No Conspiracy Behind Tumbling Commodities 18 comments
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The GlobeAndMail is reporting on The Real Reason Commodities Are Tumbling.
To hear Donald Coxe tell it, the commodity selloff ripping through Canada's stock market is no accident. It is the result of a deliberate, brilliantly executed plan hatched at the highest levels of the U.S. Federal Reserve and Treasury.
U.S. authorities engineered the collapse in commodities a move he said was necessary to shore up the global financial system to be bitter. My attitude is, goddamn it, they're good it was brilliant. ...
The Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets. ...
Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There's no doubt whatever in my mind” about what happened, he says.
Don Coxe Jumps The Shark
(For the intended meaning of "Jump The Shark," see definitions #2 and #6.)
Those who want listen to an audio of shark jumping can do so at the Don Coxe Weekly Webcast 9/12/2008.
While it is true the Treasury is guilty of blatant manipulation when it comes to the bailout of Fannie Mae (FNM) and Freddie Mac (FRE), the dollar did not rise nor did oil or commodities drop because of it.
Let's take a look at charts of the US dollar and crude in the aforementioned 5 days around July 11 when crude started to plunge.
US$ Index
(Click on charts for sharper image.)
Crude
The chart clearly shows that crude started to plunge long before the dollar rally. Right off the bat we can see clearly see Coxe is off on his timeframe in regards to action on the US dollar.
Furthermore, the odds of a Fannie Mae bailout causing crude to plunge immediately but the dollar to stay flat for two weeks then soar are virtually zero.
Yes, Coxe is correct that Paulson wanted to ignite a rally in financials, but when it comes to Fannie Mae, Washington Mutual (WM), Freddie Mac, Lehman (LEH) and others, I believe one needs to take a look at actual results before making claims of brilliant execution.
Here are the actual results: Fannie Mae and Freddie Mac are both trading under $1. Lehman is under $4. Washington Mutual touched $1.75. Do "brilliantly executed plans" as Coxe puts it, always succeed so spectacularly? If that's success, pray tell what constitutes failure?
The plain fact of the matter is there were many fundamental reasons for the dollar to rally, and it did. Likewise there were fundamental reasons for Fannie and Freddie to become worthless, and they did, in spite of admittedly massive intervention (manipulation).
I have discussed the dollar at great length recently so let's do a review.
People will see what they want to see, but the dollar rallied because there was every fundamental reason for it to rally. Was there jawboning by Paulson and Trichet? Of course there was.
However, the market ignored Paulson's jawboning for forever and a day, while Trichet's statements were in regards to a weakening Europe that is now clearly deteriorating rapidly. The dollar was poised to soar on the story of a weakening global economy that was supposed to decouple from the US but failed to do so.
Carry Trade Blows Sky High
An massive unwinding of the carry trade is now fueling the dollar rally. Huge speculation by traders shorting the Yen and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar is being unwound.
Similarly there was massive speculation by traders shorting the dollar and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar. That too is being unwound.
Those sorry bets were made on the misguided belief that Europe, Asia, and especially China would decouple from the US. In other words, massive bets were made that the tail would wag the dog. Now we see how foolish those bets were, especially for the Johnny Come Latelies who plowed into the trade just as it was about to reverse.
New Zealand, Australia, Germany, Ireland, Spain, and the UK are in or rapidly sliding towards recession. This is an enormous fundamental factor and very supportive of a strengthening US dollar.
The net effect of the unwinding of carry trades is the US dollar is rising against every major currency but the Yen, while the Yen is rising against everything.
Inquiring minds may wish to read Carry Trade Rout Continues for more details.
What About Oil?
The reality is there was no fundamental reason for oil to have risen to $148 in the first place. The US economy is in recession. The UK, Japan, New Zealand, Spain, Ireland, Australia and other countries are likewise headed for if not already in recession. There is simply no way that China could keep the energy bull going by itself.
While it may not have been apparent at the time, it certainly should be in hindsight.
China Fuel Buying Binge Ends
Please consider this, from Reuters: A long wait for China to repeat fuel buying binge.
China's nine-month auto fuel buying frenzy ahead of the summer Olympics helped lift global oil markets to records, but beleaguered bulls beware -- it could be years before conditions force it to launch another raid.
"The massive import levels that we witnessed are not likely to be duplicated for a long time. The point about demand threatening to stall is a real important one," said U.S.-based independent analyst Paul Ting.
