When investment demand becomes momentum

For the past few years, we have noted that ballooning capital flows into commodities have caused a momentum unto itself frequently at odds with fundamental concepts of end use supply and demand. Hedge funds, commodity-based-exchange traded funds and institutions looking for alternative investments to under-performing equities the past 10 years have become a price force on to themselves. This can present real challenge to those of us who are trying to follow rational investment process. Investment-momentum-money is fickle, largely trend-following and often irrational. It typically buys just to buy and sells in panic.
This article on oil makes the point well: see Oil should be around $10 a barrel: Annalyst :

The price of a barrel of oil would be closer to $10 if the commodity wasn't traded as an investment instrument, given the record-high levels of U.S. oil inventories, Peter Beutel, president of Cameron Hanover, told CNBC Monday.
“I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn't be anywhere near where it is,” Beutel said.
“We have so much oil right now, more than we've had in 27 years. Why is it 27 years? Because that's how far our records go back. It's probably the most in 50 or 100 years,” he added.

Higher prices the past few years have encouraged the usual response: much higher exploration, innovation and production, ballooning world supply. Passionate arguments aside, the price of oil today makes no mathematical sense in the lower demand world of the post-credit-bubble economy.

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8 Responses to When investment demand becomes momentum

  1. Anonymous says:

    The marginalizing of the Individual Investor
    http://www.international-economy.com/TIE_Su10_MalmgrenStys.pdf

  2. Anonymous says:

    Come on folks, let's get real!
    A same or similar argument could be said for gold, if it would be used only for jewelery or tooth filling…

  3. Anonymous says:

    Our ever shrinking pension payouts: Millions now facing the lowest returns on investments since records began
    http://www.dailymail.co.uk/news/article-1307497/Pensions-payouts-shrinking-annuity-rates-nose-dive.html

  4. Anonymous says:

    Danielle,
    I'm on board with about 95% of what you say, and I have actually sent clients of my own excerpts of notes because of your common sense wisdom.
    That said, this Beutel comment is sheer nonsense, and I'd be surprised if you don't see that. I would HIGHLY SUGGEST when you have about 20 hours of free time that you go visit this blog and read every single blog post from the past 3-4 years.
    http://gregor.us/
    Just one quick point, looking at current inventories is stupid without considering future demand growth (China) and future supply contraction (Mexico). We are much closer to hitting the wall then many realize.
    Oh well, while Beutel tries to gain fame with outlandish predictions, I'll make money being long oil and oil stocks the next 10 years.

  5. Anonymous says:

    FOMC minutes translated………….
    http://market-ticker.org/akcs-www?post=165685

  6. Anonymous says:

    Surprised to see an article in the Globe saying Canadians are buying bigger vehicles now due to incentives. The press continues to push the view that Canada is far different in terms of recovery than the US. I doubt it. We may in the short term appear better but make no mistake if our American neighbors continue to struggle to recover in time we will too.

