Over the past several months, I have repeatedly expressed skeptism on the whole “demand is driving commodity prices” rhetoric. I have typically received the most angry emails and comments when I have pointed out that a slowing global economy will naturally demand less commodities and that prices should be going down not up. Well an interesting story this week on revisions now being made to the estimated influence that speculators have had on energy markets over the past many months, see Revised data show speculators controlled nearly half of NYMEX oil futures :
“(Reuters)—A quiet data revision that has boosted by nearly 25% the number of oil futures contracts U.S. regulators think are held by speculators. And that revelation is raising eyebrows in the energy trading community.
The revision means that speculators controlled 48% of the open interest in NYMEX crude oil futures and options as of July 15—compared with just over 38% under the previous classification.
“That’s huge when you look at the numbers,” said Phil Flynn of Alaron Trading in Chicago.
“It changes the whole way you look at the recent moves in this market.”
As oil and other commodities have been falling sharply over the past few weeks, the Canadian dollar has predictably plunged with them: see Party's over for once red-hot Canadian dollar.
It seems that following a lengthy period of utter insanity, natural correcting mechanisms are once again restoring some equilibrium to world markets. There will be more of this to come over the coming weeks and months as those who thought they were “investing” in commodities and the “China story”, will be forced to realize that they were in fact speculating on lots of hope and very little common sense.
As commodities fall, the US dollar is strengthening. This is the logical outcome. Commodity prices were driven to bubble-heights as global masses clamored on to the hate-the-horrible-US bandwagon. And now, the rest of the world is waking up to the reality that they are not better than the US. And in many cases other countries are economically and socially worse off than the US.
China is not the new Saviour. Like the rest of us, their government and people are not brilliant. They were fortuitously ready over the past few years to pump out lots of cheap goods to a western world addicted to spending via low rates and dumb credit. Jeremy Grantham (a fellow money manager who, like me, has been discounted as bearish these past couple of years) was quoted in an interview this week:
“Grantham, who is amazed at how smart investors failed to see the housing bubble and ensuing crisis, is also surprised by those who express little concern about China's centrally planned economy and the strong likelihood of slower growth.
“Why have they become wonderful economists?” Grantham said. “What they have done is they have become wonderfully lucky like the rest of us.”
The odds that China, a major driver of global economic growth this decade, will stumble seem extremely high, he said. A Chinese downturn would send shockwaves through many economies that depend on its voracious demand for raw materials.”
Canada, we have been forewarned.
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