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Commodity bubble proponent
44 Comments
Is the Commodity Bull Market Over?
Some interesting signs:
1. Iran has doubled the amount of crude oil sitting in tankers waiting to be delivered, creating a ship shortage (20 million barrels as of today). If demand was so hot as everyone is claiming, that should be gone.
2. Saudi Arabia just cut it's benchmark discount on all of its varieties of crude. Why would they do that if the demand was as hot as everyone claims? (source: Bloomberg)
The Commodity Conundrum: Securitization and Systemic Concerns (Part III)
Is the Commodities Bubble Popping?- Fast Money Recap (4/29/08)
We now have cheaper money (thanks Ben for unnecessarily lowering the interest rate), a really shitty regulatory system (the CFTC is an absolute joke). And to boot President "there's no oil speculation, it's all based on supply and demand. Price rises have nothing to do with the 400 billion that has been pumped into these markets" Bush and Hank "I want a strong dollar, but not really" Paulson are still in power. Even OPEC sees that it's a sham and is fundamentally justified in their approach.
This game is welfare for Wall Street and we all get to pay for it. The worst part: There's nothing we can do until Bush is out of office and the CFTC starts doing it's job again. Sorry man
Is the Commodities Bubble Popping?- Fast Money Recap (4/29/08)
We're going to see $150-200 before 90 again. Nothing systemic has changed in this market. But it will crash.
The Commodity Conundrum: Securitization and Systemic Concerns (Part I)
While I think that some of the rise in commodity prices is justified in terms of supply/demand, to say that derivatives trading has thrown gasoline on this fire would be the understatement of the century. All of the governmental reports, from the EIA to the IEA show inventories of all products within to slightly above the five year averages and effective spare capacity of 2.3-2.5 million barrels per day. This coincidentally, is the least tight the oil market has been since the Iraq war in 2004. More oil projects are in the pipeline and new drilling equipment is being built to meet demand. Additionally, any supply forecast that tries to predict market conditions beyond 2-3 years would be somewhat unreliable and maybe understated somewhat because companies tend to play their cards close to the vest in order to prevent others from getting in on their oil finds.
As a land acquisition manager for a major homebuilder, this market reeks of the same kind of bs that Wall St pulled with the real estate market.
While we all might be rooting for a commodities bubble to burst, I think that the unintended consequences might be far worse than $120 oil. If this market were to unwind rapidly, it would cause a fundamental breakdown to the counterparty risk models set up by Wall St, leading to more horrific writedowns and lots more pain for the financial industry and a bigger credit crunch than the one we had prior.
The deflationary problem with all of this is that the fed can't print enough money to resolve these market problems. Trillions of dollars of writedowns are far more deflationary than the billions that the fed can give banks
Commodities and the Fed: Answering the Skeptics
Why sell your copper at $3.75/oz when you know it will be worth $4.25 tomorrow?
This is why nobody wants to invest in new production. It makes more economic sense to keep the reserves in the ground. We need interest rate hikes to reverse this
Weak Dollar is Bad For America - and ETFs
This will actually cause far more damage to the global growth story than the US Economy for a few reasons.
1. Increased commodity inflation puts China in a lose-lose situation. As we all know, China is the world's source of cheap labor. If China allows the yuan to appreciate to fight commodity inflation, it will lead to less demand for their goods overseas and a reduction in their labor force. Since China's stability is dependent on double digit growth, underemployment will create further instability.
Looking at it from the other angle, China's population cannot afford to keep the yuan weak to fund the rapid growth in the country. Since the average Chinese person spends nearly 25% of their income on food and does not have nearly the disposable income of the average person in the developed world, China's population cannot sustain a dramatic price inflation of basic commodities. If the state government tries to control prices, it will lead to shortages of raw goods, since the input costs for farmers to grow food will be higher than the final output. This is potentially devastating.
It seems as though China will be forced to unfairly absorb much of America's excesses vis-a-vis commodity price inflation. Once the Chinese bubble economy does in fact deflate to more appropriate levels, this will have serious knock on effects on the commodity producers, thereby deflating the commodity bubble and the rest of the emerging markets.
Ouch...
Is OPEC Killing Itself?
The cause of high oil & commodity prices are due to Helicopter Benny pumping disgusting amounts of money into the system at basically 0% interest rates.
De-regulation of the commodity futures markets in 2000-1 have had some effect in that anybody and their little sister can write an oil futures contract. BUT LOOK AT THE PATHETIC DOLLAR.
Exxon Mobil: The Root of all Evil?
