Tel Aviv, Israel

A rarely tracked commodity benchmark has been in a free fall since May.

The Journal of Commerce Industrial Commodity Smoothed Price Index, which tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57% in May -- two years after a decline that foreshadowed the worst recession in fifty years. The index is important as a forecasting tool because half the items in the benchmark don't trade on futures exchanges used by traders or speculators; the index crashed from 60.56 on April 30th to 25.97 on May 28th.

The Journal of Commerce Price Index is discounting a major slowdown for raw materials consumption. If this plays out the way I think it will then commodities will continue to endure a rough summer marked by extreme volatility. Gold, cocoa and natural gas ranked among the few commodities to rise in an ugly May for world markets.

In addition to the Journal of Commerce Price Index, the CRB Index is also breaking down this spring. The CRB Index is widely followed, tracking 19 commodities, including its largest component, crude oil. The CRB Index has formed a Death Cross (see chart below). Notice the convergence of short-term and long-term moving averages, which usually implies weaker prices ahead.

The primary concern for commodities investors is the breakdown we've witnessed in the inflation-trade. Copper has topped-out, oil prices are topping out and Treasury bond prices are soaring as yields plunge to 3.17% this morning. TIPS, or Treasury Inflation Protected Securities, also show declining inflation concerns with the spread between TIPS and benchmark ten-year Treasury bonds declining to 1.92% from over 2.40% just three months ago. That marks the first time since the credit crisis that TIP-Treasury spreads trade below 2%.

Also, the Baltic Dry Index, which has been rallying until recently, now faces downside pressure. An investigation by the U.S. maritime authorities is examining whether shipping companies are colluding to fix rates; that would explain why shipping rates have been firm until a few weeks ago. The Baltic Dry Index, however, is in a short-term downtrend. Despite a big rally for stocks, the index fell sharply on Tuesday.

What really bothers me with this price action is the huge rally still underway in Treasury bonds, which tells me we're possibly heading back to the den of price deflation; it's also possible that bonds will violate their December 2008 lows if the markets continue to slide lower. Deflation and the destruction of credit is alive and kicking this year as credit stress spreads from the private sector in 2008-2009 to the public sector in 2010 in countries like Greece and the rest of southern Europe.

If the above primary trends continue then it's a given that markets have correctly started to discount a slowdown in global economic growth – largely due to declining consumption across Europe amid a growing debt crisis and a slowdown in Chinese manufacturing. Increasingly, this looks more serious than your typical correction.

A reader was kind enough to send me an email last night correcting my calculations on Israeli gas prices. Indeed, I forgot to mention that the $1.55 per liter price in Israel is the equivalent to $5.86 a gallon.