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The Real Reason Commodities are Tumbling

Wednesday, September 10, 2008, 5:05 PM

I happen to fully believe that our
markets are being largely influenced by official acts, both overt and
covert.  My logic is simple; where motive and opportunity co-exist, the
burden of proof shifts to the accused. 

The Central Banks and the Treasury
had a powerful set of motives to shift money away from commodity hedge
funds and into the stricken banking system.  Their opportunity is both
well characterized and self-evident, so I won't go into that here.

I am not alone in my views:

To hear Donald Coxe tell it, the commodity sell off ripping through Canada's stock market is no accident. It is the result of a deliberate, brilliantly executed plan hatched at the highest levels of the U.S. Federal Reserve and Treasury.

Mr. Coxe is no paranoid conspiracy theorist. As the chairman and chief strategist of Harris Investment Management in Chicago, he is one of the most respected investment authorities in North America. He also happens to have lost about 10 per cent of his personal wealth in the commodity rout, which came at the worst possible time for his Coxe Commodity Strategy Fund that started trading in June.

“This has done more damage to my personal wealth than anything in the last 20 years,” he said in an interview yesterday. But he has too much respect for how the U.S. authorities engineered the collapse in commodities – a move he said was necessary to shore up the global financial system – to be bitter.

“My attitude is, goddamn it, they're good … it was brilliant.”

While I understand that the Treasury department feels that circumstances are quite extreme and warrant whatever methods they can conjure up, my core belief is that central planning is ultimately counterproductive and not worth it.

Instead of admitting that our past excesses were foolish and in need of
correction, the natural inclination of the career politician is to "fix
it".  This will only make things worse over time.


For a more complete read of Mr. Coxe's views, the downloadable document is a transcript a recent investor con-call where he lays out his case.  It is well worth a read
.

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7 Comments

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Can it really be?
Chris, I have so much respect for you and your insight that when you suggest that government officials are engineering the commodities sell-off/dollar recovery, I give it weight even though every instinct I have resists the conspiricy theory. I read the transcript of Mr. Coxe's conference call yesterday and am well aware that what is going on in the markets lately seems to fly in the face of logic. The commodities sell-off/dollar recovery does not seem to make sense. Here is the problem I have followed by a question: Problem: I understand the motive, but I have never had a satisfactory answer to the question of "how." How do the officials engineer this result? Who exactly is doing the engineering and how do they do it? I mean does Hank Paulson pick up the phone and call his friends and tell them all to please do him a big favor and sell their gold and silver and buy treasuries? Someone tell me how it happens. If there is a grand plan, what is a plausible explanation of the precise mechanics of that plan? Question: Assume it is engineered. You talk about it being counterproductive in the long run, but what do you mean by that? I like to think that this dramatic reversal, if engineered, is like pulling on a rubber band and it's going to reach a certain limit and snap right back up, but is that necessarily so or can they keep the rubber band held down?
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
    I am not sure

 

 

I am not sure what you mean by "conspiracy theory".  If you mean you have a hard time believing that people often make plans and take actions in their own self-interests I can only say that as a former corporate strategist, that stuff happens every day, all day.

 

My problem is that I read history and note that it is chock full of people planning, scheming, and generally working to their own benefit.  This leads me to the conclusion that people operating in their own self-interest is the default position, not the exception to the rule.  I am not quite sure how it came to be that so many people hold the opposite view.  

 

At any rate, my second problem is that I don't happen to believe that there is anything special about "the markets" that protect them from political or self-interested interference.  Here are the "free and fair" markets that you already accept as being fully manipulated:

 

1) Subsidized farm products.  The prices for many US farm products are not the result of supply and demand, but rather influenced by committee decisions taken in DC on a yearly basis.  Without such interference many products would have entirely different prices.

 

2) The price of money.  We call this the "interest rate" which is set by a committee on a 6 week reviewable basis.

 

3)  Foreign exchange rates.  Central banks routinely intervene to re-set prices for currencies that they feel need some tweaking.  They write papers about the best way to go about this and share tips on the best way to use proxy banks to hide tracks for better impact.  It is all there, right in the open, on the BIS server.  We even have our own exchange stabilization fund. (ESF)  It has a mission and a purpose and a website and it reports what it does.It intervenes in financial markets, specifically currency markets to achieve specific aims on a short term basis.

 

4) The Trash for Treasuries program.  The Federal Reserve has openly exchanged cash and treasuries for impaired debt that could not otherwise be sold into the open market at anything approaching the 85% of face value offered.   Without this unprecedented intervention using the TAF, TSLF (etc) programs our debt markets would have a very different price structure and a number of firms (that should have) would have gone bankrupt.  Hence, the fed has intervened to set market prices of debt.

 

5) The CPI, GDP and other fuzzy numbers.  These are demonstrably out of line with reality and if they do not represent a conspiracy of sorts, we need a word to describe them rather badly.  I am open to suggestions.  A 'coordinated program of self-deception' perhaps?  I don't know.

 

And so on. 

 

All of these, and many more, represent official intervention to set prices that would otherwise be set by 'the market'.  We accept all of these as 'not conspiracy' because we are told about them.

 

Now here's the place where you and I separate a bit, and it's worth exploring.  We are in the midst of the largest financial crisis in the lifetime of anybody who could possibly be reading this.  In my mind it absolutely goes without saying that there are actions going on behind the scenes that we are not told about.  I expect this and I remain on the lookout for signs of their appearance because a little bit of warning can go a long way in times like these.