Exxon's real profit margin before share buybacks, and dividends was nearly 71 billion dollars. However, everyone focuses on the net number. Nobody forces XOM to issue 30 billion in dividends and buybacks
The reality is that XOM's real profit margin is closer to 20% than it is to 11.32%. It really annoys the hell out of me that no one in mainstream media or the internet recognizes this.
However, that being said, I don't fault Tillerson & Raymond & co for their obscene profit margin. I'd rather they have it, distribute it to their shareholders, and penetrate the real economy than have the government take it and waste it on stupid pet projects.
Get Out of Commodities - Barron's
1. Housing
2. Credit/Investment vehicles
3. Private equity/M&A
4. Emerging Markets
5. Commodity Futures
As each of these bubbles gradually expanded in succession during the early part of the decade, these banks have made ridiculous sums of money on highly leveraged schemes. All five investment bubbles were initially based upon sound economic theses.
However, as each has burst in succession when fundamentals began to reassert themselves, investment banks leaned on the remaining asset bubbles to maintain profit margins. As these margins have begun to erode, the systems requires that these institutions delever themselves
The credit bubble of 2001-8 was the catalyst for the other four bubbles. As the housing bubble burst in 2005, Wall St. saved itself by using M&A/emerging markets/commodities to maintain profitability. These three asset classes continued to rise. Once the M&A/private equity takeover bubble burst in 2006, investors leaned on emerging markets and commodities to maintain profits. Once emerging markets crashed in late 07, commodity future speculation has been the only speculative profit engine left standing.
I'm not sure what will end these ridiculous commodity prices. The majority of the fundamental data points to high prices, high supply, and low demand but it will end. Unfortunately, this will not be pretty just as we have seen with the other 4 bubbles bursting.
Why Commodities Are Likely to Struggle in 2008
The biggest problem in this market is the speculation on extremely high margins. ETFs and investment banks can take their leveraged shareholder dollars, and buy commodity futures on the margins. Exchanges can print as many as people are willing to buy since no one ever takes delivery.
The amount of leverage is significant. ETFs can borrow against their initial asset base at fairly high margins (20 % assets to 80% loans). From there, they can buy commodity futures at a 6% margin. As a result, $1 in ETF assets can control $20-$75 commodity futures. This is not exactly a pretty picture.
I suspect too that major energy producers have trading desks that are involved in this game as well.
Burst Bubble? Commodities' Long-Term Story Remains Intact
To me, most of the arguments for the commodity super cycle are bs. for the following reasons.
1. The Inflation Story: The popular hoards think that since the fed is pumping money into the system, it will lead to inflation. The reality is that the inflation was already built into the system with derivatives that dwarf that real money supply (est. 515 trillion dollars). When looking at the fed liquidity injects, they are miniscule compared to the deflationary impact of these illiquid investment vehicles falling apart. This is why a couple of bad mortgages are destroying the housing industry
2. Oil supply has "peaked" in 2005 and will inexorably decline: Not true according to the EIA. We have had several instances of supply over the "peak" in 2005.
3. Oil/commodity demand will march onwards and upwards unto eternity: Not true again. See declines in OECD consumption. As the US/EU slows down, less demand for cheap Chinese goods, reduced Chinese incomes, and less commodity demand. Total OECD petroleum consumption DOWN over the last 2 years and stagnant since 2004.
4. Emerging markets will grow forever and ever and ever. These markets are most prone to crisis.
A Note to the Bubble-Phobes
Based upon the capital layout to expected cashflow from these "commodity" investments (and I say that b/c these investors don't buy the actual commodity), these futures markets are ripe for speculation. (cough...Amaranth...co... "Runaway" world oil demand has increased at it's height by 2% per year (2001-2003) and is now less than 1%. In any other industry, that type of demand growth would be pathetic.
BUT...I don't think bubbles are a horrific thing. There was a real demand for new housing, and the tech "bubble" produced one of the highest margin industries in the world (typical margins exceed 25% of revenue today), and this commodities bubble will breed and create new business that grow the global economy.
Greenspan's Latest: Oil Boom Will Likely 'Go on Forever'
Eventually (and we are seeing the first seeds of change), alternative energy solutions (algae based biofuels, cellulosic ethanol NOT food based fuels) will make a gigantic impact on energy demand. The argument that oil demand will rise indefinitely and that alternatives will take hold in 300 years is akin to saying in 1989 that the cellphones and the internet would be niche technology for at least 30 years (and yes people said that in the early tech boom).