Commodity Bubble Proponent

The Commodity Conundrum: Securitization and Systemic Concerns (Part III)

nice piece

Commodities and the Fed: Answering the Skeptics

This argument is nonsense. The reason we don't have inventory buildups is that negative real interest rates encourage people to use the inventory rather than produce out of mines or invest in new capacity. Benny & His buddies at the fed have now firmly ingrained high inflation expectations into commodity producers minds
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

Get Out of Commodities - Barron's

Since 2001, accommodative monetary policy and lax regulation on investment banks created five distinctly large bubbles fueled by Goldman Sachs and their Wall St. bretheren.

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.

Burst Bubble? Commodities' Long-Term Story Remains Intact

I'd like to see how much "demand" there really is if buying on the margin was discontinued. Would you really want to pay full face value for a futures contract for 110 oil and 1,000 gold?

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.