Oil below $120: Has the commodities bubble been pricked?

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NYMEX Crude oil futures dipped below $120 today for the first time since May.

Furthermore, Bloomberg reports that “Plunging prices for cocoa, natural gas and sugar are sending the Reuters/Jefferies CRB Index of 19 commodities to it biggest one-day decline since March.”

Bloomberg cites the slowing U.S. economy, rising inventories, and prospects for improved production of various commodities for the broad-based declines.

Of course, commodity trading is highly volatile, and this may just be a slight retrenchment before the march higher resumes, as commodity bulls argue. OTOH, could the commodity bubble be deflating? There must be financial players in the commodity market getting squeezed by their >$20 loss in current crude oil contracts. If the margin calls start coming, we may see further sell-offs…

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  1. Anonymous

    13: The General Theory of the Rate of Interest

    Keynes argues that it is impossible to determine the rate of interest with reference to only the demand for savings and the propensity to save, though he leaves a detailed look at the classical theory of interest to the next chapter….

    So we have three motives for holding money: transactions, precautionary and speculative. Now we come to another paradox of the development of capital markets: deeper capital markets make it easier for individuals to sell (liquidate) their assets, so reduce the need for precautionary money balances, but open the possibility of speculation and cause fluctuations in liquidity preference because of the speculative motive. Keynes believes the interest rate will have more effect on money holdings via the speculative motive than via the transactions and precautionary motives. It is the balance between bull and bears on the bond market, then, that determines the interest rate for a given supply of money.

  2. Anonymous

    The old fudge packer said this as well:

    There may be, for example, some fairly stable proportion of the national income more than which People will not readily keep in the shape of idle balances or long periods together, provided the rate of interest exceeds a certain psychological minimum; so that if the quantity of money beyond what is required in the active circulation is in excess of this proportion of the national income, there will be a tendency sooner or later for the rate of interest to fall to the neighbourhood of this minimum. The falling rate of interest will then, cet. par., increase effective demand, and the increasing effective demand will reach one or more of the semi-critical points at which the wage-unit will tend to show a discontinuous rise, with a corresponding effect on prices. The opposite tendencies will set in if the quantity of surplus money is an abnormally low proportion of the national income. Thus the net effect of fluctuations over a period of time will be to establish a mean figure in conformity with the stable proportion between the national income and the quantity of money to which the psychology of the public tends sooner or later to revert.

  3. Anonymous

    To sum up this crap:

    An unanticipated decline in prices redistributes wealth to creditors from debtors, who presumably became debtors because of a higher marginal propensity to spend from wealth or other available resources. Since there is so much more inside debt than outside money, even a tiny difference between debtors and creditors in marginal propensities to spend could lead this Fisher effect to swamp the real balance effect. Fisher (1932, 1933) also argued that, given the level of outstanding nominal debt, the fear of costly bankruptcies, induced as falling prices increase the real value of debt, would cause a scramble for liquidity that would further reduce asset and commodity prices (cf. Dimand 1994). The individually rational scramble for liquidity by debtors would end up increasing their real burden of debt in aggregate: “By March, 1933, liquidation had reduced the debts by about 20 percent, but had increased the dollar by about 75 percent, so that the real debt, that is debt measured in terms of commodities, was increased about 40 percent” (Fisher 1933: 346). Fisher’s attention was focused on the debt-deflation process by the asset price deflation that began in 1929 and that reduced by 11 million dollars Fisher’s net worth of 10 million dollars. This analysis provided Fisher with an explanation of why the stock market crash of 1929 was followed by a lasting, major depression while the deflation of 1920-1921 was followed by a much briefer depression.

  4. Juan

    A mid-19th c ‘fudge packer’ –

    a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity.
    At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis.
    At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. … Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere… Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.

    Same funny old bearded guy was inclined to see interest rates, beyond short-term fluctuations, as being capped by avg rate of profit of production capital.

    Commodity prices? Rumour is a resource hedge fund blew up, today’s decline = forced liquidation.
    But that is _only_ a rumour.

  5. Anonymous

    The question to ask, thus, is who was over-leveraged in the biggest wrong speculation? Is a hedge connected to oil, gold, banks….

