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Why Merv Ain't Worried About Inflation

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http://www.benzinga.com/content/1954634/stresses-seen-at-the-outer-surface-of-the-ballooning-commodities-complex

o, should we call it a "bubble?"

It is just the historically unprecedented rise of price of so many commodities all at one time. That makes you very suspicious that there might be something going on. Then, if you look at, say, the way that financial markets have changed, the way that laws have been changed that allow financial [players] to get in to commodities, you find out that there is actually an extremely close correlation in the timing of when financial markets were liberalized so that they could start speculating in commodities.

You match that with the flow of funds into commodities markets, and what you see is that the correlation is 100 percent. It matches absolutely perfectly with the flows from the financial sector into commodities. That is when this completely historic boom in prices began, and it continued up through fall of 2008, and then the flows began anew. They are back in, and we have another commodities price boom.

How did this all start?

Everyone remembers that we had the high-tech bubble and then the collapse. Money managers started trying to find an asset class that wasn't highly correlated with stock prices. You don't want to "put all of your eggs into one basket," into the stock market or things that are correlated with the stock market. You want to diversify into something that is not correlated with the stock market. The CFTC--commodity futures regulators--and the industry itself did empirical studies, and they showed that commodities prices had not been correlated with the stock market, up to that point. They went around the country and they told money managers--like people who manage pension funds--that, "Hey! Commodities prices aren't correlated with the stock market. You've got to diversify."

Then, Congress, in its infinite wisdom, deregulated pension funds. They actually wrote the law in a way that pretty much forced [pension fund managers] to diversify into commodities. So, the pension funds started flowing in the early 2000s into commodities. This sort of caught my attention in the mid 2000s. I started looking at it, and you started having the strange thing that financial market participants were buying up, or renting, grain silos to store the wheat they had been buying. They actually were diversifying into the physicals. The problem with that is that it costs money to store the physical commodities. Storage costs hit an all-time peak, so they looked around. How could they buy commodities without storing them? Well, you do it in the futures markets.

So what pension funds did is they decided, "We're going to diversify, just like we're supposed to, into commodities. We're going to buy pieces of paper rather than the commodities. What we'll do is allocate, let's say, 5 percent of our total assets into commodities." Now, that all sounds good, but you have to remember that pension funds are huge. Pension funds have assets equivalent to 75 percent of GDP. So even if it's only 5 percent of total pension fund assets, it's huge amounts of money, and you can easily get five times as many dollar bets as there actually is of a physical commodity. As long as pension funds are continually allocating ever more money into commodities, they will drive the price up. It's a self-fulfilling prophecy because the financial flows will drive the prices up.

Edited by Panda

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Fourth, we know that there is high leverage and layering throughout the financial sector so that one financial institution owes another financial institution. If you go way back to the early 1980s, some will remember that the Hunt brothers had cornered the silver market. They thought they were really brilliant. They were borrowing money, buying silver, and they figured that once they cornered the market, they would have complete control over silver, and they could set any price they wanted.

They got collateral calls that they had to meet. They needed to sell some assets. They sold silver, but they also sold their other assets. It turns out that the Hunt brothers were cattlemen. They started selling cattle. The price of cattle collapsed. Now, no one would have thought that silver and cattle are highly correlated commodities, but it turns out they were. The same thing will happen. Anyone holding commodities is going to sell commodities, and when that doesn't cover their loans, they're going to have to start selling other stuff. So, because of the linkages, we get very strange correlations. Other markets are going to get hurt too as commodity prices fall, and people have to sell commodities and then sell other assets too.

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You can manipulate prices for only so long. In the long term it is supply & demand.

Plus higher prices don't go to traders they go to producers. It's not like they buy oil off putin for $10 & sell it to you for $100

Higher prices result in more production & or innovation.

Plus the paper market is traders playing each other more than the supplier or customer

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No probs, i just don't buy the "get me some bling argument" get me ten white debt slaves yes, they will make me a rich man, but not bling.............

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You can manipulate prices for only so long. In the long term it is supply & demand.

Plus higher prices don't go to traders they go to producers. It's not like they buy oil off putin for $10 & sell it to you for $100

Higher prices result in more production & or innovation.

Plus the paper market is traders playing each other more than the supplier or customer

Tell that to someone who sells anything to Tescos. Higher prices go to the middle men and don't give rise to significant innovation.

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  • 338 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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