You Know Global Warming is Over When ...

MSNBC (not Fox!) blames the food riots in Egypt on "speculation" not Global Warming (ie. food shortages due to unusual weather such as the Russian summer heat wave):

Visit msnbc.com for breaking news, world news, and news about the economy

One of my predictions for this year is that blaming every funky weather event on global warming will now get a mocking roll of the eyes not a knowing nod of the head. Happening faster than I thought it would.

Coincidently, I am in a heated debate with a reader over this issue. He blames the food inflation on a series of unusual circumstances that are causing shortages, whereas I ask him why almost all commodities took off in a parabolic surge (a signature of a speculative bubble) just after The Ben Bernank announced QE2 in August. Hard to argue that recent floods in Queensland (coal) or last summer's heat wave in Russia (wheat) or whatever all caused a spike in commodities of all sorts at the same time.  Sure, these events contribute to spikes in particular commodity prices as they occur, and corn jumped a bit after the Russian heat wave, but the parabolic run-up began after the QE2 announcement:

Comments

[Michael]

Supply constraints first started to emerge in the middle of last year. Dry weather in South America, flooding in Australia, drought and wildfires in Russia have all compounded huge supply constraints.

Current US Corn supplies stand at 745 million bushels.
That is the smallest SUPPLY since 1995.

The Corn "stocks-to-use" ratio stands at 5.5%, the lowest since '95-'96. The Soybean stocks-to-use ratio is at 4.2% That is the lowest level since Soybeans became a major crop for US Farmers.

What does this have to do with QE???
Absolutely nothing.

[yelnick]

Michael, you are using a logical fallacy to try to make a point. It may be that the corn shortages have nothing to do with QE, but that does not mean QE has nothing to do with the price spike. You need to deal with the issue of why almost all commodities spiked at the same time (and have continued spiking) - the QE2 announcement.

[LDA]

As I see it, both factors are principal price drivers. The underlying supply/demand shift caused by weather events and the new(er) part of the demand components-ethanol AND the liquidity provided by QE and the subsequent drop in the dollar all have an impact. Both factors are at work. Current prices would not be where they are if not for both factors being at work at the same time. QE was like puring jet fuel on fire given that a number of food/fiber commodities were getting snug before July 1 of last year. How much are prices higher because of QE is one of the best questions ever asked.
LDA

[Michael]

Now, if you want to talk about the position limit exemptions that Gary Gensler over at the CFTC has given to what he has deemed as "Bonafide Hedgers" in last months 4-1 vote by the CFTC Commissioners ( JPM GS, DB, etc. being grandfathered in ) then that is another argument... but one that ALSO has nothing to do with the pricing of commodities via QE.

[yelnick]

Michael, on your second point about QE and the Commodities Bubble Echo regarding changes in limits, I disagree. We saw with the big Commodities Bubble in 2008 how regulatory changes (such as opening up London electronically and recharacterizing speculators as principal interest) were mechanisms to amplify the easy credit that started the bubble. In this case QE provides liquidity to speculators (primarily at the big banks) to engage in commodities bets, and changes in regulations amplify the impact.

[Tom CZ]

Guys,

I work in asset management field. And can assure you that commodities is very interesting asset class nowadays. It is very simple to explain to clients why easy money will feed into inflation... No one cares why but understands as that is simple solution - too much easy money = rise in prices. Thats why they go and hedge against rising prices (b/w inflation hedges structuring also popuplar as old structures linked to hard credit models are not in love after 2007-2009 affairs...) by buying commodities (they do not hedge their consumption but money - means they are speculators). By creating new demand price rises and magnifies inflation risk which generates another interest for so called hedging. (b/w I think it was summer months of 2010 when there were news that some hedge fund bought all the supply of coffee or cacao... ). It is hard to find out commodities speculators in CFTC positions but if you look how many commodities desk in major banks were started through last 10 years and if you look to AUM of running commodities ETF then you see you have nothing to do with real world of consumers and "miners/producers".

Tom CZ

[Tom CZ]

b/w I did not have a look recently but esp. those days of 2008 commodities bubble I was looking to correlation between dollar and oil and dolar and commodities and was very close to 1. Just oil/commodities bear higher beta. Suppose you do not want to tell me that dollar is dependent on future oil demand/supply...

Tom CZ

[yelnick]

Tom CZ, the Dollar since 1973 has been (in effect) backed by oil: we cut a deal with the Saudis to defend their oilfields if they traded in Dollars. Oil up/Dollar down is a consequence. Interesting question is which is the driver?

[Madhu Shah]

I think the equity markets have set themselves for a downturn from here and the next few weeks during February and March are going to be not only volatile but the long awaited correction (of 10% - 15%) can start any day now. Buyers beware - take defensive positions and buy some protection by way of puts etc. Good luck!!

[joe]

I agree with you Madhu - that 1310ish area on the S&P has looked like an area that people should be careful with.

Joe

[joe]

Yelnik -

I don't spend much time watching comodities - but the CRB sure does look like a bubble. How long do you think it can go before it bursts?

I agree with your post by the way.

Joe

[yelnick]

Joe - June 13 week

[Michael]

Yelnick,

The Commodity Futures Modernization Act of 2000 changed the regulations that allowed for Enron to trade power contracts via an electronic platform, and such electronic exchanges as ICE to trade West Texas Intermediate Crude Oil over in London and Dubai with ZERO position limits and no Regulation, which helped facilitate the surge in Crude to $147 per barrel back in 2008.

I would suggest that this legislation ( and change in regulation ) that was spear-headed by Texas Senator Phil Gramm was WELL BEFORE any hint of QE. Nearly a Decade in fact!

[yelnick]

Michael, yes of course, there have been a series of regulatory changes which have fed more speculative fever. You remain focused on proving that QE is not the ONLY cause, a proposition I never asserted. But for the speculative regulatory changes to work, there needs to be credit easing. The flood of liquidity from QE2 is the spark. The many regulatory changes make the speculative pipeline fatter. You still need to come back and explain why commodities took off at the QE2 announcement for factors that exclude QE.

If you go back further, the Greenspan Put from 1987, the removal of overnight reserve requirements in 1992, the many examples of the Put in the 90s, the breakdown of the Glass Steagal restrictions to enable Sandy Weil to merge Travelers into Citi, the 2000 to remove derivatives from exchange regulation, the several steps which enabled electronic trading (beyond the Enron law), the recharacterization of speculators as principal interest, and of course the Fannie/Freddie support of subprime mortgages, all fed the bubble that was sparked in 2003 by cheap credit. Without cheap credit, however, it would never have gone out of control. THAT took the Fed in 2003 and again in 2010.