Did Barron's Really Pan All Commodity Investing? 12 comments
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The cover story of this week's Barron's was Guess who's behind commodities boom ($), with this quote on the cover:
More than half of all bullish bets on commodities have been made by speculators, both big and small. When these markets fall, they'll fall hard, perhaps by 30%.
That quote summarizes the article pretty well. The cornerstone of the author's argument was the current record net long position of speculators and the corresponding record net short position of the commercials who are considered the "smart money." Commitment of traders [COT] data is indeed a valuable tool in analyzing markets, but to ascribe the price run-up to speculative demand alone glosses over the very real bullish supply/demand fundamentals. For example, the chart below (source: FABRI world agricultural briefing book 2008) shows that the record run-up in wheat prices was accompanied by an equally significant decline in its stock-to-use ratio. Similarly bullish supply/demand picture for other agricultural commodities can be found in the same source. [These charts also predict future price declines for several major crops. Obviously, the level of confidence to be placed on future predictions vs. past data is quite different. At any rate, the point is that speculative demand cannot alone explain the price increase in many agricultural commodities.]
If the main thesis of the Barron's article was that the commodities will correct further, I would have titled this post "Barron's pans commodities." Hell, I probably would not have written this post since I see some short term technical difficulties myself. However, rather than voicing an opinion on the future price trajectory, the article was really an indictment on investing in commodities, or to be exact, investing in commodities in long-only index funds. One particular quote belies the author's disdain:
In other words, they [the commodity index funds] trade the naive and potentially fatal assumption that commodities have the same tendency as stocks to rise over the long run.
Much of the article was an accusation that the commodity index funds distort the futures markets and it even implied that the CTFC might rescind an exemption that allows these commodity index funds to take on large long positions.
Given the size of the futures contracts, the commodity index funds represent the only realistic chance that individual investors can participate in this booming market. I don't know about you, but the prospect of government limiting access to tangible things of real value all the while debasing the currency so that the prices of real things have nowhere to go but up does not sit well with me.
The article spoke of an upcoming CFTC meeting on Arpil 22 "to hear firsthand from participants to ensure that the exchanges are functioning properly." I believe concerned individual investors should let relevant government officials know where they stand regarding their freedom to put their dollars. The contact information below may come handy:
U.S. Commodity Futures Trading Commission
Three Lafayette Centre, 1155 21st Street, NW Washington, DC 20581, 202-418-5000
Acting Chairman: Walter Lukken, (tel) 202-418-5014, (fax) 202-418-5550
US Senate Committee on Finance
219 Dirksen Senate Office Building, Washington, DC 20510-6200, (202) 224-4515
House Committee on Financial Services
House Financial Services Committee, Democratic Staff, 2129 Rayburn House Office Building, (202) 225–4247
Committee Chairman: Barney Frank
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This article has 12 comments:
The rise of comms has to do with the fall of the dollar, Barrons!
Guess what? That will continue. Barrons is dead to me.
Commodities; particularly oil and prescious metals; are in a bubble.
Look how far gold has fallen already.
Oil is next....
Given that some of the grain markets have daily limits of $1 or more, think about how much a speculator could lose in five $1 limit down days in a row at $5,000 per day. That's a potential wipeout of $25,000 in a week. I don't know what the margins are now, but they're probably in the $6,000 to $10,000 per contract range on wheat. Maybe lower. So an index fund has, say, 5,000 contracts, according to the article.
The question is, are the downside risks worth the potential down side losses, assuming you're a buy and hold index fund and not a trader who watches the screen every minute of every trading session?
Who will bail out the dumb money?
And if I may expand on the point, how many clueless index fund investors would be wiped out in a major correction. It just looks too scary to me.
And yet the lowly oz of gold still buys today what it did 100 or 2000 years ago - a damn fine suit & shoes, or the finest toga and sandals to be found on the streets of the Roman Empire.
The PURE definition of inflation is: more "currency" units each with less purchasing power, period.
Prices do not rise vis gold. More dollars, worth ever less, requires more of them to purchase the same amounts of goods or sevices.
