Bubble? What bubble?

Over the past 9 months markets have rallied from the sublime to the ridiculous in the risk-asset melt-up since March. Just one of the many areas where prices have gone delusional once more is commodities. The Canadian stock market with our rocks and trees concentration has been a major recipient of melt-up euphoria, leading some familiar culprits back to the “decoupling” banter of 2007-2008: “Commodity bubble? What bubble?” they say, wide-eyed and hopeful.
The flow of the US carry trade into our Canadian stock market speaks for itself in this picture of the falling U$ and it’s near perfect negative correlation with the Canadian TSX year to date:

Today's Bloomberg article “Aluminum Bubble Concerns Mount as Surplus May Add 29%” highlights some important facts about the present supply/demand disconnect in pricing:
“This year’s 33 percent rally in aluminum and the 48 percent jump in the S&P GSCI index of commodities are prompting concerns of a bubble in the making. China, the biggest aluminum producer, is at risk from an absence of consumer demand from trading partners, said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. Exxon Mobil Corp. Chief Executive Officer Rex Tillerson said Nov. 13 oil prices aren’t supported by market fundamentals.
Investors are “chasing commodities” and there is a risk of bubbles emerging, Nouriel Roubini, the New York University professor who predicted the global financial crisis, said Nov. 20 in a speech in Lisbon…Commodities will likely attract a record $60 billion this year as investors seek to diversify their assets, Barclays said Nov. 19. That’s helped stoke prices for everything from copper to zinc. Lead added 140 percent this year as stockpiles tripled and copper 127 percent as inventory expanded 25 percent…
Copper production will outpace demand by 344,000 tons this year and 210,000 tons next year, Barclays estimates. Refined copper imports by China, the world’s largest consumer, slumped 40 percent last month, according to customs office data today…
Improving profits and rising output may coincide with a release of stockpiles onto the market. As much as 75 percent of the warehoused metal monitored by the LME is tied to transactions that may unwind, according to London-based research group CRU. The proportion may drop closer to 50 percent of the total next year, CRU estimates.
“This is a financial-market driven move at the moment rather than a fabricator and manufacturers move, so it is very dangerous to call a top,” said Sean Corrigan, chief investment officer of Diapason Commodities Management SA in Lausanne, Switzerland. “Once this momentum has exhausted itself the background picture is not that positive.”
My assessment: buyer and holders, beware.

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