Data due on Wednesday should confirm that China imported a hefty 530,000 tonnes (128,000 barrels per day) of diesel in August, a last batch of purchases after buying a record near 1 million tonnes in July, rivaling the United States.
Those who want further evidence of a slowdown in China should consider reading the full text of this recent Bloomberg article: China's Manufacturing Contracts for Second Month.
Manufacturing in China, the world's fastest-growing major economy, contracted for a second straight month in August, according to a survey of purchasing managers.
The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.
Since July, Chinese policy makers have put extra emphasis on sustaining the economy's expansion rather than cooling inflation. Growth has slowed for four quarters and Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on China's exports for the rest of the year.
Runup In Price Explained
So there you have it. China was ramping up crude supplies like mad ahead of the Olympics. When imports went back to normal levels and Chinese manufacturing went into contraction, the price of crude crashed.
None of this had a thing to do with Paulson or Fannie Mae.
US Fuel Demand Drops
Let's now consider this: Oil Falls After U.S. Says Refinery Rates, Fuel Demand Dropped .
Sept. 10 (Bloomberg) -- Oil futures fell to a five-month low in New York following a U.S. government report that showed fuel demand declined and refinery production dropped after Hurricane Gustav shut plants along the Gulf Coast.
Operating rates declined to 78.3 percent of capacity in the week ended Sept. 5, the lowest since 2005, when hurricanes Katrina and Rita struck the Gulf, the Energy Department said today in a weekly report. Demand for fuels averaged over the past four weeks declined 3.8 percent, the department's report showed.
Oil supplies increased by 1.77 million barrels in states along the Gulf of Mexico at the same time regional producers shut all U.S. crude output in preparation for Hurricane Gustav. Regional inventories reached 159.6 million barrels, the highest since May.
"We ended up with more oil on the Gulf Coast than we thought because refineries didn't use as much," said David Pursell, an analyst at Tudor, Pickering, Holt & Co. in Houston. "The decrease in refinery usage was offset by a reduction in imports so we ended up with a little more oil in the Gulf Coast, rather than big draws."
If demand for crude was soaring we would not be seeing this (from Wednesday's NY Times): OPEC Says It Will Cut Oil Production.
VIENNA — In an unexpected decision made after a six-hour meeting that lasted well into the night, the OPEC oil cartel said it would reduce its oil production by about half a million barrels a day in a bid to stem a rapid decline in oil prices in recent weeks.
Fears that the market was currently oversupplied while demand for oil was slowing led the group to say it would “strictly comply” with production quotas set in September 2007. Since then, the group has been producing above those levels to drive prices down.
In its final statement, the oil-producing group said it had noted “a shift in market sentiment causing downside risks to the global oil market outlook.”
Oil prices peaked at $145.29 a barrel on July 3 but have been falling lately because of slowing global demand.
Oil Prices Falling Because Of Slowing Global Demand
Ding Ding Ding. We have a winner. It's amazing how few can see the obvious truth!
Slowing global demand and a corresponding unwinding of leverage by commodity speculators and carry trade speculators are to blame for falling gold, silver, energy, and commodity prices in general.
Yes, there was massive manipulation in the equities markets by Paulson and the SEC. However, that manipulation actually blew up because it did not succeed at rescuing Fannie and Freddie. Furthermore, the "brilliant execution" caused many unintentional consequences.
The proper conclusion is that screams of manipulation (no matter how loud or by how many) are nothing more than a scapegoat when it comes to the unwinding of the commodity trade. Those who blame manipulation for the ongoing commodities selloff are jumping sharks.
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Do not much care whether Coxe is jumping the shark or gets eaten by one. May the best one win!
Well, scratch this guy off your must-read list. If anyone thinks that the present administration is capable of anything useful, they musn't be paying attention.
jegan ;-)
See www.nowandfutures.com/...
2. not a conspiracy, it's just the hedgie funds (leveraged @ 200/1) bailing out of their underwater positions.
> jack
A refutation of Congressman Bart Stupak's (D-Mich.) researcher-in-chief can be found in the Hard Assets Investor article, "Congress Blames Index Speculators" at www.hardassetsinvestor....
Sorry. I am not buying any of this stronger USD story. Let me point out a few FACTS as opposed to media propaganda:
1. Yes China's economy is slowing. But if you care to follow through, it is slowing from 10% to 9%. Big deal. The USA would kill for that kind of growth. As the Honeywell CEO said on CNBC yesterday, Chinese (and India) demand for a variety of its products remain robust. Similar comments were echoed by the CEOs of General Electric, Dow Chemical, and 3M lately.
