Without QE3, Commodities May Suffer

 |  Includes: FXI, JJC, SLV, SPY
by: Glen Bradford

While China continues to make asset driven economic decisions and now looks like a traction control experiment where the economy is like a car that is driving on ice that doesn't yet know it, QE2 ignited the bunsen burner for commodity price speculation. Last I checked, Ben Bernanke has decided to continue on with QE2 but has decided that QE3 is probably a bad idea because the true positive impact of additional money coming into the economy would be more than offset by inflation. In my opinion he's making the right call, but this call is likely going to put downward pressure on commodities and other assets.

ECRI: Industrials to Peak
The ECRI is forecasting a global industrial slowdown by the middle of this year. Granted, I'm pretty sure that a lot of this is forecasted because of the recent weakness in commodities, but I still see this as more of a leading indicator that the speculation that resulted from QE2 is wearing off. Combine this with my opinion that a lot of asset prices are overextended to the upside, because when you look at asset valuations from a cash flow perspective, and a lot of things don't look sustainable.

The Country Leaderboard: China
China has taken the world stage as the hero for leading the world out of what was essentially a global recession. I've personally learned the hard way that China doesn't play fair. Buffett and Charlie Munger still have a tough lesson to learn with BYD. Yahoo (NASDAQ:YHOO) is also learning a tough lesson. You'd think that if China was doing sustainably well, this would be reflected in their markets --- and it's not. It's been setting lower highs for 2 years now.

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The Commodity Leaderboard: Copper and Silver
It's no surprise that it was very possible that Silver entered bubble territory when its price trajectory went vertical very recently. Recently, it has come down in price so rapidly that it is my opinion that anyone who argues that the price did not crash should take another look. Meanwhile, copper and the rest of the industrial commodities are showing enough weakness to make me concerned.

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With things the way they are, there is a lot of systemic risk out there and QE2 lit a fire under some unsustainable prices and encouraged speculation. From a cash flow standpoint, you start hitting the wall of unsustainability when a large part of your willingness to buy is your ability to sell later at a greater price and not the cash flow from operations. A few highlights of unsustainability: Dubai is going for round 2 in real estate boom/busts --- with a 2-3 year gap. China is going for round 2 for asset based boom/busts, but their last round was The Great Leap Forward --- so that's a half century ago.

Where are we going? Nobody knows, but buying into commodities, especially industrial commodities, is fundamentally more in line with speculation than investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.