There’s nobody like an investment banker to deliver yesterday’s news tomorrow, and charge you dearly for it. Goldman Sachs have turned bullish on the dollar, while Merrill Lynch are calling crude oil down to $80. If bandwagon jumping was an Olympic sport, these guys would have more gold medals than Michael Phelps. After pumping up the commodity and Euro bubbles all year, a whiff of a bear market and they shamelessly perform a high speed U-turn. Even more amusing is the sudden discovery by the CFTC, which bent over backwards to convince Congress that oil prices were set by fundamentals, that they underestimated the share of trading accounted for by financial speculators. You don’t say. If a canny operator like Boone Pickens has lost $2bn in a month on oil futures, the odds of another Amaranth Advisors style blowup are worryingly high over coming weeks as the commodity markets deleverage. The market absorbed that $6bn hit in 2006 back when investment bank balance sheets were in decent shape; now the upheaval would be considerable greater and might well sink a second tier bank. Despite this risk, we’re probably on the cusp of the kind of Bull Trap rally in commodities that will give the optimists one last hurrah before prices nosedive faster than the Chinese stock market. I’ve closed my commodity short positions and liquidated my equity holdings as discussed last week. Ultimately, as in every previous cycle, most commodities will converge to their marginal production costs, implying a 50% plus decline from the recent peaks. Some are already close, like grains, but many like copper and oil have a long way to fall. When the bubble excesses are cleared in 6-12 mths, and the banks have started shutting their shiny new commodity desks as volumes slump, I’ll be buying for the secular uptrend still in place. As for currencies, I stated on July 7 in Bear Markets and Holiday Reading that ‘I’ve noted the dreadful economic news flooding out of the UK in the past week and being a Dollar bull in general, I’m opening a short in Stg/$ expectation of a move below 1.80 by the Autumn.’ Suddenly everyone thinks the UK is a hedge fund with a monarchy attached and facing some nasty margin calls. Greed isn’t good in these volatile markets so I’m banking my fast profits, although I would expect to see the dollar hit 1.50-1.60 medium term, reverting to the range seen in the decade up to 2002. Meanwhile, the Chinese government has displayed the kind of shameless manipulation in the Olympic opening ceremony that would make even a Wall Street banker blush. From swapping a buck toothed but talented child singer for a prettier miming version to digitally faking the fireworks display (a real one would have been invisible in the toxic smog) and substituting suitably made up Han Chinese for ethnic minorities in the parade, the whole operation was more fake than a Louis Vuitton handbag bought in a Beijing street market. If anybody is still naive enough to believe official Chinese economic statistics, then they’re in for a rude awakening, because the next consensus to implode will be the stumbling Chinese economic miracle. Tradable goods exports cannot be sustained at recent rates with the US trade account shrinking fast not just cyclically but as a result of a structural downturn in consumption that may amount to 4-5% of GDP (which just brings us to the average level before the credit boom of recent years). Or perhaps those Wall Street gurus will notice that the S&P has now outperformed every major foreign index, developed and emerging, YTD. So much for that mantra of overseas diversification. As with the dollar, the revelation of recent weeks is that with the Eurozone and Japan stuttering, US equities are the best of a bad global bunch.

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