Tulips, South Sea Bubble & Commodities
“Hundreds who, a few months previously, had begun to doubt that there was such a thing as poverty in the land, suddenly found themselves the possessors of a few bulbs, which nobody would buy, even though they offered them at one quarter of the sums they had paid for them. The cry of distress resounded everywhere, and each man accused his neighbour.”-- Charles Mackay: Extraordinary Popular Delusions and the Madness of Crowds
By Steven Spencer
December 2008 : Whatever happens in December will make little difference to the Armageddon that has hit the commodity index funds, which we predicted and about which we have written continuously over the past year. Since the middle of 2007 our systematic model has been detecting historical anomalies in volatility, which have become more violent and frequent throughout 2008. The Levy Report into the commodity bubble focuses strongly on the Commodity Futures Trading Commission's disclosures of July 15th, as the market turning point.
The volatile surge in prices was entirely based on speculative frenzy, fuelled by deliberately selective reports from vested interests. As a chief economist of a major mining company said about certain analysts on China: “China first, analysis second.”
From the institutions that brought you the NASDAQ boom-bust, CDOs, SIVs, the sub-prime crisis and credit default swaps, came arguments for the sustained commodity price bubble that beggared belief. Agricultural land would run out in China, copper would run out, oil would run out, sugar, corn, wheat would all run out and the world would starve. What they had actually started was the biggest game of pass-the-parcel of all time. The one fundamental that was driving the price was the fact that the price had gone up yesterday and some investors had missed it. Beyond that, all arguments were unnecessary. Tulip mania indeed.
From now on, conditions are likely to be very different. Not only should the markets continue to decline as they overshoot to the downside and then stagnate for a very long period. We believe this will be a long, deep and tough recession and we discount all the arguments about cutbacks in production supporting prices. The long period of sustained high prices has stimulated over-production of every commodity and we expect conditions of oversupply to extend for years.
Steven Spencer Manages Traderight Global Resources Fund
CRB Commodities Index ( Source- BigCharts)
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