Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Lumber
- Nasdaq Index
- Silver
- European Maize
- Nickel
Last week’s reversing trends:
- Red Winter Wheat
- Euro-Yen Cross Rate
- Taiwanese Equities
- Gasoil
- Nikkei Index
What we are taking note of:
It was only three weeks ago that we highlighted the performance of lumber futures. Even the Wall Street Journal, not known for its keen interest in sawmills, sported a headline “Lumber Futures Price Climbs to Record High.” The lumber price was approaching the unimaginable level of $650 per 1,000 board feet. Last week, lumber futures closed trading at the price of $830, another 27% increase in less than a month. We have entered a truly unprecedented territory. How did we get here? We addressed the demand side of the equation in a previous post (View from Crystal Bay: The Housing Shortage is Here).
What about the supply side?
About one-third of US lumber consumption is imported from Canada. The topic of Canadian lumber pricing has been a subject of a long-running tariff dispute between the US and Canada that we won’t get into here. The important point is that Canadian supply is absolutely crucial to meeting the US lumber demand. And that supply is not exactly in great shape.
In the early 1990s, a small outbreak of mountain pine beetle in British Columbia started killing lodgepole pines, the dominant species of softwood lumber used in construction. And it grew. And grew. It has affected more than 18 million hectares of forest (out of 55 million total hectares) and killed 50% of all lodgepole pines in British Columbia. It is now spreading into northern Alberta. British Columbia contributes 50% of total Canadian softwood lumber production, with Alberta adding another 15%. It will take decades to replace the lost forests; estimates range from 30 to 40 years.
In the first two decades of the infestation, BC loggers engaged in a massive salvage operation, harvesting recently dead trees (they can be processed even six to seven years after they die, as long as they remain standing). This kept lumber production artificially elevated, but it has come to an end now. Without trees to process, BC sawmills are closing. The total number of sawmills in BC’s interior went from about 100 in fifteen years to about half that many now: 25 were closed in 2019 alone.
The second-largest lumber producer in Canada is Quebec. The provincial government there is pursuing a policy of preserving its forests, and they have been reducing the Annual Allowable Cut, or the amount of timber that loggers can harvest. It shows no interest in replacing the lost BC production.
Turning our eye to the US, we note that the Western region has kept production flat for a decade, and the regulatory environment is hostile to the expansion of logging. That leaves only the US South to pick up the slack and replace lost BC production.
The South is stepping up to the plate. New sawmills are being built, logging infrastructure is expanding, workers are being hired and trained, and commercial forests are being upgraded. The problem is that all this takes time. Even with accelerated buildout, we’re facing continuing tight supply for lumber.
How are we heading into next week?
The Crystal Bay Ubitrend currently has a long position in lumber futures and continues to hold.