 

Hank had to have known some time back that FRE and FNM were going under.  In fact I'd wager Hank knew right around the time that congress was authorizing the blank check and he was proclaiming it 'unlikely' that taxpayer money would ever be needed that FNM and FRE were already bankrupt.  And I go further to suggest that he was in close coordination with all the major players (central banks mainly) who held GSE debt.  And I would consider it entirely unthinkable to propose that during these meetings the relative value of the dollar was not discussed.  And then I find it entirely too coincidental that it was at this exact period of time that the dollar began its improbable climb (largest ever on a percentage basis). It just doesn't fit the fundamental data or even the technical data well at all.  It defies everything except a view of official intervention.

 

So I know that official FOREX intervention happens, I know that they badly needed the dollar to stage a rally here, and I know  the sequence of events fits the observed actions.  To me, all of this is simply the best fit of the data to an hypothesis.

 

Now, how does one accomplish  a coordinated raid on a market with official help?  Easy.  The vast majority of the various markets are not made up of "investors", they are made up of black boxes that trade algorithms and use sophisticated data feeds to sniff the markets with sub-millisecond precision.  Consider that more than 10% of the daily market volume on the NYSE is traded by a single hedge fund whose servers are located on the NYSE floor to minimize electronic transmission lag and you can begin to appreciate how these things can be done.  

 

A few phone calls go out to select and trusted 'partners' and then a little shove here, a pull there and the black box stampede is off and running. All the black boxes need to know is which way is the preferred direction.

 

It is really quite simple.

 

And, for the record, I believe that such official interventions only serve to exacerbate the underlying problems, not make them better,  Hank's sole mission is to last out the year and ride off into the sunset a hero.  His sense of self-interest assures that there will be few limits on the bold, daring, unprecedented actions he is willing to take.

 

To help the country, of course.

 

Chris Martenson

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Thank you, but what about part two?
Chris, I should have used a different term than "conspiricy theory." I was actually being a bit sarcastic because when you hear critics of the idea of manipulation it pretty much boils down something of an ad hominem attack that one is a "conspiricy theorist" if s/he belives in the idea of manipulation along these lines. So I suppose my calling it a conspiricy theory was my way of being funny. So. . . Hank makes some calls and they tweak the black boxes. These black boxes over which he has influence have sufficient pull to direct the market in a certain direction. OK. But if Hank can call the black boxes, cannot the dollar be propped up indefinitely? Cannot commodities be controlled forever? What chance do WE have?
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
  Oh.  Never

 

Oh.  Never mind.

 

Just kidding.  Smile

 

I guess I missed the sarcasm...I don't know how...that never happens on the internet.

 

In answer to your question, "no", nothing that is unsustainable can be propped forever.  They've got much better tools for manipulation today than in times past, that's for sure, but since I know it is not possible to borrow and spend beyond your means forever I know that this too shall pass.

 

Let me be blunt.  The US is insolvent.  From top to bottom.  That was what I showed in "National Failure to Save".  

 

To me it is quite telling that neither political party is talking about this issue at all.  There's Ron Paul over on the side talking about it, but that's about it.

 

My goal is to elevate the ideas and concepts in the Crash Course to the very top of the political discussions.  We owe it to ourselves and our children and whoever comes after us.

 

Chris Martenson

cybernytrix's picture
cybernytrix
Status: Member (Offline)
Joined: Sep 11 2008
Posts: 18
The black boxes trading was
The black boxes trading was superbly demonstrated today by Google News. They accidentally published a bankruptcy story about UAL and voila, more than 1.3 billion was vaporized. More here: http://online.wsj.com/article_print/SB122100794359017593.html
john50's picture
john50
Status: Bronze Member (Offline)
Joined: Sep 2 2008
Posts: 74
Deflation - signs to consider are deflationary

Deflation is so rare that when it hits, few recognize the manifestations. And even fewer members of the financial press have yet to recognize the signs, but, so far:

U.S. stocks are down 21% from their October 2007 peak,

foreign stocks are down 26% from their October peak (MSCI World Index),

agricultural commodities (corn, wheat, soybeans and sugar) are collectively down 25% from their February 2008 peak (DBA fund index),

oil is down 30% from its July peak,

forex is down 13% from their July peak (euro),

housing is down 55% from its July 2005 peak (HGX), and

Fannie Mae is down 99% from its December 2000 peak,

the yield on the 30-year U.S. Treasury Bond is down to 4.21%, within shouting distance of its all-time low of 4.09% in January of this year,

and the supposed “safe havens” for all this turmoil, gold and silver, are each down 27% and 50% from their respective March 17, 2008 peaks, nearly the largest percentage decline of them all!

This across-the-board “shared” decline is what happens when liquidity (i.e., credit) contracts, which, in our current economic system, is deflationary.

There was a brief whiff of deflation in the first quarter of 1980, 28 years ago, but besides that one has to go back to the 1930s to see the last time the U.S. and the world experienced a full-fledged economic deflation. If this Elliott Wave assessment of the larger degree wave structure is correct, the economy is still in the very early stages of the contraction.

John

Expect the best - Prepare for the worst.
http://www.can-offshore.com
scotttherrien's picture
scotttherrien
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 13
The things we do for our oil habit
I agree with your analysis of governmental intervention in

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