2. Yes, I agree that the dollar was due for a dead cat bounce rally. But there simply is nothing fundamentally there to support a long-term move higher. It is highly debatable that Europe's economy is "drastically worse" than the US. Just because we here in the US entered a slowdown first does not guarantee a rebound sooner. Our entire financial "system" as we know it is completely broken. That is simply not the case in Europe. And as most of us are well aware the European Central Bank's mandate is one thing only; price stability. And Trichet has already quashed any premature hopes for a rate cut in Euroland. So much for the stronger dollar scenario here.
3. US fuel demand drops? Yes it has by 2 % year to date. Unfortunately world oil demand has risen 1%. Emerging market countries will continue to subsidize fuel prices regardless of what we do here. What is indisputable is the long term outlook for oil supply/demand. IT'S HORRIBLE. Mexico's production (2nd largest exporter of oil to the USA) is down dramatically. Ditto for North Sea production and Venezuela. Russia expereinced its first decline in oil production in almost 25 years. The important point to note here is that almost always declines are "irreversible". There are no more Cantarell fields in Mexico. Gone. Bottom line: no matter how much we conserve fuel here in the USA we will not overcome the steepening deficit between supply and demand.
4. The "Fairy Tale" of expected higher interest rates to support the USD- This is a real whopper. As the story goes on Wall St. Bernanke will raise rates soon to support the USD. Excuse me did I miss something here? Was it the billions of dollars in ARMs that reset in March? Was it the record amount of bankruptcies and foreclosures reported in August? Maybe it was the minor problem of a 6.1% unempoyment rate last week (almost a 30% increase over 2007)? Oh I l almost forgot. Jobless claims are moving towards the 500k level (not seen since the darkest days of the 1970s). Not exactly the right conditions for a rate hike cycle do you think?
In short, this whole decoupling, strong USD talk is all blather and no substance. Bernake and Paulson can "declare war" on commodities all they want. The underlying commodity bull cycle is firmly intact as we continue to see supply deficits in key metals as global demand continues strong. Commodity supercycles have never lasted less than 15-20 years. This one is no different from any of the others. The USD will resume its decline after the election. The developing economies will reflate. And the bull market in metals, oil, ng, and grains will resume.
I can't believe you wrote that.
A correllary to Occam's Razor!
This manipulation and intervention stuff smacks of what conspiracy theorists refer to as hyper-competence.
So, yes there is an unwinding but thats what Bear Markets do. When the forward PE ratios of good stocks get down to or below their forecasted 12 month growth rates, then they become value investments(IMHO). But not necessarily buying opportunities since I have yet to see Analysts downgrading Earnings enmass.
If the Sky is indeed falling then why aren't there corresponding projected Earnings decreases.
Regarding the Bric+ countries, Their Economies show that they have indeed Decoupled. Years ago, if the US slowed, the rest of the world stopped. Now with the US stopping, they are slowing.
I am talking about economies not Financials. Stock Markets are linked more than ever before. Financial investments have surged into the emerging markets and are being repatriated. If the Bric+ countries did the same thing, the US dollar could drop 50% within weeks. They hold Trillions of our Debt.
The way things are going here, how much longer do you think the rating agencies in the rest of the world will continue to give our debt a AAA?
To suggest that the commodity correction was somehow orchestrated by authorities to shore up financial stocks is at best misguided for a number of reasons. 1) Bespoke Investment Group research shows strong correlation between commodity and equities prices in line with the study of intermarket relationships. More often than not, commodities corrections accompany stock market corrections. To suggest that a drop in commodity prices would cause a rally in financial stocks shows an ignorance of how markets work.
2) If government authorities were actually capable of manipulating commodity prices to that extent, why did they let oil prices rise to $147/bbl in the first place? I agree the governments do their level best to manipulate markets in an attempt to get re-elected. It is the reason there is such a powerful 4-year election cycle (see tradesystemguru.com/co... ) But even it they had the ability, driving down commodity prices will contribute to a slowing economy and falling stock prices over the long haul, not help them if history is any guide.
The more likely explanation is that thanks in part to the US easy money policy from 2001-2004, we had a number of global bubbles form including a commodity bubble. All bubbles eventually burst and burst violently and that is what is happening now.