    Also see: It is rumored that The Fed is a sect which originated in medieval Bulgaria, where its followers were called bogomils, but when they spread out of the country they were called buggres (from the ethnonym Bulgars).

  6. Juan

    ah yes, and infighting among the vulgars gave rise to sects of wristonites who, equipped with special communicative powers, (and even while drunk) led a complete transformation into the New Financial Era, proudly and fully astride the multiplying estado novos. ne’ertheless old rumours linger in the countryside, where, like duendies, they demand their due.

  7. Michael McKinlay

    What we are seeing is the collapse of the world economy. Commodities are falling due to demand destruction and the destruction of money due to the credit collapse.

    The process is now accelerating due to the destruction of money through the destruction of debt and the absence of new debt due to spreading recessions in the US, the EU and Japan to maintain money creation for the debt spiral needed for fractional reserve banking.

    Get ready for the great deflation that will begin the implosions of fractional reserve banking institutions around the world.

  8. Anonymous

    The Pixies of Devon who disguised themselves as bundles of rags (to lure children into their play) are like the hedge fund traders that are ready to bait the rubes with covered bonds…

  9. Anonymous

    This seems (highly) on topic, Re:
    "commodity trading is highly volatile, and this may just be a slight retrenchment "

    See>>>: The sprite trap is created from a blackthorn stave and copper wire that has never carried electricity. During a ritual process, the copper wire is bound to the stave with red thread and the stave is marked with a Dag (or D) rune.
    Sprite traps are used at night, when the trap is set at the entrance to a home, church, graveyard, or other location where disturbances are taking place. To attract the troublesome entity, a cleft blackthorn stave with a lighted candle is placed in front of the trap.
    After the sprite trap has captured a spirit, it is removed from the location and the red thread is cut with a consecrated knife; the thread is then placed into a prepared witch bottle. If the bottle has been prepared to imprison the spirit, a spell is recited while the thread is placed in it. Finally, the bottle is corked and sealed with red wax before being buried. A thorn bush will be planted on the site.
    It is said that if a witch's bottle containing a sprite is opened, a very angry spirit will escape.
    However there is another way to rid yourself of a sprite, they do not like to be ignored and tend to leave the person they are in pursuit of annoying when the person the no longer gives them the attention they want.

  10. Anonymous

    Yah gotta love this:

    “After one president in the pocket of big oil, we can’t afford another,” the announcer on the advertisements for Mr Obama said.

    The McCain campaign responded quickly, pointing out that Mr Obama’s boasts of taking no contributions from oil companies is misleading because he has received $400,000 in contributions from oil industry employees.

    Aides to the Republican also accused Mr Obama of hypocrisy because he voted for Mr Bush’s 2005 Energy Bill, which gave $14.5 billion in tax breaks to oil companies – legislation that Mr McCain opposed.

  11. Anonymous

    To make this point, Obama cited oil man-turned energy problem solver T. Boone Pickens, who has recently launched an effort to contribute ideas for solutions to the energy crisis. “[John McCain] also knows that if we opened up and drilled on every single square inch of our land and our shores, we would still find only three percent of the world’s oil reserves. Three percent for a country that uses 25% of the world’s oil. Even Texas oil man Boone Pickens – Boone’s not a Democrat – who’s calling for major new investments in alternative energy, has said, ‘This is one emergency we can’t drill our way out of.’ That’s Boone Pickens, an oil man, made his money drilling,” Obama said.

  12. Anonymous

    yes, tboonepickens, the scurrilous one, the man who wants government subsidies of transmission grids for wind farms — not because he gives a flyin’ hoot for wind farms, but because he needs the right of way created by the new transmission grids for the pipelines to carry the water from all the land/water rights he’s been buying up in nowhere Texas.

    call him scoombag pickens, I say

  13. Anonymous

    “Peak Confusion”.

    Can’t imagine that demand destruction
    could kick in so fast. Not quite
    sure commodities won’t gap up
    tomorrow. Could go either way.
    Or something.

  14. scott

    “peak confusion”

    I only saw the word “demand” a few times in the comment section. I didn’t once see the word “supply”.

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