  7. Anonymous says:

    Zero Interest Rates, the Cruelest Tax of All
    Interest-Rates / US Interest Rates Nov 26, 2009 – 10:25 AM
    By: Sarel_Oberholster
    Interest-Rates
    Best Financial Markets Analysis ArticleThe zero-interest-rate policy of the Fed is sold to the public as a benign economic rescue in the public interest. The stark reality is that this policy is a disguised tax implemented by the Fed. It takes income from savers and hands it as a subsidy to borrowers. It also facilitates and funds the fiscal deficit policies of central government. Such a well disguised tax is a boon for governments. The cruelest tax of all is this 100 percent tax on interest income, disguised and rationalized as “good” policy.
    The zero-interest-rate policy deserves closer scrutiny. Would a saver willingly agree to an economic environment of zero interest rates? Certainly not. Would a debtor prefer a zero interest rate? Absolutely. The saver and the debtor would, under normal, willing-economic-participant conditions, negotiate a “price” for the use of money saved. That price for the use of funds is interest.
    The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver. Counterfeiting money through policies of unlimited liquidity provision is a “price control” over interest rates, instituted to force interest rates down and eventually spiral them downwards out of control to zero. The interest income of the saver is eventually taxed to extinction at zero interest rates.
    It is basic economic theory that price control actually reduces the availability of the item subject to the control. It should therefore come as no surprise that available credit is falling despite unrestrained liquidity provision at zero interest rates. Banks have no direct cost implication when they hold funds at zero (apart from opportunity cost). Thus there is no direct cost penalty for doing nothing.
    Not exploiting a lending opportunity in a high default-risk environment, where the margin between a zero-interest cost of funds and the lending rate is insufficient to protect bankers against default risk, is an entirely rational choice for bankers. While the intended consequence is to increase the availability of credit, the ultimate “zero-rate” intervention actually reduces credit availability. One wonders how significant this unintended consequence would be in the absence of Cash for Clunkers, the now-expanded subsidy policy for housing purchases, and the constant Fed, Treasury and Federal Housing Finance Agency support for Freddie Mac and Fannie Mae. We shall find out when fiscal deficits can no longer fund such excesses.
    Savings will migrate to term assets for meager interest income but that income has more to do with a term premium than with interest, the cost for the use of funds. The stated policy is to start the yield curve at zero and to use all the influence and tools of the Fed to apply downward force on the slope of the yield curve. No one has any moral standing to defend any policy that dispossesses the interest of the saver; however, the indiscriminate redistribution of this interest tax is exceptionally unjust.
    “The central bank enters the negotiation between saver and borrower, and by counterfeiting money it destroys the negotiating base of the saver.”
    The normal standards for a tax are that it must be fair and it must be evenly distributed. The “for the public good” argument is that tax may be levied disproportionately usually with reference to some wealth measure. In simple terms, the rich must pay more and the poor must pay less.
    The tax of a zero-interest-rate policy fails dismally when it is tested against this framework. There is no discrimination in taxing savers' interest. All savers are taxed by a zero interest rate. Some savers, usually the wealthier and more sophisticated savers, can institute countertax measures and are able to avoid or escape the zero-interest-rate tax to some extent. Most savers can't, and they fund the redistribution and subsidies to the borrowers.
    Indiscriminate principles are applied in allocating the interest subsidy. Its distribution is not monitored fairly and equitably in the interest of society. The recipients are random borrowers, selected with no reference to the wealth, income, or other discerning standards that would normally apply. It is appropriate to ask by what standards society decides that a homeowner who bought a property priced beyond his means must be subsidized by a pensioner who had saved to survive the income drought of old age? Why must a big bank have access to zero or near-zero cost of funds to carry all those losses making loans while an ordinary saver can no longer afford his child's tuition?
    The zero-interest-rate tax strips the interest income from savers and hands it to government, and morally justifies this as stimulating the economy through deficit funding. The justification is that it is of no use to run up huge deficits if it involves paying a high interest rate. Strip the interest and hand it indiscriminately to over-extended borrowers, many of whom used the borrowings to speculate on asset inflations. Strip the interest and hand it to the banks to “repair” their balance sheets and to “carry” the bad debts. Strip the interest and hand it to the developers who overinvested in property, capacity, or trading. Strip the saver of interest to fund the carrying of compounding, unliquidated losses.
    How totally one-sided! Rip off the savers and give to the borrowers. Not even the socialist dictate that everybody should contribute according to ability and receive according to need can contain the injustice of a zero-interest-rate-policy tax. Surely nobody can have a zero need and a 100 percent obligation to contribute. Neither can anyone claim 100 percent contribution from savers against a zero contribution from borrowers (the bank margin excluded).
    It is not fair, moral, or just for central banks in their quest for self-preservation to strip savers of their income. The phrase, “interest rates will remain at zero for longer” simply means the imposition of hardship on the saver for longer. Placing the weight of the interest-tax burden on a small and responsible portion of society is self-serving behavior by central bankers who have the encouragement, support, and consent of central government.
    Robbing the saver is immoral. The indiscriminate redistribution of income rights from the responsible and the cautious to overburdened borrowers, speculators, government, and risk-seeking banks serves not the short- or long-term interests of economic society. Rationalizing this mean policy and indiscriminately cruel tax into a benign and caring action by central banks is certainly folly.
    Sarel Oberholster is a South African living in Johannesburg, Gauteng province. He is an economist by training, a specialist financial engineer by craft, and an inquisitive spirit by nature. He has been involved in banking for over 30 years. His quest for understanding complex economic phenomena is his muse for writing and he shares his insights on his blog. Send him mail. See Sarel Oberholster's article archives. Comment on the blog.
    © 2005-2010 http://www.MarketOracle.co.uk – The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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