Longview Media

Have we fallen off the cycle or is the bike broken? Since 1998, commodities have been in a bull market—the so-called supercycle, where surging demand for raw materials eclipses supply, juicing prices to abnormal highs.

Longview Economics focuses on equities and asks: how long will the Western secular bull market last? Its answer, to give away the punchline, is about two years. It makes its own calculation on what is fair value for shares and plots to what extent shares have been above or below fair value. You can see in the bottom graph the result, with bands shown at one standard deviation and two standard deviations above and below it. As you can see, this indicator has been signalling a "buy" since August last year and remains in buy territory.

At any rate, Chris Watling's view is that positive news from the US and the prospect of a return to growth in Europe in the second half of this year should underpin equities for a couple of months more, a view supported by one of the oldest of market adages, the first part of which is that one should "sell in May and go away

ALTHOUGH the yen has captured most of the currency headlines since the start of the year, sterling has been almost as weak. It started the year worth Y141 and is now around Y143. Against the dollar, the pound has weakened from $1.62 to $1.53; against the euro, the drop has been from €1.23 to €1.145, a 6.9% decline. It doesn't sound much but remember that the pound was only allowed to fall 6% from its peg to the D-Mark under the old Exchange Rate Mechanism.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/7dfe1d0a-76c5-11e2-b925-00144feabdc0.html#ixzz2SbLiP8Gc Some intuitive suspicion of grand theories of history is in order, of course. But the fit with recent history is very plausible, and the ramifications go beyond commodity investors. Research by Chris Watling of Longview Economics showed that throughout the 20th century, stocks were horizontal when commodities were in their “up” cycle and made all their gains when commodities were quiet. The surge in materials prices during the past decade coincides with a “lost decade” for stocks.

Those are the arguments, and the conclusion of Chris Watling at Longview Economics, who pulled together this data, is that assuming the US manages to sort out its fiscal situation and the eurozone gets through its current troubles (two big "ifs") global shares are indeed a good buy. But there is a solid view, articulated for example by Andrew Smithers of Smithers & Co, who believes that US shares in particular are significantly overpriced when compared with their long-term performance.

Past commodity supercycles have lasted from 12 to 30 years, according to Longview Economics. If this one is ending, it will be the shortest so far. But if it is, prepare for much bigger falls to come...

IS IT good news or bad news? Commodity prices have been falling sharply in recent weeks—the S&P GSCI index dropped by 13% in May alone, the biggest monthly decline in two years. That amounts to a tax cut for Western consumers but it may also be a worrying sign that global growth is decelerating.