Trust him, he works for the guys with this as a one year chart

If you are a customer of the Royal Bank of Scotland (RBS)* you need to be clear about what's going on in commodities, cos your financial advisers don't have a clue and you need to be protected from their outright ignorance. I was sent the link to a 2 page report from the Royal Bank of Scotland written by one of their economics dudes. It's worth a look because

1) it's only two pages long.
2) it shows you how little these so-called professionals understand about what's going on.

The report reasons that commodities are in a bubble scenario and that bubble is about to burst. The note touches a few bases, but the key part is this;

"...The commodity cycle used to lead the economic cycle. In the past, with improving expectations for economic growth, expectations for commodity demand also increased. Since the supply side usually responds with a time lag, commodity prices tended to move up sharply. Following the same rationale, weaker demand prospects would weigh on prices in times of anticipated slowing economic growth. Not this time. At the start of the latest economic expansion, commodities followed the usual script. But now that many economic and financial markets indicators (bond and equity prices) point to a sharp slowdown in economic activity, commodities are defying gravity..."

This RBS dude is saying to us that what commodities are doing is somehow miraculously defying their historical pattern because demand is dropping, and he knows it's dropping because bonds and equities prices are telling him that.

He's wrong. The only thing he does nail is the "this time it's different" idea, but he's applied it to the wrong criterion. He thinks it's different this time because demand is drying up in the face of economic weakness. Well....if you use Wall St. USA as your benchmark then you'd quickly say things are weak, but out in the real world real people are really buying real commodities and they don't care about the crap going down in the Kafkaesque world of JP Morgan and its U$90 trillion derivative contracts position. Really.

That real world is called China. That real world explains why there's no copper left at the LME.

That real world knows why re-bar prices are going up 30% while those stuck in the past scratch their heads and say "that can't be right". The real world knows why soybeans have done this...

....while the Dow has done this.

There's a whole school of argument out there saying commods are suddenly expensive and the "massive drop" in everything last week is "proof" that Bennyboy's slashing and burning has worked. Total crap. The price rises have been going on the months...for years, in fact. It's just that all of a sudden raw materials prices have become inconvenient. That other commodity called "your house" has dropped, so it's only fair that copper drops too...right? Well aside the fact that "your house" was made with U$50k of building materials, a U$20k plot of land, U$30k worth of man hours and sold to you for U$300,000 on a no-downpayment mortgage, the fact is that nobody wants to buy your house at the price you're asking but there's a country with 1.3 billion people desperate to buy their copper cathode at the price they're asking.

Get it straight. Once upon a time when I was a boy and when my dad was a boy and when his dad was a boy, if the US had an economic hiccup demand for raw materials immediately slumped. This was because the US were the dudes using the raw materials. This is how many experts still see today's world, and it's the big, fat hole in their argument. "This time it's different" is badly used by RBS, but it works just fine for the demise of the USA as the world's commodities end user, even though it remains numero uno in financial circles. For every tonne of copper unsold in the US this year China will buy two tonnes**, and what happens at Bear Stearns is not going to affect that by an ounce.

And when the US finally gets itself together, stops foreclosing its houses and finds a bottom to its own economic mess, all those dollars that Greenspan printed will still be hanging around. And this points to the biggest mistake made by that RBS dude in his note. He blames commodity inflation on commodity demand and expects prices to return to his median once demand slacks, but INFLATION IS A MONETARY EFFECT, and this so-called professional financial adviser is putting a very large cart before a very large horse. That's a subject for another day, however. Today, you only need to remember one thing. I'm right and he's wrong.

*Ok so I'm picking on RBS, but it could have been any one of a hundred banks, really.
** In the period 2005 to 2007, US copper demand dropped 2MT per annum avg. while China demand grew 4.7MT per annum avg.