We have mentioned several times in recent posts about our belief that the latest rise in oil and other commodities appears to be speculative due in large part to the lack of participation in the underlying stocks.  An article from Barron’s over the weekend lays out possible explanations for this disconnect and can be viewed here with a subscription. 

The article suggests that the heart of this speculation is the proliferation of exchange-traded funds (ETF’s) which may be responsible for upwards of 40% of all bullish bets on commodities.  The growth of ETF’s, index funds and the like have allowed the small investor to invest in areas that were previously inaccessible such as commodities.  This is ultimately a good thing as it gives investors more choice.  That said, the general public is notorious for chasing what’s worked and piling on right at the peak.  Doug and I witnessed this phenomenon first-hand with the bursting of the tech bubble and more recently (and thankfully from afar), with housing stocks, private equity investments and the credit markets.  

The move in global markets suggests economic slowing not only in the U.S. but abroad as well.  The S&P 500 is down 10% this year as most of us know.  What many may not realize is that other markets are down much more with China tumbling 32% and India falling 20%.  Germany, France and Japan are down more than 15% as well.  Markets tend to lead the economy and the recent weakness in stocks around the world gives us another reason to believe that the latest run-up in commodities may at this point reflect more about short term speculative pressures than longer term economic fundamentals.