Stephen Roach on the Commodity Bubble

[Groty]

http://www.morganstanley.com/GEFdata...60515-mon.html

[casinospt]

Very very very good!

Thank you.

[adios]

From the article and btw thanks for posting the link:

In fact, in the just-enacted 11th Five-Year Plan, the Chinese leadership announced explicit targets to reduce its energy content per unit of GDP by 20% over the next five years.

and

This is a key reason why China has now embraced a very different macro strategy over the next five years -- moving away from a commodity-intensive export and investment growth dynamic toward more of a commodity-saving strain of consumer-led growth (see my 24 April Special Economic Study, “China’s Rebalancing Challenge”).


Now let me get this straight, a well respected U.S. economist is more or less saying that it's a given that a planned economic approach will allocate resources effeciently? I for one wouldn't hang my hat on a 5 year plan from a communist led government [img]/images/graemlins/smile.gif[/img]. I think "bubble" is the most over used term in the financial markets now FWIW. Stating the rise in prices in commodities is akin to the NASDAQ in the late 90's and early 2000s is silly IMO. Hey I hope that commodity prices do come down alot but I have my doubts and this article was less than convincing to me.

Whether or not commodity prices are out of line is debabtable and that's what makes a market. The other quibble I have with his analysis is that he discusses absolute numbers regarding world GDP growth but I think the analysis should also discuss the rate of change even more so. I didn't read anything about that in the article but maybe I missed it. Again thank you for posting it.

[Groty]

"The other quibble I have with his analysis is that he discusses absolute numbers regarding world GDP growth but I think the analysis should also discuss the rate of change even more so."

I couldn't agree more.

I also thought it strange that he didn't devote a single sentence to the outlook for the supply/production/output of industrial commodities. He focused exclusively on demand.

We all know from Econ 101 that price is the equilibrium point where the demand function and the supply function intersect. Discussing the impact of changing demand to price without mentioning supply is an incomplete analysis.

This report was clearly not his best work.

[laserboy]

Although I am bullish long term on most commodities because of supply/demand fundamentals, I am also a deflationist and can certainly understand the argument behind a short term collapse in industrial commodities. Tightening of credit markets/money supply plus a slowdown in the global economy would certainly lead to reduced demand of all industrial commodities.

Roach's commentary, however, makes no sense whatsoever. On one side, he implies that there is a fixed asset investment bubble in China that will burst resulting in a collapse in demand. And on the other hand he is predicting that the global economy will expand at a more rapid pace and that inflation is about to pick up. These are completely contradictary arguments.

A deflationary collapse in commodities would almost certainly take place only against a backdrop of a massive deflationary slowdown or perhaps global depression.

Roach's commentaries are hard enough to read as it is without him jumping all over the place like that. Honestly I think he often gets away with being sloppy just because 95% of Wall Street is too dumb to understand what he is saying.

[adios]

Good point but I think his implicit assumption is that the supply curve will shift to the right so to speak due to the increase in commodity prices.

[Mr. Now]

I agree we have careened from bubble to bubble over the last 6 years: stocks, real estate, now this.

The way to participate in the upside and protect against the downside is to become a trend follower, and use trend following methods. Trend following does require you to be a philosopher. You cannot be a trend follower and pretend to predict the future at the same time.

Such methods can get you on trends early, and out of stocks in 2000, out of real estate in 2005, and out of commodities when they roll over.

There is nothing to fear from bubbles if you are a disciplined, non-judgemental trend follower. By this I mean, you refuse to attempt predict anything. Trend following is a game of odds. You get on early and you ride it (without "reasons") until it rolls over. When it rolls over you give some back. It's a small price to pay.

If you need reasons, you will never get on a trend early. You will wait instead for validation from the news, other traders etc.

If you need reasons, you will not ride the trend. You will find reasons why the price is "too high", sell, etc.

If you need reasons, you will never get off the trend after it rolls over. This is because of your belief in "reasons" for staying in at the Top.

[casinospt]

I'm more of a contrarian then a trend follower. But lately trend followers generely had good returns on the up and on down of the very inflated bubbles.

[eastbay]

[ QUOTE ]
Trend following does require you to be a philosopher. You cannot be a trend follower and pretend to predict the future at the same time.


[/ QUOTE ]

I hate this kind of contradictory, contentless nonsense. It's absolutely epidemic in trading talk, too.

"Following a trend" is making a prediction. Period. Otherwise, why put your money into something that you don't expect to make money on? If you expect to make money, you're making a prediction.

eastbay

[Baulucky]

[ QUOTE ]
"Following a trend" is making a prediction. Period.

[/ QUOTE ]

Yes. It's making the prediction that market price change distributions will remain leptokurtotic (fat tailed). A 100% lock IMO.