According to Marx, Lenin, and ideological pal Keynes; inflation, along with graduated taxes, are the millstones with which to grind away the wealth of the people - and which not one man in a million could detect because of it's invisibility.
It's the EXACT reason the Constitution calls for ONLY gold or silver money, and NO fiat toilet paper a la the 2nd Reich or Imperial Rome, because elites can diddle with it for their own benefit to the people's impoverishment, as stated by too many founders to be quibbled over.
Does ANYONE know that Hamilton was married to a Rothschild? Or that Rothschilds were behind Rockefeller & Morgan who conspired to create the FED, the author of the FED being Paul Warburg, Hitler's banker Max's brother?
Read Murray N Rothbard's "Wall Street, Banks and American Foreign Policy" for the eyeopener of your lives:
www.mises.org/resource...
an excerpt from the intro:
The New Deal economic policy was, as Rothbard demonstrated, prefigured by Herbert Hoover, champion of big business, and foreshadowed in the reforms of the Progressive era. As the
revisionist economic historians, such as Gabriel Kolko, have shown, those who regulated the great industries in the name of progressive "reform" were recruited from the very cartels and
trusts they were created to tame.
And of course the monopolists didn't mind being tamed, so long as their competitors were tamed (if not eliminated). Every giant leap forward of economic planning and centralization—central banking, the welfare state, "civil rights," and affirmative action—was supported if not initiated by the biggest and most politically powerful business interests in the country. The House of
Morgan, the Rockefellers, and the Kuhn-Loebs must take their place alongside the First, Second, and Third Internationals as the historic enemies of liberty.
Giant multinational corporations, and their economic satellites, in alliance with governments and the big banks, are in the process of extending their influence on a global scale: they dream of a
world central bank, global planning, and an international welfare state, with American troops policing the world to guarantee their profit margins.
After the long battle to create a central bank in the U.S., the high priests of high finance finally seized and consolidated control of domestic economic policy. It only remained for them to extend their dominance internationally, and for this purpose they created the Council on Foreign Relations, and, later, the Trilateral Commission.
These two groups have been seized upon by the new populist Right as the virtual embodiments of the Power Elite, and rightly so. It is only by reading Rothbard, however, that this insight is placed in its proper historical perspective. For the fact of the matter is that, as Rothbard shows, the CFR/Trilateralist network is merely the latest incarnation of a trend deeply rooted in modern American history.
Long before the founding of the CFR or the Trilateral Commission, there was a power elite in this country; that elite will likely endure long after those organizations are gone or transmuted into something else. Rothbard's unmasking of the historical and economic roots of this trend is vital in understanding that this is not a "conspiracy" centered in the CFR and the Trilateralist groups, as such, but an ideological trend traditionally centered in the Northeast,
among the upper classes, and deeply rooted in American history.
I put the word "conspiracy" in quotes because it has become the favorite swearword of the Respectable Right and the "extremist"-baiting Left.
If it is conspiracy-mongering to believe that human beings engage in purposeful activity to achieve their economic, political, and personal goals, then rational men and women must necessarily plead guilty. The alternative is to assert that human action is purposeless, random, and inexplicable. History, in this view, is a series of discontinuous accidents.
Yet it would be inaccurate to call the Rothbardian world view a "conspiracy theory." To say that the House of Morgan was engaged in a "conspiracy" to drag the U.S. into World War I, when
indeed it openly used every stratagem, every lever both economic and political, to push us into "the war to end all wars," seems woefully inadequate. This was not some secret cabal meeting in
a soundproof corporate boardroom, but a "conspiracy" of ideas openly and vociferously expressed. (On this point, please note and underscore Rothbard's analysis of the founding of The New Republic as the literary flagship of "the growing alliance for war and statism" between the Morgan interests and liberal intellectuals—and isn't it funny how some things never change?)
A conspiracy theory attributes virtually all social problems to a single monolithic agency. Radical feminism, which attributes all the evil in the world to the existence of men, is a classic conspiracy theory; the paranoid views of the ex-Communists in the conservative movement, who were obsessed with destroying their ex-comrades, was another.
