Thursday, March 29, 2012

Is The Commodities Bubble About To Pop? Again?

Even though the Nasdaq and S&P are making new highs off of the 2011 mini crash, we have talked about how the Nasdaq and Dow Transports have not. If we look at the behemoth copper, gold and minerals miner Freeport McMoran, we see that it isn't anywhere near making a new high. In fact, it is moving the opposite direction.  Exxon, the U.S.'s largest oil producer, hasn't made a new high in about a year and a half even though oil keeps running higher. Newmont Mining, North America's largest gold producer the last time I looked, hasn't made a new high in seven calendar years.  Yet, commodities are still levitating at very high levels thanks to Wall Street manipulation.  For now.

If fundamental demand for gold, as an example, remains robust, why aren't Freeport and Newmont moving higher?   Well, fundamental demand for gold isn't robust as we wrote on here some time ago.  Additionally, there simply isn't enough liquidity to drive all of these assets into bubble territory.  But, leverage is being used to replace the liquidity shortcoming in financial markets.  Leverage that is on Wall Street balance sheets.   Leverage courtesy of free taxpayer money given to financial criminals courtesy of the Federal Reserve.   Unfortunately, leverage in the underlying economy, credit, cannot be replicated if there is not enough fundamental demand.  Hence, the divergence between financial markets and the economy.

It's been many years since I have made this statement, but smart money knows that equities lead base commodities in directional price movements.  Equity price movements anticipate production demand based on increased liquidity and, therefore, increased economic activity that results.  And stocks always lead the economy in expansions and contractions for the same reasons.  But, we are no longer in a working economy and we are never going back to that world.  Ever.  That Goldman Sachs just said this is the best time in a generation to buy stocks says what?  It says they are still living in the bubble of incompetence.  That's all it says.  It is no reflection of the real world or anything happening in the real world.

The main reason I put this chart up is to get an appreciation of the massive speculation we have seen in commodities-based equities. Up until a decade ago, Freeport never traded more than 30 million shares in any given month as shown by the lower horizontal line. Look at me now. 500 million and even one billion shares in a single month. Commodities derivatives (leverage) have seen an even larger explosion.  But, volume in the overall market, and as shown in Freeport below, is waning as liquidity again dries up in the global economy.  The only dynamic levitating financial assets is leverage (derivatives).  And, who is levered?   It is Wall Street.  It is the financial system.  Again.

What happens when financial demand for commodities outstrips end market demand?  It's a dynamic we have discussed no less than a dozen times on here.  Pull up a chair as we witness the glory of mutually assured destruction or MAD; the perfect acronym to describe the financial beast before us.

Click on graphic for a larger view
posted by TimingLogic at 11:19 AM

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