What goes up...

[Jonflyfish]

While I'm not here prognosticating anything special, history is an excellent teacher, especially about humans and the nature of markets.

[Country]

YUP... This time is different. During the entire time period of the graph portrayed, when has the government intentially and purposely destroyed the value of our currency by issuing more debt than in all of America's history? This intentional destruction of the dollar to avoid monumental debt is unprecidented. Unless it is curtailed soon, we will be witnessing another Weinmar super-inflation here in the USA. The effect of that inflation, just getting started now, will soon push ALL commodities far above the vertical axis of the graph portrayed.

[panther]

also, you should draw a best fit line for the peaks and dips. the low points are rising, the peaks are getting higher. based on the recent low point, i would guess the spike will go higher still before crashing, if it even does, this time.

[OtusLotus]

I think that this time is also different, as many countries used to buy dollars as a way to have a diversified currency other than their own.. These same countries are now buying silver and gold to hedge their currency portfolios.

I don't know of any other time in history when the whole world was net buyers of gold and silver and net sellers of US dollars..

Scary... I used to remember when a dollar used to buy you a piece of bazooka!

[barrytrot]

Is it just me or did you look at this and think, "does the price of commodities drive war?" It seemed that the peak was always a big war!

[Thogey]

Those commodity peaks are 20 years wide, so are the troughs. We also have to consider the inevitable, we die.

[neilgin1]

i'm with country, this monetization of the national debt, the absolute ressponsible printing of money out of thin air is unpreccedented in American history. i always thought that this was something "somebody" else did, but its not.

and i would venture to say, it borders on the criminal in the fact that it was done to make whole, the banking concerns in this nation.

and as a "new thing" we now have peak oil to contend with. Our whole system is predicated on the availibility of cheap petroleum, those days are over.

Might i suggest a very good film to you all, called "Collapse", which features Micheal Ruppert, who is NOT wearing a tin foil hat, very sober and a very interesting read on whats happening.

respectfully, neil

[neilgin1]

Mega-Banks and the Next Financial Crisis
Hedge-fund manager Paul Singer recognized the risks of subprime mortgages and bet against them. Now he warns that monetary policy could cripple American banks again.

By JAMES FREEMAN
At the height of the housing bubble, hedge-fund manager Paul Singer was shorting subprime mortgages. By the spring of 2007, he was warning regulators on both sides of the Atlantic that the world was facing a major financial crisis.

They ignored him. Now the founder of Elliott Management says the biggest banks are headed for another credit meltdown. Among the likely triggers for the next crisis, Mr. Singer sees one leading candidate: Monetary policy "is extremely risky," he says, "the risk being massive inflation."

In some areas gas prices have reached $4 per gallon, and now Americans must brace themselves for higher grocery bills. This week the Labor Department reported that February wholesale food prices posted their sharpest increase since 1974. News like that has driven Mr. Singer to the history books: He treats visitors to his 5th Avenue office to a copy of a 1931 treatise on German currency debasement, Constantino Bresciani-Turroni's "The Economics of Inflation."

Mr. Singer—who launched Elliott in 1977 and has delivered a 14.3% compound annual return (compared to the S&P 500's 10.9%)—is not comparing today's Federal Reserve to the Reichsbank of the early 1920s. Rather, he's once again warning financial regulators. This time the message is: Don't take for granted investor faith in a major currency.

.While at Harvard Law School, Mr. Singer turned down a research job with his intellectual hero, Daniel Patrick Moynihan, to pursue a career in finance. Today, he's still looking for heroes among the stewards of the major currencies. Central bankers, particularly at the Fed but also in Europe, "seem to be acting as if they have unlimited flexibility to ease monetary policy," he says.

He specifically targets the Fed's "unprecedented" policy of sustaining near-zero interest rates and its exercise in money-printing, "Quantitative Easing 2," that has it buying medium- and longer-term securities from the Treasury. "In effect they're treating confidence in fiat money—in paper money—as inexhaustible, that it's a tool that's able to be used not just in the throes of crisis," but also as "a virtually complete substitute for sound fiscal, regulatory and taxing policy."

