Commodities have been getting crushed, and Mark Dow explains why:

“Specifically these days, I think about Chinese financial liquidation. We know there was a boom in China. We know there was a boom in commodities. And we know Chinese entities were stockpiling commodities and in many cases pledging them as collateral. They are now unwinding. They are not alone, but they’re the most salient example.

My fundamental view is that commodities got overhyped and over loved over the 2004-2011 period and we’re going through a long period of mean reversion. Initially, the hype was based on emerging market economies plugging into the grid and consultants convincing slower money that it was its own asset class and a great diversifier. The second phase of the ramp came from misunderstanding QE.

Now, however, we’re in the down cycle. We saw the first leg of the great commodity unwind and the second one may be upon us. The first shakeout was mostly tourist dollars getting shaken out of the gold tree. Many of the investors who bought gold as protection against QE-induced inflation were forced out over 2011-2013, as it became clear they got it wrong. The second phase, will come as higher real rates drive the wooden stake the rest of the way through, shaking out the long term money, the asset allocators and the true believers. And based on the charts above, if this is not happening now, it is likely to happen very soon.”

Source: Behavioral Macro

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