A quick look at commodity prices says that the growth story is still strong. These two indices of industrial commodity prices today are both at new highs for the year. This is undoubtedly a reflection of an ongoing and significant rebound in global activity. As such, it supports an optimistic view of the future of U.S. growth prospects. Last year was a horrible year, but with action like this, the memory is fading fast.
This is bullish.
ReplyDeleteBut having looked at the NYMEX closely, we also seem to have "commodity investing" going on.
The world is awash in capital, looking for a home. With the advent of commodity funds and other mechanisms to invest in commodities, we can see investors spiking commodities, even as demand is just so-so.
The oil markets are a case in point. OPEC is witholding 4 millions barrels of oil a day from the market (out of daily demand of roughly 84 mbd), and demand is still not going up. But NYMWX speculators (some suspect manipulators) are able to double prices in last year.
Demand for oil is inelastic in the sort- to medium-run, so this speculative push in oil prices is somewhat sustainable.
I don't know the situation in other commodities, but it seems many have become speculative markets. In the long-run, this will probably sort itself out, but for now it appears that markets can be gamed. Certainly commodity-dependent exporters would have incentive to game the NYMEX, and would have resources to do it.
The Hunts once gamed the silver markets, and had limited resources compared to sovereign funds.
As the identities of traders on the NYMEX can be effectively cloaked, no one can conclusively say if the NYMEX is being gamed now, or not. The CFTC has not the tools or investigative ability to determine that, one way or the other.
Interesting to watch, however.
Connect the dots between 2004 and 2010. Inflation is roaring.
ReplyDeleteIt is no wonder that oil producers are leaving oil in the ground. Would it be prudent to pump it and put the money in T bills?
It is amazing how rapidly sentiment has shifted from treasury love to treasury hate...it's all so obvious now...obviously. Where are the David Rosenbergs and 100 other sell-side genius guys who were saying all day every day 'Get long, yields with a 2 handle at year end'? Now its all so obvious to everyone that yields are heading to 5%...forget we are in the midst of the biggest household deleveraging of all time, unemployment is still monstrous, demographic pressures are starting to hit, inflation is non-existent, base rates arent moving anytime soon etc etc etc....to me it seems now is the best opportunity you've had in a while to get long fixed income....not sure about the TBT bet Scott!
ReplyDeletePS..and this is NOT a criticism, merely an observation but it strikes me there is little or no quantitative reasoning to your work...it always comes across as qualitative economics of common sense...would you say that is fair or do you do lots of quanty stuff behind the scenes and we only enjoy the logical presentation of your top-level themes and ideas?
ReplyDeleteLab-Rat: how can you say that inflation pressures are non-existent? What about these charts of commodity prices? And gold prices?
ReplyDeleteAs for my style, I am definitely a qualitative analyst, not a quant by any stretch. I'll take common sense any day over equations.
Benjamin: I've commented before on the issue of how significant commodity speculation is to commodity prices. I'm sure that speculators account for some of the increase, but not the bulk of it. To speculate in commodities you have to effectively buy them and store them. To think that virtually every single commodity in the world is being stockpiled like crazy is a stretch for me. Lots of the commodities that are rising can't really be stockpiled to any meaningful degree with (e.g., corn, burlap, sugar, etc.).
ReplyDeleteHowever, an inflationary monetary policy can cause the world's demand for physical things to rise, and it takes commodities to make those things.
Regardless of how significant speculative activity is, it can't account for the lion's share of price action. At the end of the day, commodity prices are rising because demand for commodities is rising, and that must have something to do with global economic activity rising.
We'll have to agree to disagree on inflation (isn't it funny how the inflation vs deflation thing really has become like a religion or your favourite sports team?? you become so blinded to the other sides POV!!)....but hoping we dont get to here.... http://moneytipcentral.com/wp-content/uploads/2009/03/zim-dollars-toilet-paper.jpg
ReplyDeleteI am no stranger to devalued currencies. I have a bundle of 1 million peso notes from Argentina, and a friend recently gave me a 1 billion dollar Zimbabwe note. Great collectors' items!
