In light of my article yesterday briefly discussing "crowded trades", today will feature the most crowded trade of all. I wonder how many pundits are recommending passive commodity funds...
Anyway, Anatole Kaletsky gets it right:
"What, then, has suddenly boosted demand for agricultural commodities
and how might this be related to the credit crunch? A possible
explanation is that the rise in prices itself has triggered a
self-sustaining upward spiral of demand, in which investors,
wholesalers and final consumers want to buy more of a commodity each
time its price rises and this leads to more hoarding and still higher
prices. Such self-sustaining price trends are normally rapidly
reversed because value-oriented investors and commodity producers
start to trade against the trend, selling more each time the price
rises. In present conditions, however, it is harder than usual for
speculators to trade against the rising price trend, because bank
lending has dried up. Several American grain wholesalers, for example,
have been pushed towards bankruptcy because they have sold futures
against grain supplies they bought in advance from US farmers and have
then been unable to finance these temporary "short positions" until
the next harvest comes along."
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