Fed officials, he adds, "really seem to think that inflation is something they can deal with very easily and very quickly. I don't believe they're right." He notes that, in the late 1970s, inflation was only in the high single digits yet curing it required interest rates of 20% and a collapse of the bond market.

Mr. Singer further warns that investors shouldn't misinterpret apparently bullish signals from a rising market. "Of course printing money is going to support asset prices," but "it's very dangerous" and is not a substitute for trade, tax and regulatory reforms that make America an attractive place for job creation.

"What would a loss of confidence in the dollar actually look like? Gold going absolutely nuts," adds Mr. Singer, who is also a major donor to conservative intellectual causes and think tanks such as the Manhattan Institute. He observes that prices for many commodities are already near all-time highs, even with "kind of a soft recovery" in the U.S. and Europe, and robust growth in Asia. "Imagine if hoarding, speculation, investment positions in [hard assets] accumulate to cause commodities and gold to go rocketing up. Wages, prices will follow," he says.

As destructive as raging inflation would be, why would it hurt the big financial institutions? It could wreak havoc on the ability of big banks' corporate customers to make good on their obligations, Mr. Singer believes—and financial reform did little to reduce risks.

"Dodd-Frank has made the system more brittle and has shaped the next crisis in a very negative way," he warns. "The opacity of financial institution financial statements has not been addressed or changed at all. . . . We have a very large analytical research effort here and we have not found anybody that can parse" the sensitivity of big banks to changes in interest rates, asset prices and the like. "You can't do it."

Even after the crisis, credit ratings "obviously provide no real clue," he says. "Rumor and feeling is all you have. You don't know the financial condition of [Citigroup], JPMorgan, Bank of America, any of them." Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.

The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management—even the ones that are vaunted along those lines. . . . How and why do they exist? Mostly an accident, meaning who got bailed out first and who was saved next and how did people feel and what did people say the weekend Merrill was under pressure [in September 2008]."


Mr. Singer says he does as little business with big banks as possible. "Aside from a large position in Lehman as part of our bankruptcy investing, we have no significant positions in global banks."

"We institutionally have tried to—way before the crisis of '08—tried to insulate ourselves in every way we can from the counterparty problem," i.e. getting involved in a trade with a partner that might not be able to make good on its obligations down the line. But the nature of his business, he says, means that he can't sever all connections. "We've removed as many assets from the Street as we possibly can, and we think we're pretty well insulated. . . . If we could completely avoid being subject to the financial condition of any large financial institution, we would do so."

Most investors don't share this view, of course, and big banks are still able to borrow at lower rates than their smaller competitors. The reason, says Mr. Singer, is that right now the system "is underwritten by the United States government and the governments of Europe. And the system is perceived as underwritten or guaranteed." But, he warns, "at some point that guarantee, in some way that I can't really visualize today, will go away."

Will it really? The authors of Dodd-Frank claim that the law prevents the government from bailing out any particular firm, but the Fed can still provide emergency loans to a failing giant as long as it offers similar financing to other firms.

"It's a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators," says Mr. Singer. "Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes."

If the government deems a firm not "systemically important," Mr. Singer forecasts, it could spell its doom. "Small and medium-sized financial institutions may be disadvantaged, may be sacrificed in the next crisis to protect these behemoths," he says.

It gets even worse, Mr. Singer says, if the government ever deems a financial giant "in danger of default"—a judgment that can be made without the consent of the firm or its investors. The business is then taken over by the Federal Deposit Insurance Corporation, with its Orderly Liquidation Authority.

Once in charge of the firm, the government can discriminate among similarly situated creditors and transfer assets out of the business at will. Because of this, says Mr. Singer, creditors and trading counterparties might flee even faster than they would from a firm headed toward bankruptcy, where at least there is established law instead of regulator discretion.

