Category Archives: Commodities

Commodities Tank

We’ve been sayin’ the commodities runup and the fixation on inflation looked like a rerun of spring 2008: a liquidity-fueled hunt for inflation hedges when the deflationary undertow was stronger. That observation is now looking to be accurate.

But what may prove different this time is the speed of the reversal. With investors acting as if Uncle Ben would ever and always protect their backs, markets moved into the widely discussed “risk on-risk off” trade, a degree of investment synchronization never before seen. All correlations moving to one historically was the sign of a market downdraft, not speculative froth. And as we are seeing, that means the correlation will likely be similarly high in what would normally be a reversal, and that in turn increases the odds that it can amplify quickly into something more serious.

Are the Chinese Hoarding Certain Commodities to Obtain Cheap Funding?

As much as it may sound barmy to stockpile commodities to obtain better terms on financing, Michael Pettis claims that’s one of the factors behind what looks to be unduly aggressive purchases of copper by the Chinese. An excerpt from his latest newsletter, courtesy Michael Shedlock:

UBS’s Magnus Warns of Risk of Chinese Minsky Moment

UBS strategist George Magnus helped popularize economist Hyman Minsky’s thinking in the runup to the financial crisis by warning of the likelihood of a “Minsky moment.” For those not familiar with Minsky’s work, a short overview from ECONNED:

Hyman Minsky, an economist at Washington University, observed [that] periods of stability actually produce instability. Economic growth and low defaults lead to greater confidence and, with it, lax lending.

In early stages of the economic cycle, thanks to fresh memories of tough times and defaults, lenders are stringent. Most borrowers can pay interest and repay the loan balance (principal) when it comes due. But even in those times, some debtors are what Minsky calls “speculative units” who cannot repay principal. They need to borrow again when their current loan matures, which makes
them hostage to market conditions when they need to roll their obligation. Minsky created a third category, “Ponzi units,” which can’t even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky’s observation:
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Marshall Auerback: Get Ready for a Global Growth Slowdown

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

Governments across the globe are headed for a disaster entirely of their own making.

Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought (with a mere 2% growth rate expected to be released for Q1 shortly), and the European economy is overdue for its own slowdown. The U.S. stock market has also rallied despite the threat of a very high gasoline price, disappointing economic growth data, and a fairly mixed earnings picture.

Silver Down 12%, Big Default Rumored at Comex

We managed to miss out on the parabolic rise of silver, which has now been followed by a stomach-churning 12% fall in thin holiday trading. And commodity markets are less deep than securities markets. Recall that the famed peak of gold in 1980 to $850, was a violent spike up, vasty high than the level two days earlier or two days later.

Silver in particular has been closely watched due to the presence of very large short interests which were apparently partially closed out late last week leading to some very serious intraday volatility. Today we have this cheery development, courtesy Jesse:

Guest Post: China is Different

Cross posted from MacroBusiness

We need a new framework for understanding and interpreting what is happening in China. As a friend recently commented to me, there should be three categories of economies: developed, developing and China. China may struggle, but it will struggle in a uniquely Chinese way, and inevitably pose deep questions about the future of capitalism. Pundits, especially of the bearish persuasion, are fond of deriding the comment that “this time it is different”. But are things always the same? Analytics should match the subject matter (methodology should match ontology), and what has happened in China already is very different to anything yet seen. It has been the most sustained wealth creation in history, largely unpredicted. Two recent comments reported on MacroBusiness, one by Michael Pettis and the other by Nouriel Roubini reveal the problem.

Both pundits focus on China’s extremely high levels of investment, which is about half GDP, instead of about a tenth in most developed economies. Viewing China through the lens of a developed economy, they argue there is trouble ahead. But Pettis also sees the frameworks used for developed economies start to fail:

Gas Pump Woes

Time for comic relief. Hat tip Tim Coldwell (click to enlarge):

Marshall Auerback: QE2 – The Slogan Masquarading as a Serious Policy

By Marshall Auerback, a portfolio strategist and hedge fund manager Cross posted from New Deal 2.0.

Bernanke’s QE2 program has hurt savers, done nothing for banks, and eviscerated middle class living standards.

The U.S. Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned. And not a moment too soon.

David Apgar: What Was So Unpredictable about Deepwater Horizon?

By David Apgar, the Director of ApgarPartners LLC, a new business that applies assumption-based metrics to the performance evaluation problems of development organizations, individual corporate executives, and emerging-markets investors, and author of Risk Intelligence (Harvard Business School Press 2006) and Relevance: Hitting Your Goals by Knowing What Matters (Jossey-Bass 2008). He blogs at WhatMatters.

It’s tempting to look for a little consolation on the anniversary of the oil spill from BP’s Deepwater Horizon rig in the idea that our worst industrial accidents are unpredictable and not the result of negligence. The only trouble is that the BP disaster in the Gulf of Mexico was predictable.

Gas From Fracking More Damaging to Climate Than Coal?

I’m pretty amazed that no one looked into the greenhouse gas impact of fracking until now. One of the big rationales for fracking, which is already controversial due to reports of damage to aquifers, is that it was abundant in North America and also produces comparatively little in the way of carbon emissions.

The problem, per a study soon to be published by Cornell University, is fracking results in the release of methane, one of the most potent greenhouse gases, apparently enough to undercut the claims that it is relatively “clean”.

Town Hall Discussion of Energy Solutions: Live Stream of Dylan Ratigan Here at 8 PM EDT

Dylan Rtigan is hosting an important conversation on energy solutions from a Town Hall panel live from Oklahoma State University at 8PM ET / 7PM CST tonight. The goal is to generate the political will to reduce our dependence on oil.

Panelists include:

· Boone Pickens, Oil Tycoon & Founder, BP Capital Management
· Ashwin Madia, VoteVets.org
· Bob Deans, Director of Federal Communications, Natural Resources Defense Council
· Former CIA Director James Woolsey

View it below:

Marshall Auerback: The Economic Policy Behind Intervention in Libya Chases Its Own Tail

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Deal 2.0

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama’s actions in Libya show that he has caved in to the “humanitarian interventionists” in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.