Bond Outlook [by bridport & cie, June 4th 2008]
| Despite the view of a certain former central banker to the contrary, we think that it is fairly easy to recognise a bubble when it is building. “Dot.com” was obvious, so was housing; the bubble in low-credit perhaps less so. A much more difficult challenge is to detect the beginning of the deflation of a bubble, for example, the current commodities bubble. We suspect that this has now begun. Many soft and hard commodities are already well down from their peaks, although this has been little noticed because of the focus on crude oil. Yet this has also pulled back from its USD 135 peak, which it reached not only as a result of supply/demand imbalances, but also because of much speculative investment. |
| Our suspicion that the commodities bubble is deflating does not mean that we expect cheap commodities again, nor that politicians can legitimately blame speculators without considering their own responsibility (ethanol subsidies, anti-gm, general interference in agricultural markets and little encouragement of alternative sources of energy). Nevertheless, if the speculative component of the oil price is shaken off, a fall of some tens of dollars per barrel is on the cards. |