Mr. Singer's fund specializes in distressed debt and bankruptcy situations, so perhaps he has reason to oppose changes to a system he knows so well. But he's also well-qualified to examine the government's reforms.

"You don't know how you will be treated," he says of financial institutions under the new FDIC regime. "If there are companies that are also counterparties alongside you but they've been designated systemically important, that's a clue. It's like a game of treasure hunt. It's a clue that you're going to get disadvantaged compared to them."

So maybe FDIC chairman Sheila Bair and the authors of Dodd-Frank were right about one thing: Perhaps their new process for resolving failing giants really will discourage some people from lending to the biggest banks—but only at the worst possible moment.

The problem, in Mr. Singer's view, will be the jarring shift from one day being an investor in a member of the "systemically important" club, to the next day being a creditor whose claim is determined by bureaucratic whim. This may be welcome news to government pension funds that will want to be bailed out, but certainly not for private investors.

The speed at which a firm will collapse as word gets around that it might be headed to FDIC resolution could be "amazing," says Mr. Singer. And that "speed will drive the size of the losses."

This "atmosphere of unpredictability" is harmful to America's place in the financial world, he says, and "it doesn't make the system any safer. . . . This is nuts to be identifying systemically important institutions." He views it as a poor "substitute for creating soundness and reasonable levels of leverage throughout the system."

Mr. Singer's views on systemic risk are particularly interesting given his prescience about subprime mortgages (to say nothing of his ability to build a firm from zero to $17 billion in assets). In a famous 2006 presentation at a conference hosted by Grant's Interest Rate Observer, he explained in painstaking detail the flaws in subprime-mortgage securitizations, and in the high grades awarded to them by government-anointed credit-rating agencies. In the spring of 2007, he warned the G-7 finance ministers about the grave threat to the banking system, but his words "fell on deaf ears," he says.


Not that Mr. Singer's analytical skills are perfect: In the aftermath of the crisis, he fingered derivatives as a key factor, and he maintains that they will also play a role in the next crisis, even though it's now clear that in 2008 banks were felled by more conventional housing bets, not derivatives. Also, since Elliott largely doesn't play in the derivatives market, Mr. Singer bears few of the costs if that market is regulated more heavily.

Still, Mr. Singer's testimony against Dodd-Frank and Fed monetary policy is compelling.

One reason his firm has survived for 34 years, he says, is that "we try to be very respectful of the unpredictability of markets. We try to at all times at least assume that the world is not being properly run." A safe assumption.

[aristobolus]

Once again, economies are based in cultures. If I could draw my own graph the latter would go downward, and PM's would go upward. But ya never know...

[silverflake]

Interesting that the higher lows on the posted chart begin in the 1930's, right around the time FDR prohibited gold ownership by private citizens, then devalued the dollar by 40+% by revaluing gold from $20 an ounce to $35/ounce. I hate to use the phrase "this time it's different" but for commodities to come off their highs, it's going to be a close race with the dollar heading to it's lowest lows.

[68Camaro]

Is it just me or did you look at this and think, "does the price of commodities drive war?" It seemed that the peak was always a big war!

Commodity peaks often follow major wars, due to the rebuilding usually required after the war ends. However, the current peaking, despite wars on-going in the world, is caused this time more by the other unprecedented conditions in the world.

[Jonflyfish]

Didn't mean to provoke such ardent reactions of commodity allegiance. Was just some food for thought.
I'll trade whatever my system says. Nonetheless, something tells me that the USD is about to rally, and it could be quite surprisingly strong.
I just try to keep an open mind and see things for what they are. Perhaps this will be the black swan of Realcent.
I could be 100% wrong of course.

Cheers!

[shinnosuke]

Didn't mean to provoke such ardent reactions of commodity allegiance. Was just some food for thought.
I'll trade whatever my system says. Nonetheless, something tells me that the USD is about to rally, and it could be quite surprisingly strong.
I just try to keep an open mind and see things for what they are. Perhaps this will be the black swan of Realcent.
I could be 100% wrong of course.

