M2 adjusted chart of lumber against all other commodities

Hello friends. This is a M2 money supply adjusted chart of lumber against all other commodities , and it's absolutely a fringe chart but it's also very interesting.

The ticker we are using is: ((CME:LBS1!/AMEX:DBC)/ECONOMICS:USM2)*1000000000000)

Let's dig into exactly what this is. It's lumber futures divided by the general commodity market divided by the money supply times a large number to make it more visible what the chart's reading is. (otherwise the number on the chart would be zero)

Anyway, what we can see from this analysis is that, similar to our pair trade between natural gas and crude oil , there is a clear range in which prices move from supply to demand and back again. The logic here is that when lumber is outperforming the general commodity market, consumers who demand lumber will be financially incentivized to find alternatives that are cheaper. On the flipside when lumber is the one that is cheaper than everything else, consumers who demand things which may be replaced by lumber are financially incentivized to instead use lumber.

Let's give an example. We could say that you are a consumer who wishes to heat your house because it is cold. You have a fireplace, but you also have a space heater. If electricity is cheap and wood is expensive, you will be wise to go ahead and use electricity to heat your house by turning on the space heater, which drives demand for electricity. If on the flip-side, electricity is expensive and wood is cheap, you would be wise to go ahead and turn off the space heater which consumes electricity, and instead burn wood on your fireplace.

Obviously this is one of 1000 different interactions that could cause this supply and demand balance to take shape over time, but on the small scale you should get the picture. Of course one single consumer's shift in behaviour won't change the market, but when millions of consumers (and also producers in some instances) move together, they absolutely will.

So, how can we trade this chart? It's easier than it looks. All you need to do is:

Long lumber
Short the DBC ETF

This will give you a hedged out long on the lumber commodity without having to sweat about general exposure to the commodity market itself.

Thanks for playing.


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