The Trouble with Lumber

Montreal, Canada

Lumber prices are struggling again. Since hitting a high for the year earlier in March, lumber prices have declined more than 20% and seem to be following a similar pattern that occurred in 2010.

Last year, amid an ongoing depression in housing and construction, demand for lumber declined sharply and proved to be an accurate bell-weather for a weaker economy; the Fed’s QE II program squashed the swoon in lumber and a major recovery ensued consistent with other risk-based assets.

Trends in lumber are similar to those played-out by copper. Both commodities are regarded as heavy cyclical products in the global growth cycle and are sensitive to changes in supply and demand and interest rates.

But the picture unfolding this summer is still indecisive.

Lumber has entered a trading range since May with no clear pattern. The chart below shows a recent break-out above its 50-day moving average and challenging the more important 200-day average.

What’s interesting about lumber is its predictive ability – at least recently. Lumber prices began consolidating last spring before the stock market ran into trouble in May (Flash Crash). It also began correcting sharply in April before broader commodities and equities began a downward trajectory.

If lumber and copper can continue to muster gains this month, then the global economy is likely to survive a soft-patch. Both are pointing upwards recently. If not, there’s always the Fed and QE III, which seems inevitable in an environment of slow consumption, weak jobs growth and the possibility of sovereign debt contagion in Europe.

Increasingly, it looks like the United States economy requires a steady hand of support from the Feds to keep the expansion alive – now almost halfway through its typical postwar expansion in terms of duration. Since this remains a very untypical expansion since 2009, we have to assume that another dislocation lies ahead this year requiring more Federal support. Fiscal support won’t happen. This leaves the Fed as the markets’ only crutch.

The Fed is not telling the truth about QE III. It’s already in the cards and will be implemented either later this fall or in early 2012.

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