Cheers!

I would really like to know what fundamentals you see that would cause the USD to rally and "strongly" at that. Not trying to pick a fight, but I see the Weimar Republic & Zimbabwe in my crystal ball due to QE ad nauseum. Add to that the increased validation of UN authority by Obummer and his socialist pals and I think we are headed towards more world government, not less. Understandably, a world government needs a world currency. The dollar will lose its reserve status and be replaced. Or at least the attempt to do so will be made.

This time, finally, Ron Paul for 2012 anyone?

[Mossy]

...something tells me that the USD is about to rally, and it could be quite surprisingly strong.

I don't see how it can, what with all the money hiding in the system. Even if it rallies, we are not going to see deflation dropping costs down to old levels.

[68Camaro]

Didn't mean to provoke such ardent reactions of commodity allegiance. Was just some food for thought.
I'll trade whatever my system says. Nonetheless, something tells me that the USD is about to rally, and it could be quite surprisingly strong.
I just try to keep an open mind and see things for what they are. Perhaps this will be the black swan of Realcent.
I could be 100% wrong of course.

Cheers!

No problem here. No provocation assumed. My point was this. I like data, but when I look at that chart you posted (which was interesting, BTW), I read it quite a bit differently than perhaps you did. The text markers on the chart, which suggested that they were pointing to a year of a war, were (in I think every case, but I'm not looking at it while I type this) all pointing to dates that were several years after the wars ended. Which suggested some very interesting things to me, but not those that you mentioned.

Extrapolating my thoughts to the latest data suggest that we have just exited from a significant war. Which - interestingly enough - we have not; we are still embroiled in two wars (or one war with two fronts, depending on how you view things), and just starting (perhaps) a third (front, or war). So, the plot is rising to peaks that every previous time signaled one thing, but which doesn't match our current state. It seems to me to be yet another clue that we face an extremely unusual circumstance that doesn't match our previous experience, and it makes me want to be even more careful about extrapolation than normal.

[68Camaro]

Further to this, if you look at that chart and consider the meaning of inflation and real money, all those peaks and valleys up through the last 40 years were (mostly) variations around a mean. The value of the dollar in terms of real money remained mostly constant, except for the devaluing of the dollar in 1933 when we went off the gold standard.

So, one could read the chart as if commodities are about to crash....

But the way I read it is that the dollar has been significantly devalued over the past few years. And I think (surely) we all know that is true. I think if there was a way to correctly correct the chart (and I'm not sure there is a way to do that without debate) for a "constant" dollar so that the percentages plotted were all apples to apples, that the plot would look significantly different, and it wouldn't show a recent peak at all, in terms of constant uninflated dollars.

[theo]

Didn't mean to provoke such ardent reactions of commodity allegiance. Was just some food for thought.
I'll trade whatever my system says. Nonetheless, something tells me that the USD is about to rally, and it could be quite surprisingly strong.
I just try to keep an open mind and see things for what they are. Perhaps this will be the black swan of Realcent.
I could be 100% wrong of course.

Cheers!

As I've said before I'm not a big believer in charts. Assets, portforlios and economies rise and fall because of events and how people react to them. Charts merely reflect that reality. You seem to be suggesting that because commodities have suffered several huge sell offs in the past two centuries that they maybe they due for another massive drop. As others have pointed out ,most pevious commodity price decreases have occurred during a period of stability following a period of instability (usually War). Personally, I don't see any real stability for the foreseeable future.

Having said that, I do think that we will see some serious volitality that may well include 10% to 15% temporary price drops in various commodities; however the overall trend will be higher.

