Monday, June 30, 2008
The Demand Word Is Spoken
Slowing global growth signals commodity demand will ``soften,'' the International Monetary Fund said in March. During the last U.S. recession in 2001, the CRB index plunged 16 percent.Well, commodities always seem to be the last bubble, and like all bubbles, they are money-driven, not fact driven. These bubbles will drop when the flow of money into commodities can't be sustained:
Commodities advanced this year during a ``buying orgy'' by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March.
Second-quarter net inflows into European exchange-traded products linked to commodities fell about 58 percent to $800 million from the previous quarter, Barclays Capital said.However the load of belief about oil, for example, is such that I doubt the bubble will break until people find themselves stuck with contracts worth about $20 or $30 less. The problem is that when that happens, they may be worth $40-$50 less.
The smell of money burning in the summer can lead to very unpleasant circumstances!
What happens when this collapse is layered on top of all the other problems? It's going to be very interesting, in a Night-Of-The-Living-Undead sort of way.
Seriously, with housing tanking and the stock market tanking, where else would the money go? It went to commodities, bidding them up. Commodities have always been one of the riskier places to invest, and this will be demonstrated with a vengeance soon.
However the load of belief about oil, for example, is such that I doubt the bubble will break until people find themselves stuck with contracts worth about $20 or $30 less. The problem is that when that happens, they may be worth $40-$50 less.
The oil bubble is going to be real ugly. You cannot let it rot in the fields or run an extra shift at the slaughterhouse. There is coming a time when you have to sell but falling demand means not having to take delivery. Refinery reserves are very low. they ain't stoopid. They are pushing through all that expensive oil and don't want to be caught holding when the tanker captains start begging for a berth.
I was looking up the heating oil pulse. In the US it is mostly in the NE, but a surprising fraction of oil is used for space heating in other northern countries. It's a pretty big pulse - but who can afford to buy that much this year at these prices?
US imports already off 2.7%. We'll see, but this isn't going to last that long.
If the contract buyers can't pay upfront, the heating oil companies won't even be able to buy stock from the wholesalers.
There will be a double pulse of demand destruction with a lag between them, I think. Idled factories and unemployed workers aren't going to demand as much as the commodities investors think.
All the money is being sucked into fuel. The world will slide into a ferocious recession. It's already too late.
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