Pettis Versus Grantham on the commodity cycle

Greenworld Investor has a piece on the debate between Michael Pettis and Jeremy Grantham on where we are in the commodity cycle:

“Two of the most respected market analysts have radically opposite positions on where the commodity cycle is right now. While Michael Pettis thinks that the commodity cycle has peaked and hard commodities will crash by 2015, Grantham thinks there has been a paradigm change in commodities which will keep on increasing in price.

Pettis’s Arguments are based on:

a) First, during the last decade commodity producers were caught by surprise by the surge in demand. Their belated response was to ramp up production dramatically, but since there is a long lead-time between intention and supply, for the next several years we will continue to experience rapid growth in supply.

b) Second, almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China.

c) Third, and more importantly, as China’s economy re-balances towards a much more sustainable form of growth, this will automatically make Chinese growth much less commodity intensive

d) Surging Chinese hard commodity purchases in the past few years supplied, not just growing domestic needs but also rapidly growing inventory.

Grantham Thesis on Commodities

Global Commodity Parabolic Price Rise Bubble or Real- Is it Really Different This Time

The rise in global commodity prices is fueling inflation everywhere particularly in developing countries where food and energy forms a major percentage of the inflation basket. This has forced countries like India and China to accelerate interest rate hikes to cool down inflation. Rising Food Prices has caused distress in a number of places leading to food riots in Africa and have been said to be a leading cause of the revolutions in the Middle East. Oil Prices continues to increase unabated as dollar decreases with US Money Printing. Commodities are touching new all time peaks as rising global demand, finite resources, money printing by developed countries fuel price hikes. Silver has been increasing in a parabolic manner with other commodities too showing heart-stopping jumps in prices. The rise in global wheat,rice prices has been at a record as well. Almost all commodities have seen sharp prices increase.

Grantham has made a famous call

The rise in commodities is not a cyclical phenomenon but a secular long term one. He says that the rise in commodity prices is different from the past. Note Grantham has done an extensive study of bubbles and is one of the leading minds in the investment community. While every time in the past, the statement “this time is different” has led to a crash, Grantham’s call cannot be taken lightly. He says that the rise in population, shortage of resources, the growing consumption power of massive chunks of prosperous citizens in India and China will lead to a continued surge. Note commodity prices have declined secularly in the last century and since 2000 have managed to erase all their losses to form new peaks. Grantham also says there is a possibility of a massive short term decline which will give a historic opportunity to load on commodities. Jim Rogers is the most famous commodity bull and now Grantham has joined him.”

Cyber Wars: Robot Traders Spoof High Frequency Trades

Alexis Madrigal writes at The Atlantic about robot traders that spoof market orders and introduce potentially dangerous “noise” into high-frequency trading that could end up in a flash crash. The spoof trades can be used to coordinate what is effectively a denial service attack on certain nodes in the financial network. Essentially this is the same as what happens in the other DNS attacks in infrastructure critical to national security. It amounts to clogging the system with data so that it slows down and eventually seizes up.

“High-frequency traders have become a target for all kinds of people, but most of them appear to make their money being a little faster and little smarter than their competitors. And if they are playing by the rules, they improve the quality of markets by minuscule amounts trade after trade after trade.

But the algorithms we see at work here are different. They don’t serve any function in the market. University of Pennsylvania finance professor, Michael Kearns, a specialist in algorithmic trading, called the patterns “curious,” and noted that it wasn’t immediately apparent what such order placement strategies might do.

Donovan thinks that the odd algorithms are just a way of introducing noise into the works. Other firms have to deal with that noise, but the originating entity can easily filter it out because they know what they did. Perhaps that gives them an advantage of some milliseconds. In the highly competitive and fast HFT world, where even one’s physical proximity to a stock exchange matters, market players could be looking for any advantage.

“They are moving the high-frequency services as close to the exchanges as possible because even the speed of light matters,” in such a competitive market, said Stanford finance professor Peter Hansen.

Given Nanex’s data, let’s say that these algorithms are being run each and every day, just about every minute. Are they really a big deal? Donovan said that quote stuffing or market spoofing played a role in the Flash Crash, but that event appears to have had so many causes and failures that it’s nearly impossible to apportion blame. (It is worth noting that European markets are largely protected from a similar event by volatility interruption auctions.)

But already since the May event, Nanex’s monitoring turned up another potentially disastrous situation. On July 16 in a quiet hour before the market opened, suddenly they saw a huge spike in bandwidth. When they looked at the data, they found that 84,000 quotes for each of 300 stocks had been made in under 20 seconds.

“This all happened pre-market when volume is low, but if this kind of burst had come in at a time when we were getting hit hardest, I guarantee it would have caused delays in the [central quotation system],” Donovan said. That, in turn, could have become one of those dominoes that always seem to present themselves whenever there is a catastrophic failure of a complex system.

There are ways to prevent quote stuffing, of course, and at least one of the members of the Commodity Futures Trading Commission’s Technology Advisory Committee thinks it should be outlawed.

“Algorithms that might be spoofing the market are something that should be made illegal,” said John Bates, a former Cambridge professor and the CTO of Progress Software. But he didn’t want this presumably negative practice to color the more mundane competitive practices of high-frequency traders.”

“Flash Crashes” Suggest Market Trouble?

Update (Sept 29, 5:54 PM):

Just a thought. Could a DHS cyber security exercise scheduled for this week have had anything to do with these two market “accidents”?

According to this report, the following sectors (among others) were to have been targeted for several days this week:

“This year’s exercise will be the largest yet, including representatives from seven cabinet-level federal departments, intelligence agencies, 11 states, 12 international partners and 60 private sector companies in multiple critical infrastructure sectors like banking, defense, energy and transportation.”

The markets aren’t specifically mentioned, but then you’d expect that if they were the chosen target…

ORIGINAL POST

Peter Cooper at Arabian Money argues that an apparent Google “flash crash” last Friday signals a market correction in the offing:

“It also seems pretty clear that Wall Street insiders flicked the sell switch at the weekend. That would account for the ‘accidental’ Google flash crash last Friday (click here). You bet against this crowd at your peril.

On this reckoning the gold pit action is just a last burst of optimism from latecomers to the party. For the gold price will surely dip (if not to much more than $1,150) in a big sell-off in financial markets, and silver will also fall back below $20.”

Meanwhile, Rick Ackerman points to a mini flash crash that apparently took place on Tuesday night in the gold futures market…..and explains why Bob Prechter has been wrong for the last 18 months – he’s an expert in real markets, not completely rigged ones…

I’ll admit that I’m glad to see this because of my own market bias, which has left me a bit lonely waiting for some kind of correction in the gold price.

Years of making my very own patentable blunders have made me much more comfortable being wrong on my own rather than being right in a crowd…..

But there does seem to be some technical evidence that a correction might be due.

Gold Reacting To Anxiety, Says ECRI Chief

Lakshman Achuthan, managing director of the influential Economic Cycle Research Institute, has said he’s sure the economy is “rolling over” but can’t definitively call it a recession yet.  Today he adds that the elevated price of gold signals anxiety more than inflation concerns. ECRI has a good track record as a trend predictor, from all accounts. On the other hand, it’s also true that gold is hitting new highs and the financial media has to put a good spin on that. Wall Street doesn’t like physical gold, because whenever it dominates the news stories, it undermines the stock and fund selling on which the Street mainly depends. Continue reading