Bubble Markets Cleantech, Metals, China?

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Writer’s block set in today as I have been preparing slides for a non-ferrous metals talk I am giving at the Smart Sourcing Summit for Purchasing.com on Wednesday. When that happens, I turn to my alternative news sources to spark the creative juices. I was not disappointed. The BBC had a headline that made me roar this morning, “What Happened to Global Warming? The headline might not appear shocking but coming from the BBC, I couldn’t help but read it. The article suggests that natural cycles, over which we have no control, and not man-made gasses dictate planet warmth. Moreover the skeptics contend ocean temperatures and solar charge particles account for nearly all global warming (although there has not been any global warming since 19998 according to the article).

And what does that have to do with metals markets? Well, it got me thinking about a range of headlines I have seen these past few days, many discussing “bubble markets. The first involves bank lending in China from Zero Hedge, “¦.according to banking sources September lending by China’s four largest banks was the lowest so far this year at a paltry 110b yuan (from 166 billion in August). Ordinarily, according to the post, at this time of year “banks traditionally let the spigot on full blast. This lending has fueled China growth (we would argue activity, not all growth as some of this money went toward stockpiling of metals) but the bubble might be deflating.

A second lengthy post suggests a whole range of bubbles may be growing and they may come sooner than you think. The post points out a number of trends which we have also covered though the author discusses why bubble markets form, “one reason is that there’s a sharp rise in the amount of capital sloshing around the world in search of the best returns. The author also discusses herd mentality (which we believe has impacted base metals prices in terms of the growth of ETF’s), the fact that investors seek the fastest and most profitable investments,   and the growth of financial assets which lead to big booms (internet, housing etc). There are multiple metals angles to the potential bubbles. One angle involves the role of the dollar. As the dollar falls, metals priced in dollars become cheaper for overseas buyers who buy into them which feeds the “herd and causes that asset class to increase.

Getting back to the BBC’s global warming (not) story, the cleantech revolution, in large part is based on the science of global warming which has created a boom for new technologies ranging from hybrids to wind turbines to solar cells to smart appliances, many of which rely on rare earth metals as we regularly cover. The Zero Hedge post asks whether Americans will embrace these new technologies and will the new jobs merely replace the old jobs or will the economy actually create new jobs? Cleantech has dominated venture capital investments, even surpassing biotech and software. If the science behind global warming starts to fall apart, will the green revolution fall apart as well? People and companies are making lots of big bets that the science remains sound and individuals will purchase these new technologies.

Realizing that there are more long metals ETFs available in the market than short ETF’s, we can’t help but think base metals markets may be in a bubble of sorts. Rising short fund interest acts as a type of predictive market. Investors are placing their bets that the market will fall over a period of time. The question now is one of timing.

–Lisa Reisman

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