Yesterday, BMB said that the markets - not just the stock market, but the commodity and currency markets as well - were “having spasms”, and trader Dan Norcini was of the belief that the recent sharp moves in the commodity markets were due to a tremendous unwinding of leveraged positions.
Doug Noland shares that opinion in his commentary this week:
Here’s how I see it. Many are rejoicing the bursting of the energy/commodities Bubble. Rapidly declining oil and resource prices are now expected to alleviate inflationary pressures, while bolstering household purchasing power. There’ll be no pressure on the Fed to raise rates, while their global central bank compatriots can soon begin cutting. The consensus view is that this is bullish for the U.S. economy and stock market and, if nothing else, market action did take attention away from troubling financial and economic news.
I am not one to easily dismiss notions of bursting Bubbles, and perhaps there is something to the energy bust thesis. I’m just skeptical of the idea that a slumping global economy is behind recent stunning price declines. Examining the global market backdrop, I sense different dynamics at play - important dynamics. And I tend to believe rapidly retreating commodities markets should be viewed in the context of a Bursting Leveraged Speculating Community Bubble.
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I believe global markets - equities, debt, currencies, and commodities - are all in some stage of dislocation (perhaps not emerging debt, at least yet). Trading conditions across the spectrum of markets are as chaotic as I’ve ever witnessed, a dislocation chiefly related to the now forced unwinds of speculative positions. Recent extreme global market volatility is part and parcel to the Heightened Monetary Disorder I have been addressing for months now. The Massive Global Pool of Speculative Finance has Run Amuck. The bulls will celebrate the rally, yet markets this unstable are prone to “melt-ups” that lead to breakdowns.
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…it is not the nature of dislocated markets to let fundamentals get in the way of price movement. Markets, after all, live on fear and greed. Sinking energy prices and a short squeeze ignited U.S. stocks this week. And surging stock prices always entice the optimistic viewpoint, with many viewing runs in stocks and the dollar as confirmation that the worst of the financial and economic crisis is behind us. The bursting of the so-called Energy/Commodities Bubble is also viewed in positive light.
Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of “market neutral,” “quant” and myriad risk hedging strategies. If today’s dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly “melt-up” followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.
It is not difficult to envision the backdrop for problematic market liquidation and deepening financial crisis. The hedge fund community is now susceptible to huge year-end redemptions, generally poor performance, shrinking assets & tighter Credit - all taking place in ia climate of inhospitable market conditions which dictate ongoing Credit system de-leveraging. The pool of players willing and able to acquire U.S. risk assets is being depleted by the week. To be sure, the unfolding change of fortunes for the leveraged speculating community is one more key facet of tighter system Credit and faltering Marketplace Liquidity - extremely problematic Financial Conditions for the finance-driven U.S. Bubble Economy. And this makes the current market dislocations in the face of rapidly deteriorating fundamentals such a dangerous development.