But the complexity and subtlety of the Rothbardian analysis, backed up by the sheer mass of rich historical detail, sets Rothbard on an altogether different and higher plane. Here there is no single
agency, no omnipotent central committee that issues directives, but a multiplicity of interest groups and factions whose goals are generally congruent.
In this milieu, there are familial, social, and economic connections, as well as ideological complicity, and none is better than Rothbard at ferreting out and unraveling these biographical details. Taken together, the author's small and studied brushstrokes paint a portrait of a ruling class whose ruthlessness is surpassed only by its brazen disloyalty to the nation. It is a portrait that remains unchanged, in its essentials, to this day. Wall Street, Banks, and
American Foreign Policy was written and published in 1984, during the Reagan years.
Reagan started out by denouncing the power elite and specifically the CFR and the Trilateralists, but wound up with that epitome of the Establishment, Skull-&-Bonesman George Bush as his vice president and successor. Bush is a longtime CFR director, and Trilateralist; most of his major cabinet officers, including his chairman of the joint chiefs, Colin Powell, were CFR members.
The Clinton administration is similarly afflicted, from the President (CFR/Trilateral) on down through Donna Shalala (CFR/Trilateral) and George Stephanopoulos (CFR), with the CFR honeycombed (as usual) throughout the State Department. In addition to Secretary of State Warren Christopher, other CFR members in the Clinton cabinet include Laura Tyson, chairman of the Council of Economic advisors, Treasury Secretary Robert Rubin; Interior Secretary Bruce Babbitt, HUD honcho Henry Cisneros; and Alice Rivlin, OMB director.
The other side of the aisle is equally co-opted at the leadership level, as vividly dramatized by Gingrich's retreat before the power and majesty of Henry Kissinger. One naturally expects cowardice from politicians, but the indictment also includes what passes for the intellectual leaders of the Republican free-market "revolution."
www.mises.org/resource...
----Both parties are rotten to the core and serve the very same masters who tap, back & place their puppets, and is why Rothbard's 40 pg essay is a MUST read for ALL Americans in understanding what this corrupt establishment LEAST wants Americans to know, having wasted billions of our tax dollars to make sure we don't via the state's compulsion.----
Your a real a**hole if you think you really deserve the right to crowd energy futures pits elevating prices. I guess 9/11 means nothing to you since you ae spoon feeding those Saudis trillions. Ken Lay from Enron sponsored the bill that allowed you and hedge funds entry into that market. Bin Laden and Ken Lay...boy your in great company
One day this foolishness will finally be over and a Constitutional government with a Constitutional currency will be returned to the people.
We need Ron Paul and Edwin Vierra, Jr. more than most people realize.
I know because this is what clients say they want.
Then, it makes the erroneous connection that commercials are "smart money".
Keep in mind that Citigroup's purchase of MBS and other derivatives was "smart money", as was the idea of off balance sheet investments. Thats "smart money" taking more risk than the "dumb money".
But many of these commercials are more "speculative" (i.e.--short term and leveraged) than the ETF holders.The short term, and leveraged positions of the commercials shorts in particular is the opposite of "non-speculative".
The evidence that the article uses would better used to make the opposite conclusion of the one it comes to.
Moreover, The word "bubble" is overused, and in fact, a linguistic bubble has developed in its use. The contrarian linguistic sentiment indicator I use tell me that as the use of the word Bubble increases in the press...the overall level of actual financial bubble declines. (ok, not really, but it amuses me).
Bubble should include--increasing financial leverage, short term traders taking more and more of the trades, and a subjective sense that the assett price cant decline,
Therefore: belief that Houses cant decline+excessive leverage+ house flipping= bubble.
lets look at commodities: overwhelming belief that they will decline+little leverage on long side (but excessive leverage on short side in some commodities+little evidence (at least in most of ETF's) that traders are DOMINATING the markets. What does this spell?
Not a bubble...a short term correction perhaps. Lets not contribute to the linguistic bubble by overusing the word "bubble".
Its a misuse of language and non-analytical.