ARK and commodity deflation risk - Don't think so...

Catherine Wood of ARK Invest send an open letter to the Fed concerning her fears that we may face significant deflation risks. This argument was reinforced with comments that the current markets are like the 1920's when commodity deflation and tight money preceded the depression. See ARK extends open letter to the Fed.

A comparison between the returns over the last year, five years, and from pre-GFC tells a very different story. Commodities have come off cyclical lows but have not, in some cases, reached post-GFC highs as measured by some broad-based commodity indices.

Commodity markets are off the extremes from the beginning of the Ukraine-Russia War and the pandemic, but it would hard to argue that we are entering a deflation period. The last few years have been a catch-up from super-cycle lows. 

There are always three cycles in commodities that drive longer-term price moves. One, there is the commodity super-cycle which is associated with long-term investments and long-term demand. Growth shocks like the ascent of China with under-investment will create a super-cycle. Second, there is the business cycle. A slowdown in global growth will create commodity excess supply and price declines. Third, there is the weather cycle that may create crop shortages. These are more market-specific shocks, but weather patterns like La Nina create cyclical price changes. Before we start with the deflation fears, let's make sure we understand current commodity cycles.