Wednesday, September 2, 2009

The liquidity trade is dead - long live the short commodities trade

We are witnessing a change in trend.  The liquidity inspired rally of all things risk has bumped into the ceiling.  Now the reality of a serious retrenchment in consumer demand is likely to take over as the cause celebre.  Expect commodity prices to bear the brunt of this...

First to the signs that the liquidity trade is over (it's all ETF's today as a quick snapshot).  Financials are starting to struggle:

While Investment grade corporates outperform their slack-jawed cousins in hi-yield land - suggesting that the holders of investable cash aren't all that keen on the risk/reward for pushing up the risk spectrum.

And commodities?  Oil has broken its uptrend...

Base metals are fluffing...
While gold is playing the fiddle... 
Really not sure what to make of this break-out in gold given that hedge funds already have their pockets full of the stuff and everyone else has been waiting to play the break when it happens.  Regardless wouldn't be surprised if there is some stop hunting to the downside.


  1. only problem is that looking at that XLF chart, you would have been fairly confident in predicting a pullback at that point in early July, just where the bottom line touches. And yet the market somehow rallied stongly.

  2. Sure, I'm less confident about the banks than industrials, given they continue to benefit from government handouts. Still all I'm seeing is pain on the horizon from a fundamental standpoint - queston is whether it takes the public imagination?

    As you might have guessed from recent posts, I'm trying hard to get some sense of what China can deliver...any thoughts there?

  3. I probably have two views on China at the moment. While I am long-term bullish on the 'China' effect on the global economy, particularly companies like BHP, I do think that the short-term impact has been overplayed. I've only just read your latest post and you've already pointed out that the numbers don't just stack up (at least for the moment).

    I think a lot of the price movements we are seeing (be they stock prices, materials, shipping costs, whatever) have diverged signifcantly from fundamentals in the past 12 months. Central Banks are creating liquidity out of thin air and it has to go somewhere, creating distortions in the market for just about everything (be it inflated prices or a re-allocation of resources based on non-fundamental non-efficiency grounds). Anyway, I'm rambling a bit, but my point is to try and say that I think many normal price signals have stopped working, as wide swathes of capital and liquidity ebb and flow across financial markets (and non-financial markets too - I have a friend who is involved in the surveying business and the Federal govts school hall funding program is pouring money into surveyors, builders, plasterers, tilers, plumbers, electricians etc all across the country - for now. What happens when that pipe runs dry?).

    Long route to a short point - I think China will deliver in 5 years and more, I just can't see it doing so until then.

  4. Absolutely agree. Just wish I could get the bloody timing right!