About Asset Bubbles forming in Commodities (15 June 2009)

Just a bit more clarification about commodities which I touched on in my previous blog entry. There’s lots of factors which may push commodities up further, let’s just list some of them:

1. The desire for China to diversify away from just purely US treasuries and their need for raw materials and commodities to fuel their massive manufacturing.
2. The potential fall in the US dollar, rising inflation in the US, and the move towards real assets (the bear’s story).
3. The recovery in the global economy also fueling a rise in demand for commodities.
4. The massive amount of liquidity in the world (boosted by the massive stimulus packages by governments and lots of money printing). This will flow into assets, including both equities, commodities and even property.

These money inflows could cause another bubble in commodities, which was what I did not want to see (not that I can do anything if it actually happened). However, I would stress first that we are not in a bubble stage for commodities yet or for stocks for that matter.

For commodities and oil at a bubble stage, you have to see oil hit over 130 USD per barrel again. I believe the world can handle oil at 60 to 80 USD per barrel reasonably well. Anything between 80 to 100 USD would be stretching the limits of economic recovery without derailing it. While Anything over 100 USD per barrel would seriously derail any recovery and start to put us into bubble territory from which you just know there will be a big crash down again after that.

But here’s the key thing, oil is still only at 71 USD per barrel. It won’t go up to 150 USD per barrel tomorrow. These trends take time to develop, they can’t materialize the very next day. Just like how massive stimulus packages can cause asset bubbles eventually as well, we are still far from an asset bubble as yet.

When you see property prices in Asia jump to ridiculous levels, stocks trading at over 70 times PE and nobody cares, and yet oil is at 130 USD per barrel in the meantime, then yes, we would be in an asset bubble by then, and a crash will definitely follow after that. But we are not there yet by any means. Its much too early to lose sleep over asset bubbles when we are only at the starting stages of a recovery.

By the way, this doesn’t mean I still don’t love/hate commodities. I still do!