Commodities: Another Bubble Forming? 30 comments
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Gold prices have been rising ever since the Fed started easing in early 2001. There have been ups and downs along the way, but the uptrend has remained largely intact for almost 8 years. Gold fell last year, as commodities did, but by only half as much as the decline experienced by most commodities. Gold turned up in November last year, about a month before commodities started to recover. Gold is now approaching its all-time high of $1000; will commodities return to their previous highs? Will Fed ease have given us another commodity price bubble?Commodities have turned up meaningfully from their year-end lows, in direct definance of the theory that says that when economies are operating way below their potential (i.e., when "economic slack" is significant) then prices of everything tend to fall. It's popular to explain away the rise in commodity prices by asserting that China and India are mindlessly stockpiling commodities, and so this is just a temporary phenomenon. But when just about every single industrial commodity price is up, then I would argue that there must be some fundamental factors at work. Two things come quickly to mind: a rebound in global economic activity (bolstered by the big rise in shipping rates, the big upturn in outgoing container shipments, the big rise in global equity markets, the big drop in credit spreads), and very accommodative monetary policy (as seen in the extremely low level of nominal interest rates in all major economies and the very expansive growth in money supply measures).
Zeroing in on the energy sector, crude oil prices are up about 85% from their December lows. Gasoline at the pump is up about 50% from the end of last year, and considering that its price lags that of crude, gasoline is probably going up another 20% over the next month, which in turn would bring regular gasoline back to around $3 per gallon at the pump. That's not enough to qualify as "expensive" in my view (I keep thinking that gas needs to be over $4 a gallon to really grab people's attention), nor to cause a consumer revolt or any major push to buy more fuel-efficient cars, but it is enough to put inflation back on the table. For TIPS fans, I would note that the rise in gasoline prices will contribute a little over 4 percentage points to the CPI for the January-August period, and that in turn would probably drive the total CPI adjustment for this year higher than the TIPS market is hoping for.
If there are indeed two major forces pushing commodity prices higher (e.g., renewed economic growth and expansive monetary policy), then it is difficult at this point to say that the rise in commodity prices is the start of another bubble. (Bubbles being defined as prices that are pushed to unsustainable levels by speculative demand.) It's difficult if not impossible to say how much of the current rise in commodity prices is inflation/easy money speculation and how much is due to strong demand coming from a resurgent global economy.
The continued rise in gold prices tells me that there is definitely an element of monetary-driven inflation at work. As I mentioned in my earlier posts this week, I think we have now passed a "tipping point." Fed policy has shifted from correctly accommodating a massive increase in money demand, to now oversupplying the world with dollars. This shift is not the result of anything the Fed has done; it is the result of a change in the world's demand for dollars and for liquidity. The worst part of the financial crisis has clearly passed, and so the world's demand for money is now declining; money velocity was declining but it is now increasing. The Fed needs to withdraw money from the system; if it doesn't, then the gold market will prove once again to be prescient, and an abundance of cheap dollars will cause inflation to rise and commodities will once against enter bubble territory.
I believe Bernanke when he says that he is deeply committed to low inflation and a strong dollar. But for now I think the Fed is incapable of taking bold steps to tighten liquidity conditions. Unemployment is too high, and the political environment is too skewed towards "making sure" (Obama's favorite phrase) that the economy gets back on track whatever the cost. So that leaves me thinking that gold is right: inflation is going to be increasing, and commodity prices are going to continue to rise.
Rising inflation and commodity bubbles are not good for the economy in the long run, because at some point the Fed will have to tighten the monetary screws and that will likely give us yet another recession. But for now, I think it pays to bet on rising real and nominal cash flows, and rising prices for "things." That means staying long equities, long TIPS, and short T-bonds. I would also be long commodities if it weren't for my real estate holdings.
Full disclosure: I am long equities, long TIPS, and long TBT as of the time of this writing.
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Commodities and equities are way ahead of them selves, as usual the stock market is predicting the next recovery. It has been wrong most of the times, and quite very certianly it will be wrong again. 500K+ job losses and 2%+ home price drops - don't suggest revovery they pretty much indicate doomsday.
arabianmoney.net/2009/.../
You guys should try to price in Euros as a discipline. You would get a whole new perspective.
1. A collapse of US bonds
2. Rampant inflation
It is going into commodities in the concept that something "tangible" will hold value as the dollar depreciates.
As many others have pointed out, if you plotted commodities in euros or aussie dollars, it does not look so bubbly. Convince yourself, you are looking at the early phase in the pesification of the dollar.
There is ZERO commitment in the U.S. government for either low inflation or a "strong dollar" (lol!). For years, the U.S. government has relied upon "jawboning" alone - now the market is finally calling their "bluff".
To all those who predict a commodities "bubble", either now or in the medium term, you simply need to educate yourselves.
I challenge ANYONE to view the BRILLIANT series of videos in Chris Martenson's "The Crash Course" without having their views on commodities COMPLETELY transformed.
These videos can be found at either of these two links: www.chrismartenson.com... www.bullionbullscanada...
On May 29 03:30 PM Nathaniel C wrote:
> I'm sorry, but you lost me with "I believe Bernanke when he says
> that he is deeply committed to low inflation and a strong dollar."
>
>
> If Bernanke is so concerned about the dollar and inflation, why is
> he printing trillions of dollars? The whole point of printing money
> is to debase the currency and create massive amounts of inflation.
> Bernanke is a criminal plain and simple.
You won't see any bubble for a long time to come.
"At some point the Fed will have to tighten the screws" . Is that a joke? The more the Fed tries to print its way out of trouble the worse it gets. They won't stop printing, easing, stimulating and whatever until the dollar is thoroughly trashed.
On May 30 01:28 PM Crude Oil Trader wrote:
> A lot of great comments. I think a quick glance at your crude chart
> sums it up. When we correct that far, that fast, a 50% retracement
> is the least we can expect. It's all about the dollar and the SP
> 500 now. And the dollar will not continue down in a straight line.
> Check out my latest post to see how I really feel....> crudeoiltrader.blogspo...
This statement undermines the entire article for me. The worst part of the crisis *APPEARS* to have passed but we cannot say with certainty that it has. This sort of overconfidence appears to me to be a grave error of exactly the type that got us into the crisis in the first place.
There's clearly still a lot of deleveraging still to come, and how this impacts the financial sector as it unfolds remains to be seen. We do not yet know if the scale and accuracy of the government's fiscal intervention were correct, or whether it will have unintended consequences later on down the road.
You said "We do not yet know if the scale and accuracy of the government's fiscal intervention were correct" - which is correct but that is exactly what some traders will be testing in an attempt to find out. Markets are discovery mechanisms.
The Fed never learns its lessons and never protects the dollar's value even though that's their main job and the only justification for being private (to be able to fight off political pressure to keep rates abnormally low all the time to help people remain in office).