Pop Goes The Bubble Cause The Bubble Goes POP

That wet ripping sound you heard coming from the direction of Wall Street was the bottom coming out of the commodities market this afternoon.  Good ol' Asariel documents the atrocities at the Great Redoubt:

So, what happened?  We'll turn to Reuters first for some ideas.  In Oil plummets 8 percent as commodities battered, the article quotes Chris Jarvis, senior analyst for Caprock Risk Management, for some theories.  "Crude oil is selling off sharply for two primary reasons:  QE2 is coming to an end in June and without a QE3 behind it, it will take liquidity out of the market, hurting risky asset classes such as commodities....  With Osama bin Laden dead, the market is adjusting the geopolitical risk premium down accordingly.  Given this, speculative money is being taken off the table."

 

Silver took a beating  because the Chicago Mercantile Exchange Group is raising margin requirements for the 5000-ounce COMEX silver futures, according to Silver deepens dive to 5-week low, gold slips.  The margin requirement was $11,745 per contract.  Starting May 9, it will go to $21,600 per contract.

 

If you don't follow commodities much (and I don't), that's comparable to taking the house requirement for a stock from 30% to 55%.

 

Michael Shaoul, chairman of Marketfield Asset management, chalks it up to panic in Commodities Sink Most Since 2009 as Stocks Fall.  "You have those super crowded trades.  Now you're in liquidation mode.  There's nothing to do with weak US economic data.  It's not a global financial crisis.  It's  a classic liquidation move in a crowded trade."

 

One final piece of the puzzle:  the dollar was up against the euro, the British pound, the yen, and the Australian dollar.  Since commodities are traded in dollars, a strengthening dollar will help push commodity prices down.

 

Makes sense to me.  Silver's gone from $20 in January to $48 last week, dropping to $36 today.  Speculation, much?  Oil too burst, dropping a whole ten bucks today.  See if that does anything to gasoline prices where you live.

The flight to safety in recent months has been not to the dollar, but to silver, oil, gold, just about any commodity speculators could get their hands on the futures contracts for, and as the dollar continued to fall against the Euro, people bid up the prices of everything.  But today, Jean Claude Trichet of the European Central Bank mentioned the dreaded "R" word..."responsibility".

In a dinner speech at a central banking conference organized by the Bank of Finland in Helsinki, Trichet told his audience that Europe's monetary union must allow countries that have pursued sound policies to reap the benefit of them, while others pay for their own mistakes.

His remarks came on the same day that the EU and International Monetary Fund formally unveiled a EUR78 billion rescue package for Portugal, the third debt-laden member of the euro zone to seek assistance from its partners in less than a year.

Portugal's bailout means that euro-zone and other EU governments have now committed more than EUR250 billion in aid to economies that have failed to live with the constraints of the common currency, a trend that was largely responsible for the dramatic increase in support for a previously marginal right-wing party in Finland's parliamentary elections in April. 

With Trichet signaling that the Europeans are cutting off the Eurozone version of Helicopter Ben's magic printing press, the dollar's plummet against the Euro reversed itself big time today.  And as Asariel correctly notes, a stronger dollar means lower commodity prices.  Likewise, a sharply stronger dollar means sharply lower commodity prices, and that was enough to pop the bubble across the board on commodity's Big Casino game as everyone got spooked and headed for the exits.

We'll see where the commodity markets head after this, but this bubble was due to burst some time ago, and until the dollar starts weakening again, commodity traders will be seeing red.  It doesn't hurt that dropping commodity prices on things like oil and grain right now will only help the US economy, which was in real danger of locking up due to extended high gas prices.  I'm hoping this will cause a steady drop this month depending on how long the dollar rally lasts.

Having said that, can QE3 be too far around the corner?