Investment strategies for volatile markets

CRB Commodities Index
Moody’s default rate
WW I 68% above average
WW II 57% above average
Great Depression
Great Depression
53% below average
5
200
4.5
160
4
120
3.5
80
3
40
2.5
1914–1980 1980–2003 trend = –4.0%
Source: CRB
0
Source: Moody’s
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004
We measure real commodity prices using the CRB index, divided by the US consumer price index. From
World War I until the late 1970s, there was no clear secular trend, but very large cycles, especially during
the Great Depression and the two World Wars. During the 1970s, OPEC hiked oil prices and easy mon-
tighter monetary policy, resulting in what appears to be a secular bear market in the 1980s and 1990s.
This led to chronic underinvestment, laying the ground for a turnaround at the start of the present decade,
which has gathered pace with soaring demand from China and other emerging economies.
Default rates on corporate bonds generally fall in the early stages of an economic expansion. They
then tend to rise in the later years of the upswing, as companies raise leverage and interest rates trend
ingly,
the highest default rate was recorded during the Great Depression, with other noteworthy peaks
as the 1960s expansion slowed into the 1970s, and during 1970 and 2001. Since then, default rates
have fallen to historic lows as the economy has expanded. Looking ahead, however, a slow increase
is likely over the next few years, as leverage rises and interest rates remain well above earlier lows.