, but also the costs of raw materials for factories and the products they produce, as well as the ingredients for drinks and snacks, are increasing. Two key commodity indexes have reached their highest levels in 12 years, indicating that a widespread price increase for all types of physical goods is indeed in full swing.
2. Three Solid Reasons Behind the Price Increases, None of Which Can Be Quickly Resolved
These price increases are not due to speculative activities but are driven by real supply shortages that cannot be quickly addressed. The first reason is the conflict in Iran, which has destroyed local refineries, reducing the global capacity to produce gasoline and diesel. Diesel is a critical fuel for trucks, cargo ships, and construction vehicles, so any increase in diesel prices affects the transportation costs of all goods. The second reason is the escalating conflict between Russia and Ukraine; the Black Sea, a major global grain transport route, is now closed to grain ships, significantly reducing the flow of these essential commodities. The third reason is the strong El Niño phenomenon this year, with extreme weather events causing widespread crop damage, leading to reduced production of sugar, cocoa, and other crops. Since wars cannot be resolved in a short time, and weather cannot be controlled, these supply shortages will persist, making it difficult for prices to fall.
3. Why Do Rising Commodity Prices Harm Corporate Profits?
The increase in the cost of raw materials means that businesses face higher expenses. For example, if you run a bakery, the cost of flour, sugar, butter, and transportation previously remained constant, but now these costs have gone up. If you were to raise the price of bread from $10 to $15, customers would likely switch to other bakeries. You might only raise the price by $1 to $11, and the additional $4 in costs would have to be absorbed by your profits. This is the case for all businesses: when upstream costs rise rapidly, they cannot easily pass on the increases to consumers, resulting in reduced profits. The U.S. stock market has been on a bull run for several years due to consistently exceeding expectations in corporate profits, but now those profits are being eroded by rising costs, weakening the foundation for stock prices.
4. Historical Patterns Show a Clear Link Between High Commodity Prices and Poor Stock Market Performance
Wall Street analysts have studied market data from the past 100 years and found a consistent pattern: when commodity prices remain high for a long time, the stock market generally performs poorly. Conversely, when commodity prices are low, the stock market tends to do well. For example, during the 1970s, when commodity prices soared, the U.S. stock market stagnated; in 2012, when commodity prices reached their highs, the stock market was also weak. The current perception that both commodities and stocks are rising is a temporary illusion. Investors were betting that inflation would soon subside and the Federal Reserve would cut interest rates, so they bought stocks to hedge against inflation and commodities. Now that commodity prices continue to rise, it's clear that inflation will not decline, and interest rate cuts are likely to be delayed or canceled. As a result, many traders are selling overvalued stocks, and the Nasdaq index is no longer outperforming commodity indexes, indicating that some astute investors are already exiting the market.
5. The Impact on Ordinary People Is Closer Than You Think
These price increases directly affect our daily lives. Future consumption costs will gradually rise, leading to higher expenses for fuel, snacks, and groceries, leaving us with less disposable income. This will make it harder for businesses to sell their products and further reduce their profits, creating a vicious cycle. If you have invested in U.S. stock funds or hold a large position in consumer or technology growth stocks, avoid chasing high prices and maintain a safety buffer to protect yourself from potential stock market corrections caused by inflation. To hedge against these risks, consider adding gold or low-volatility resources to your portfolio.