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First with Financial Comment from Arabia

Premature commodities rally at risk of implosion

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One of the big stories in the UK press last week was The Daily Mail scoop about the number of tankers parked off the British Isles, apparently waiting for oil prices to rise to cash in.

The newspaper got the story completely the wrong way around. The tankers full of distillates and crude signal an oversupply in the market which always leads to a price correction, unless demand picks up significantly.

Depressed global demand

And how likely is that in a world of anemic GDP growth and high unemployment? Even in supposedly booming China gasoline sales are flat despite reports of surging car sales.

Speculators have already driven oil prices up beyond where they ought to be in a largely depressed global economy in which industrial output and exports are substantially down on a year ago, except in China and India where we are supposed to believe that a crash in exports has been offset by a super-surge in local demand.

The trouble with speculation is that it exaggerates the positive and the negative. It spurs oil and commodity prices to levels that make economic recovery harder, while it will turn the fall in prices into a rout when it comes.

And that the present commodities rally is premature ought to be blindingly obvious. There is a tentative recovery from the biggest crash in global industrial output and trade since the 1930s, but it is pretty small and the outlook for 2010 is sub-par economic growth at best.

Liquidity trap

Liquidity from the dollar carry trade is the source of the juice that has fueled the commodity price explosion. But in markets liquidity fueled rallies always end suddenly and disastrously. Eventually there is not enough money to send prices higher and they fall and fall again.

Stockpiles of commodities like those oil tankers reported by The Daily Mail are a harbinger of lower prices, not higher prices. China has also been stockpiling commodities this year in a desperate effort to spend its stimulus money on hard assets.

This sort of speculation can only end badly. That is the problem with government stimulus and intervention on the scale we have seen this year. Governments can not force an economy to grow because beyond a certain point new money actually has a negative impact on GDP, and inflation is a pernicious evil once let out of the bag.

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Written by Peter Cooper

November 22, 2009 at 10:39 am

One Response

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  1. Read this and weep……

    Waiting For The Train-Wreck
    by Martin Hutchinson November 16, 2009

    http://www.prudentbear.com/index.php/thebearslairview?art_id=10309

    sandman

    November 23, 2009 at 6:34 am


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