The Commodities Bubble

[Owlet]

"Yes, commodity bubbles happen, but eventually reality sets in and brings the price back down to reality. You don’t get 3, 4, and 5 standard deviation events. A four standard deviation price rise falls outside 99.994% of all outcomes—one in 100,000 years; a five standard deviation price rise is about one in 2 million years. That pretty much covers the time since our ancestors beat things with big sticks.

But wait a minute. The standard deviation of price rises for iron (5), coal, copper, corn and silver (4), sorghum, palladium, and rubber (3.5), flaxseed, palm oil, soybeans, coconut oil, and nickel (3), and so on down through jute, cotton, uranium, tin, zinc, potosh and wool (2) are so unlikely that they quite simply could not have happened. Individually. Together, the likelihood that we’ve got an unlikely boom in almost all of the 33 commodities? All at the same time? Impossible. Cannot happen. Not in the lifetime of our sun, let alone our planet.

<snip>

Why? Financialization. Just as homes became financialized (in many ways, including serving as the collateral for “ATM” cash-out home equity loans), commodities became thoroughly financialized. (So did healthcare and death, with peasant insurance and death settlements—topics for another day.)

Here’s the reason. Believe it or not, commodities markets are tiny; except for soy, oil, and corn they are smaller than tiny. Managed money is huge—tens of trillions of dollars floating around the world looking for high returns. US pension funds alone are three-fourths of US GDP–$10 trillion give or take. If you put even a fraction of managed money into commodities index funds, you blow up the prices.

<snip>

Now, to be sure, the whole thing is going to blow up, in what Frank Veneroso calls a commodities nuclear winter. As prices rise, consumption of the commodities falls (as we are already observing) both through substitution and through conservation. At the same time, additional supplies come on line. Real world suppliers feel the imperative to slash prices to have some actual real world sales. They cannot forever live in never-never land with rising prices and collapsing sales.

There are many shoes that will drop, bringing back the Global Financial Crisis with a vengeance. Commodities crash, default by a Euro periphery nation, failure of a Euro bank, or the closure of Bank of America or Citi. All of these are likely events, less than one standard deviation from the mean; probably all of them will happen within the next year.

No matter what the triggering event is, that commodities nuclear winter will happen.

Soon.

Sooner than later."

Full article here

[On the Road]

1. This is One Bubble

that will benefit everyone when it pops.

The question is where the money will go. Stocks, bonds, real estate -- all are more beneficial than having the money tied up in commodities futures.

[Warpy]

2. The commodities market has always been sucker bait for individuals

but once the hedge funds and investment banks started getting into them, they found it was really easy to create commodities bubbles. Once small time suckers (from individuals to pension funds) see a bubble building and rush in, the big money is starting to pull out. The suckers are left holding the futures as the bubble pops. There's been a lot of money left to siphon off the upper middle class and smaller institutional investors and that's exactly what these markets have been doing.

An unintended consequence of the spike in food prices was the Arab Spring.

Eventually the bubbles will get smaller and smaller and the money will rush back into stocks or bonds or snapping up foreclosed housing or something yet to be determined. However, the commodities bubbles are how they're stripmining the last of the wealth from the nearly destroyed middle class.

[Yo_Mama]

3. That pretty much sums it up

The relative size of the commodity market makes it very responsive to changes in investment money.

But real economies are acutely sensitive to changes in commodities, so this is a classic example of money shifts causing damages to "real" economies.