Thursday, October 06, 2011

Commodities Bust Update: Are Agricultural Commodities On The Verge Of Collapse?

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
-- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

We have long written that Wall Street is responsible for substantial misery around the world through its Enron-type manipulation of commodities.  Agricultural commodities most definitely are a part of that dynamic. 

Jeremy Grantham came out with some stream of conscience unintelligible blather a few months ago about a new paradigm of permanently high commodity prices.  I used to think Grantham had his head on straight but just as with Warren Buffett and Irving Fisher, his mind has become a prison for linear thinking and his own self-delusions by being an enabler to the status quo’s illegitimacy. 

Grantham’s comments about permanently high commodity prices were just in time to top-tick commodity markets before they started collapsing.   This is eerily similar to many documented remarks, including Fisher’s cited above,  in 1929 about society achieving some great new level of enlightenment and achievement by financial and economic bozos.  

Notice in the chart below that in the summer of 2010 both corn and wheat rocketed higher; price nearly doubled in about a month.   And look at how the charts are completely correlated in their pricing actions.   They are also very tightly correlated with oil, equities and countless other tradable assets.  As we have said numerous times over the years, portfolio diversification is a scam dreamed up by another financial bozo.   All tradable assets are nearly perfectly correlated.  That includes gold.   That should be no surprise to anyone.  Frankenstein finance and Wall Street computer buy programs eschew any fundamental analysis and simply launch into massive speculative buying binges across  baskets of assets.  In other words, the thinking investor has been thrown under the bus in favor of fuzzy math driven by financial bozos.   Were Benjamin Graham alive today, he would clearly be telling us the end of the investment world is nigh.  At least the world espoused by Wall Street.  Today we live in a  ‘Jim Cramer’ world where idiot savants tell us to buy, buy buy!    And that means when the system fails, all correlated tradable ‘inflation-motivated’ assets are fraught with risk.   That is no new revelation on here.

On that note, let me place a reminder in here.  We have said numerous times there is substantial evidence this is a derivatives-driven rally in assets since the summer of 2010.   (That includes gold for all of the religious ideologues who worship at the alter of this false idol.  Fundamental gold demand has been and continues to crater very substantially around the world.)  I see that again this morning in the movement of assets.  Not only in their correlated movement but how they are actually moving.  In other words, this morning’s pop upward is again derivatives-driven. 

The 1929 asset bubble was also a derivatives-driven bubble.  ie, Margin or the leveraged derivation of money was used to run assets to the moon in 1929 even though the underlying economy was already failing.  Today, that same margin is being used except we call it a derivative.  And instead of 10x margin as used in 1929, we often see magnitudes more margin leverage used today in some derivative contracts.  That means just like 1929 the vast majority of the money used to ram assets to the moon wasn’t even real.   But what is even worse is the products and Frankenstein finance strategies used to ram asset prices have no intrinsic value.  Derivatives are just pieces of paper.  They have no tangible value or asset backing them.   This rally and this financial environment was and is nothing more than an illusion.   And because the money and meaningless products used to create this massive illusion aren’t actually real and are built on incredible leverage, at some point there won’t be enough money in the real world to meet the obligations of all of these levered bets.  Bad bets or useless algorithms aren’t exposed as long as there is ample liquidity and an ever expanding supply of money to paper over the systemic incompetence of these strategies and products but as the pool of liquidity recedes, reality is very different.   When reality sets in we realize most bets are bad bets, Wall Street is leveraged hundreds of times their capital ratios with these bad bets, no counterparty except taxpayers can pay off these bets in the event of a too-big-to-fail bad bet,  Wall Street monopolies have traded counterparties out of the betting game and are holding the bag on their bad-betting strategies and the entire system is incredibly unstable.  We should have banned all banks from trading in derivatives after the 2008 collapse.   Coulda, shoulda, woulda. 

Today’s illusion of financial brilliance is many times larger than 1929.   And as we have said countless times in the last six years, as a result the average stock today is 3x more expensive than in 1929.  The dynamic is even worse for commodities.  Maybe Jeremy Grantham should have thought through his comments before posting his senseless drivel for the world to see.  Instead he will now be known for one of the most ridiculous calls in financial history.  One that will be quoted one hundred years from now just as the foolish calls of the linear mind of 1929 are quoted today.

So, in closing, let me share a heartwarming story.   I have a friend who is a grain farmer.  When he went to sell his harvest last year, he was approached by a firm who was using a derivatives hedging strategy meant to ride the commodities wave higher.  So, rather than sell his harvest, this firm asked him to join their pool with other farmers and hold their grain off the market while waiting for higher prices.  Or, should I say this dynamic actually forces prices higher by creating an artificial imbalance in supply & demand dynamics.  And this firm would use a derivatives-based scheme to give him essentially unlimited upside with little downside risk.   Of course, the downside risk is limited as long as counterparties honor their derivatives contracts.  Now, what if this artificial supply constraint was repeated countless times across the country in concert with other trading firms, countless farmers and Wall Street artificially limiting the supply of food available?  What would be the outcome?  Just something to think about.  (By the way, I told my friend to sell his grain  in the first half of 2011 and again on Labor Day weekend.)  

Did you really think Wall Street’s balance sheets were cleaned up?  Their massive leverage we wrote about before the 2008 collapse has only been reigned in on overvalued hard assets.   That is, if you appreciate their nonsensical values assigned to those assets.  Overvalued hard assets that continue to fall in value and thus create ever-deteriorating balance sheets.  That doesn’t even begin to address the exposure to massive leverage in worthless gambling schemes that have absolutely no intrinsic value.  Dodd-Frank reform?  Hahahaha.  You have got to be kidding me.   Bought and paid for government.  Now, that’s more like it. 

sc

posted by TimingLogic at 11:06 AM

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