ReplyDeleteIf there is one statistic that all but assures that a deflationary scenario is very unlikely, it would be the weak dollar. Deflations usually require significant currency appreciation relative to other currencies and relative to physical benchmarks such as gold.
Scott,
ReplyDeleteIt appears that commodity prices are rising on the margin but shipments are falling if rail employment is any indication...the transport vehicle for commodities.
Seems sorta strange that Buffett's BN is shedding the most jobs.
Rail Jobs Sink to New Low
Mid-November U.S. workforce down 1,923 from month earlier
The U.S. lines of the seven Class I freight railroads cut 1,923 jobs in the month to mid-November, leaving their combined workforce at a new low of 147,097.
Reports the carriers submitted to the Surface Transportation Board show most of the cuts coming in track maintenance crews. That job category accounted for 33,561 employees at mid-November, down from 34,622 at the same point in October.
The largest rail jobs category – train and engine workers – also shrank in the run-up to the Thanksgiving holiday period. Class I carriers trimmed their T&E force to 56,447 from 57,198 a month earlier.
In all, the November STB report shows the fourth straight monthly decline since a brief gain in rail jobs in July, when new and tighter work-hour rules took hold.
The latest total is down from 149,020 workers the Class Is reported for October, 159,511 in January and 163,020 in November 2008.
The STB requires the largest group of railroads to report their workforce as of the first payroll of each month. The companies then have until month’s end to mail in those figures, and the agency assembles them into a single report.
The agency also ranks each month’s total against the average for a base year of 1967, when the report began. Back then, Class I rail employment averaged around 600,000. The latest level is just 24.1 percent of the 1967 average, and down from 26.2 percent at the start of 2009 after the big railroads cut jobs almost steadily through the year.
For November, BNSF Railway with the second-largest rail workforce made the largest job cuts. Others trimming their payrolls were Union Pacific Railroad, the largest employer, plus CSX Transportation and the U.S. units of Canadian Pacific Railway and Canadian National Railway.
http://www.joc.com/node/415493
Scott-
ReplyDeleteWell, not sure about oil.
As stated (I am sure you know this), oil demand is medium-term inelastic.
If traders game the price higher on the NYMEX, that is what businesses and consumers will pay, for now.
I buy the same amount of gasoline at $2 a gallon and $4 a gallon, for the next year or two. Then, I buy a new car.
Writ small, I just described global demand for oil. If exporting nations can game prices higher on the NYMEX, they will hold. The market does not collpase right away (within reason, such as oil under $120).
We get gluts at some point, real hangovers, as production rises, even as consumers begin to adjust.
Well, I can't prove this, so there it lies.
Like I said, oil is a fascinating market to watch. I see one more spike coming--and then a very long-term decline in global oil demand, as it becomes a backwater industry. Man is way too inventive to suffer a market that is expensive and erratic.
Another thought: If I were Putin, I would know that my survival is tied to oil revenues.
ReplyDeleteA Putin operative would regard it as ethical, moral and patriotic to game the NYMEX. It would ne unpatriotic not to try--and perhaps fatal.
At the least, we must anticipate that sovereign entities would try to game the NYMEX--it is in their interest to do so, and law means nothing to them.
Okay, so how would they do it?
Sovereign oil producers must continually decide whether to sell their oil at the prevailing price, or pump less now in the hopes of selling it tomorrow at a higher price. "Gaming" the oil futures market is going on constantly. Sovereign states speculate on higher prices by withholding production; other non oil producing speculators must buy oil now and then store it somewhere (in tankers, for example). Oil producers have an almost unlimited capacity to store oil, but the rest of the market does not.
ReplyDeleteI'm inclined to believe that the late Jude Wanniski was correct, when he blamed big fluctuations in oil prices on erratic monetary policy. Bad monetary policy sets in motion speculative price swings; big swings in price cause subsequent changes in drilling activity; changes in drilling activity take a long time to be reflected in changing levels of output. Similarly, demand reacts very slowly to price changes as you point out. It all adds up to something that is not very easy to predict. I am certainly not an expert when it comes to predicting oil prices.
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