The Commodities Bubble

Regarding the threat of soaring commodity prices on stock markets, Legg Mason’s Bill Miller’s expressed an interesting perspective in his latest quarterly report :

“The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. …. If they continue to move steadily higher, they have the potential to destabilize the global economy ....”

I have posted on the commodity threat before – see, for example, the April 18 post, The energy crunch. Miller hints that the risks appear to be to the downside for stock markets (at least for those with low resource content like in the U.S.). As he noted in his report:

“I agree with George Soros that commodities are in a bubble. It also appears he is right when he describes it as one that is still inflating and we still have the summer driving and hurricane season with which to contend.”

Comments

[dieuwer]

The only bubble out there is in the amount of DUMB financial commentators like L.M. and B.M.
I bet SOROS is LONG commodities and tries to bully the weak hands out of the market so he can snap up some more, cheap commodities.

[Adam Katz]

The bubble can only continue so long as the global economy is stable. Should we see a significant downturn in global economic activity due to higher commodity prices, demand for the commdoities themselves will fall and the backwardation spread will increase even more so. This encourages producers to purchase as little raw materials now as possible and make more forward commitments. As we move back to a contango futures curve, front month/spot prices should fall quite sharply.

[Adam Katz]

Correction: I mis-worded my last comment. The backwardation spread will increase leading up to the tipping point, not after.

[richjoy]

I don't think anyone can successfully talk commodities up...or down. True, they are subject to corrections.

To thoroughly discuss commodities, we would need to take them one at a time, but speaking of commodities collectively, in the 'long-run', it is still a supply/demand equation. Demand is huge!...until either supply increases, or demand is curtailed (such as through a worldwide recession), the upward trend will continue (though hopefully, not at such a steep slope).

My profits in agricutural commodities put a smile on my face...but I deeply regret food riots among people for whom food is a much larger proportion of their income. OTOH, I don't think the food situation would change if I divest myself.

[Harold]

The price of base metals are up because of the fuel factor IE: gasoline & diesel needed to operate the machinery and yes because of such a demand outstripping supply. If you believe this is a bubble its because you are living in a bubble and haven't taken into account all factors of the new costs forced onto the exploration/mining companies and in some cases the excessive taxes thrown at them from various countries.

My view here is that base metals will continue as Asian countries thrive also keep in mind the infrastructure of developed countries are in dire need of replacement which will add to the demand side.

[pharma]

May be there is a commodities bubble in US$ but not so much in euro.

US Treasury and Fed are printing US$$$ as crazy trying to solve us financial and housing bubbles through world wide inflation. It never worked in the past and will not work this time either.

I feel sorry for US Treasury, Fed and politicians but you just can not print commodities...

[dorvedor]

Read Jim Roger's book "Hot Commodities" and see if you really
believe commodities are in a bubble. There will be corrections
because of volatility but commodities are not in a bubble.
If you look at a 10-20 chart of commodities, you can see that
they were depressed for many years which leads to under-investment
by these companies. Almost a billion people are going to enter the middle class in the next ten years and they will all want what you
have; a car, air conditioning, stainless steel toaster, better food,
bigger house and countries are going to have to have better infrastructure which means more commodities. It's just that simple.