(12/30/11) Have Commodity Traders Given Up?

Individual commodity traders have had a rough year, as concerns over China's housing markets have hurt prices, but MoneyShow's Jim Jubak thinks this contraction is likely to end in 2012.

This is my favorite description of the position of commodity traders: This was a quote on Bloomberg that said, “Basically commodity traders are curled up in a fetal position. They’re done with paying and they’re not even listening.” It certainly explains why you’ve got commodity traders basically acting as if there is no tomorrow.

And yet the big commodity houses—particularly Goldman Sachs and Barclays—are coming out constantly and saying, "Hey, you know, the second half of 2012 is going to be good. The second half of 2012 is going to be good. We just have to get there; it’s going to be OK." No one wants to hear it. Maybe it’s hard to hear when you’re curled up in a fetal position.

But if you look at everything that’s going on, you’ve got a really, really low level of exposure to the commodities markets. You’ve got money coming out of the funds. You’ve got positions being liquidated in the futures. Basically nobody wants to bet on this stuff. The market is getting more and more oversold, moving away from commodities, but no one yet wants to say "OK, it’s down enough, let’s go."

The great fear, of course, here is that the Chinese economy is going too slow, and no one is really going to place a big commodity bet while they’re still worried about China. The data out of China, particularly about the construction industry and real estate, is all potentially very scary. It looks like a bubble.

You can...well, OK, so all this construction is going to come to a grinding halt, and that means therefore you don’t want to buy copper, you don’t want to buy iron, you don’t want to buy anything that goes into the buildings of any sort. So the fear that’s driving it is that we can’t see a bottom in commodities until we know whether China is a bubble that’s going to burst.

There are a couple of things about China that makes it a different kind of bubble. Real estate did indeed get very, very expensive. It’s not incredibly leveraged. They had much higher requirements for down payments, and much less leverage.

So there is a bubble. It will certainly deflate. There’s certainly evidence that prices are going down, but we’re not looking at something that looks like Las Vegas at the end of it.

The second thing is that the Chinese government has decided in a way that the way they’re going to do this—deflate the bubble—is they’re going to take the money out of the private sector, but they’re going to diminish the damage to the economy as a whole by building 30 million units of public housing.

The program is behind schedule. It’s clear there isn’t quite enough money on the local level. There is not enough money on the local level to pay for this. There are big problems in executing this program.

It’s not going to do what the Chinese government wanted it to do...but it is going to make a difference. There are going to be not 30 million housing units built on schedule, but some number will be built, and that will take some of the pain out of otherwise a really nasty situation for the construction-related industries in China.

So yes, China is still slowing. Yes, it’s not good news for the construction industry and commodities, but at some point you do have to expect that commodity traders will start relaxing their fetal position, start listening to the siren calls of Goldman Sachs, and say "Hey, you know, the second half of the year will be better."