The Commodity Bubble

I’ve mentioned before that the last bubble to pop – of course, excepting the massively manipulated equity market – will be the commodity bubble. The popping of the commodity bubble will (somewhat) wipe the smug grins off the faces of the commodity countries – Australia, Brazil, Canada and Russia to name a few – and accelerate the demise of their internal bubbles, notably in housing.

A couple of straws in the wind have shown up. The first is, of course, the collapse and probable theft of customer funds at MF Global. Apparently the Fed likes this, because James Bullard, head of the St. Louis Fed, in a CNBC interview, cited  MF Global as an example of how failure should work. Seems entirely consistent with the Fed’s normal behavior – company goes bust, bankers scarper with the customers’ money, 99% left holding the bag one way or another. However, it is really another example of the increasingly in-your-face nature of theft and graft by the political elite.

It’s almost comforting to find a spate of financial scandals which involve simple, easy-to-understand illegal and unethical behavior, after all these years rummaging around in synthetic mezzanine collateralized debt obligations and the like. Three have particular salience right now:

  • The Congressional insider-trading scandal. Spencer Bachus is the poster boy here: one minute he was getting highly confidential briefings from Hank Paulson and Ben Bernanke on the parlous state of the economy; the next he was loading up on contract options on Proshares Ultra-Short QQQ, a synthetic ETF designed to maximize profits when the stock market falls, and which is emphatically for day traders only.
  • Olympus, which now seems to have channeled more than $2.5 billion to yakuza crime syndicates, including the country’s largest, the Yamaguchi Gumi.
  • MF Global, which increasingly looks as though it stole money in customer accounts.

However, it is a mistake to believe that these behaviors go unnoticed. Those of the 99% that invest may not be occupying anything other than their chairs, but they are not asleep.

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

As the market participants step aside because they have lost faith in the system, another reality intrudes.

Long-vacant New Orleans warehouses are bursting with metals such as copper, lead, aluminum and zinc as manufacturing slows down with the economy. The stockpiles that are accumulating are good news for owners of local warehouses, but the trend has touched off a rare scramble for specialized warehouses in certain parts of the metro area.

That reality is inventory. With interest rates low, the cost of carry is small. But bubble inventories mean that price declines can rapidly accelerate as long holders attempt to beat the rush to exit losing positions. And they will. And this time small speculators may not be so quick to catch falling knives, having seen that they are just financial cannon fodder for the politically connected.

Commodities are global, and so will the bust be. How much copper is stuffed in warehouses in China? No-one knows, but I suspect that we are soon to find out.

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  • Tyro  On November 18, 2011 at 3:42 pm

    If the REE export cutbacks indicate anything, there is likely no local shortage of specialized warehouses…

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