[Jonflyfish]

I don't doubt that the USD will continue to devalue over time. It is a fiat currency, so that is a given. The chart posted here does not provide the supporting reason for why I feel the way I do. One can fully appreciate the variety of ideas and opinions expressed here and elsewhere. My views are only mine. Perhaps they'll be 100% wrong, but something tells me otherwise. Inflation can come, hyperinflation can even rear its head, but not anytime soon. No Zimbabwe, no Weimar, no new world order, no Roman empire-like failure for now. All QE programs in the near term are already priced in. There will be more later. However, at this time, the banks are not about to fail. All of that QE "paper printing" has landed on the banks previously depleted balance sheets, just like the FOMC planned. The string pullers have been successful in their efforts to replenish themselves. Save the next, and perhaps ultimate systemic failure for a while.

All things ebb and flow in cycles. My quant model analysis is the primary reason for signaling the possible shift. It may even be a bit on the leading edge of the curve. Other factors have to due with currency drivers. The USD is still the de facto global reserve currency of overwhelming proportion. The G-7 et al will not simply let it fail because people think CB's are criminal organizations etc etc ad nauseam.
The European collusion experiment is on the ropes with the P-I-G (S is yet to come). Merkel and the German citizens are not in the frame of mind to carry the peripheral burden. Basket allocations may soon be leaving. Yen has experienced a tremendous cycle and is now in transition. The emerging markets have been leverage and commodity driven. All of this is a terrific recipe for asset destruction (deflation) The USD is still the only currency worthy of reserve status. This will change later. In summary, this may all seem like a black swan but it is not. No amount of debate either way will make any difference either. The markets will be the voice.

[Jonflyfish]

Didn't mean to provoke such ardent reactions of commodity allegiance. Was just some food for thought.
I'll trade whatever my system says. Nonetheless, something tells me that the USD is about to rally, and it could be quite surprisingly strong.
I just try to keep an open mind and see things for what they are. Perhaps this will be the black swan of Realcent.
I could be 100% wrong of course.

Cheers!

As I've said before I'm not a big believer in charts. Assets, portforlios and economies rise and fall because of events and how people react to them. Charts merely reflect that reality. You seem to be suggesting that because commodities have suffered several huge sell offs in the past two centuries that they maybe they due for another massive drop. As others have pointed out ,most pevious commodity price decreases have occurred during a period of stability following a period of instability (usually War). Personally, I don't see any real stability for the foreseeable future.

Having said that, I do think that we will see some serious volitality that may well include 10% to 15% temporary price drops in various commodities; however the overall trend will be higher.

No harm no foul. I do disagree with most of what you said. It is not to be contentious but it is generally price that creates the news and events, not the other way around. I also believe in charts because the tape does not lie. The markets are created where parties disagree on value and agree on price. One can look at price derived indicators, ratios etc but in the end price and price alone is the ultimate indicator. Price charts show the actual economic consequence of markets. You cannot trade Funnymentals (fundamentals) but you can trade price. Price charts reflect the collective interpretation of all information used in market transactions. All IMVHO of course. Feel free to agree or disagree.
Peace.

[68Camaro]

Inflation can come, hyperinflation can even rear its head, but not anytime soon.
...
However, at this time, the banks are not about to fail.
...
Save the next, and perhaps ultimate systemic failure for a while.

None of the above are bets I want to take.

The USD is still the de facto global reserve currency of overwhelming proportion.

Ah, but it is no longer of overwhelming proportion, and there is a significant chance that the tipping point will come this year to another currency, regardless if the black swan appears.

The G-7 et al will not simply let it fail

Another bet I won't take, not because they would choose to let it fail but because I think there is a chance they can't control it.

...In summary, this may all seem like a black swan but it is not.

Or... it could really be coming on ... which means it really isn't a black swan, because it's predictable. But that won't make it any less ugly.

No amount of debate either way will make any difference either. The markets will be the voice.

We can agree on the last.

[Jonflyfish]

Inflation can come, hyperinflation can even rear its head, but not anytime soon.
...
However, at this time, the banks are not about to fail.
...
Save the next, and perhaps ultimate systemic failure for a while.

None of the above are bets I want to take.

I would not bet against the banks right now. Sell them short or buying puts would lead to pure loss.

