Commodities are Toppy

Discussion in 'Trading' started by MarketOwl, Sep 18, 2012.

  1. Wrote the following in my blog before Monday's crude oil "flash crash":

    In the commodities futures market, you have two main groups: speculators and commercial users. They are now set for a collision course. They are due to monetary and economic forces at work. With the Fed hellbent on increasing its balance sheet at 33% annually, about $1 trillion, from its current total of ~$3 trillion, you have a natural desire by speculators to protect themselves from possible inflation by buying hard assets. End user demand in the commodity is being ignored in a rush to buy before the next guy, the sell to the greater sucker theory.

    But the economic forces are bearish for commodities. Unless you believe the Fed buying MBS will revive the economy, then you can't be a buyer based on long term fundamentals. Europe is hopeless, and will have zero growth for many years. U.S. can't grow more without bigger tax cuts and pork, not likely to happen next year.

    The biggest and most underestimated factor is the popping of the China real estate/infrastructure/manufacturing/inventory bubble. They are all interconnected, fueled by negative real interest rates. China hit their saturation point a couple of years ago, and even overshot that level. Now its stuck with a bunch of ghost cities, empty apartment buildings, huge stockpiles of various commodities, and piles of bad debt on worthless local pet projects. The bubble is popping. Shanghai Composite is in a deep downtrend, getting closer to those 2008 lows. It is trying to join Spain's IBEX index for the dubious honor of worst performing market since October 2008.

    Rich commie insiders are trying to take out as much money out of China as quickly as possible ala Russian wealthy in the late 1990s. China is extremely deflationary. And underestimated by the investor community. This is something that is being lost in the euphoria of QE3 and the desire to protect against insane money printing.

    The worst commodities from this China supply demand vantage point are copper, coal, oil, and yes, even silver. A lot of silver goes into making solar panels, much of that being produced in China and no longer in demand now that governments are less willing to subsidize this money loser. Fundamentally, gold should be fine, because it has no industrial uses, but I can't picture going up while all the others go down. Only for fleeting moments does gold go higher while industrial commodities go lower (sharp spikes in May 2010 and August 2011).

    Who do I think wins this battle? Over the next year, I expect deflation to win over, but eventually it will be inflation. It always is. The deflation forces from China will spook Eager Beaver Ben to bring out his uzi once again in 2013, this time shooting out as much money as possible until he has a corner on MBS and 10+year Treasuries, causing a run on the dollar with every mom and pop investor clamoring for commodities.