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EWI’s Very Own Paul Bunyan

Not all trees grow to the sky.

by Editorial Staff
Updated: June 21, 2021

As this chart of U.S. lumber futures shows, September 2020 marked the beginning of the market's strongest run-up in history.

may2021lumbernolabels

After four decades of staying rooted in the $200-$500 range, in late 2020 lumber prices shot up like a mighty sycamore and quadrupled to all-time highs come early this May.

According to the mainstream experts, a perfect storm of supply shortages, a surge in pandemic D.I.Y. building projects, and boom in home construction helped fuel the lumber bubble -- which everyone, from foresters to speculators, believed was here to stay.

These May news items capture an infatuation with lumber on par with the woman from Liverpool who actually married an olive tree, calling it the "best decision of her life." (True story -- look it up.)

Like her, hitching oneself to the market's incredible rise was expected to be the "best decision" an investor could make:

  • "Supply and Demand: No End in Sight to Rocketing Lumber Prices" (May 1 Domain Eagle)
  • "Elevated Lumber Prices Here to Stay. Our belief is that this cycle that we're currently in ... is here for the foreseeable future." (May 20 CNBC)

But just days after its prices peaked at record highs. By the end of May, the futures market had plunged 40% in its biggest one-month price decline in market history.

Observed one June 15 Wall Street Journal:

"Lumber Prices Are Falling Fast: Turning Hoarders into Sellers... The rapid decline suggests a bubble that has burst and the question is how low lumber prices will fall."

How in the world could this happen? How does lumber -- a market known for its insomnia-curing lack of volatility -- go from 300%-plus rally to 40%-plus crash in a matter of days?

On May 4, our European Short Term Update and Global Market Perspective editor Murray Gunn showed this chart of lumber futures and explained how one essential ingredient was missing from lumber's surge; namely, common sense.

"As the chart below shows, the shortage of wood has led to an historic squeeze in lumber prices. Much of that demand for lumber is coming from U.S. households, flush with cash that has been dropped from helicopters (ok, sent in the mail but it's the same thing). The biggest shortage, though, may be in common sense.

"The evidence of speculative froth is all around... It might have legs but end it will. Probably dramatically."

may4ESTULumber

This next chart captures the collapse that began just days later:

lumberpricechartreversal

Murray didn't offer a specific wave count, but it's likely that his many decades of observing crowd (and thus) market behavior through the lens of the Wave Principle inspired his comments.

Murray recognized that the pendulum had swung too far in one direction. If a market's behavior looks crazy and sounds crazy, chances are, it's crazy.

Investors, however, have a choice NOT to participate. That choice is Murray Gunn's Insights.

From Lumber to Cryptocurrencies: What Goes Up, Must Come (Crashing) Down

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A year later, many of those same markets are now falling back down to earth.

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