The USD is still the de facto global reserve currency of overwhelming proportion.

Ah, but it is no longer of overwhelming proportion, and there is a significant chance that the tipping point will come this year to another currency, regardless if the black swan appears.

Without question the USD is slightly under 2/3 of the global reserve. Any "tipping point" coming this year is pure speculation. If the markets knew it was coming, it would be discounted. The year is young still so there is a lot of time for many possibilities to occur.

The G-7 et al will not simply let it fail

Another bet I won't take, not because they would choose to let it fail but because I think there is a chance they can't control it.

They can and do control it. The arrows are not out of the quiver. The G-7 has the mechanisms to buy USD en force, enough to crush any group of speculators' wild dreams of the contrary.

...In summary, this may all seem like a black swan but it is not.

Or... it could really be coming on ... which means it really isn't a black swan, because it's predictable. But that won't make it any less ugly.

Black swans can be predictable. It's just that they generally are not. 95%+ of the folks here would not predict of any USD rally in the neighborhood of 10-20%+, which is what I think may be on the horizon. It can still fail as a currency (and likely will), but don't count on it in the absolute near future.

No amount of debate either way will make any difference either. The markets will be the voice.

We can agree on the last.

Indeed. Thank you for the nice discussion. Appreciate the variety of food for thought.
Cheers!

[Delawhere Jack]

Once again, economies are based in cultures. If I could draw my own graph the latter would go downward, and PM's would go upward. But ya never know...

DING-DING-DING-DING-DING!!!! We have a winner!

Excellent point.

[whatsnext]

He stated the principle What goes up must come down, but I see that the timeline for that is disputed.

Speaking of fundamentals, why hasnt the price of gas risen with silver in equal if all that QE is hitting us? When you start seeing gas move outside of big stories is when the fundamentals are in play. If your looking for the hyperish inflation it will start hitting gas first. Thats when you can safely say it is all ups with minimum downs.

Silver has risen way to much compare to gas, food, and such. It is a market with people looking for safety.

I assume that history will not always be correct.
I have a feeling politicians are just told what to do by others, so who is instructing them? Maybe they have plans we dont know about, but then again thats crazy.

[Jonflyfish]

In order to have real inflation, money supply must be expanded. Velocity of bank reserves must be in motion. I do not see that happening now, nor anytime in the near future. Any "money printing" has simply been shoring up the balance sheets at the banks, NOT lining the pockets of the commoner. Until that happens, you can kiss the "wheelbarrow full of paper for a loaf of bread" concept goodbye. It will happen later, not in the near future. Unless you feel otherwise, please send your wheelbarrow full of FRN's to me. I'll make you the best tasting bread you'll ever eat in return.

BTW- the purpose of this thread had to do with commodities in general, or I'll be more clear and say that it is based on currency cycles. Hence the pending rally of the USD, which is the crux of my point.

[neilgin1]

this is a good thread.

Jon, i HOPE you're right about a dollar rally, if only for my own selfish reasons, which i confess to my shame, that is to be selfish in outlook rather than selfless.

i am HOPING against hope, and the weightiest point you make is the contrarian argument. It's a powerful argument. If indeed 95% of market participants believe ANY trading vehicle is headed in a particular direction, the wisest course of action is the contrarian.

But you do it with your money...no offense. All my alarms are going off, these are some very strange days we live in, black is white and white is black, and things or institutions i used to trust in, that trust has eroded like topsoil in a windstorm. Meaning that i, who used to spread corn, wheat, hogs, crude oil, has no trust in any exchange, anymore. meaning that i, who first served our military at 17, and has seen things, done things contrary to my nature, and will put good young men in harm's way for dubious aims, has no more trust in national command authority. i trust only in God and the sole trades i wish to make are in metals, precious and base, along with farmland, timber and water.

but you make a good case Jon. Quants always make good money as long as they are nimble and dispassionate, which i am neither.
with respect, neil