There is a school of thought that opines that the massive “buy everything” campaign unfolding out there in speculation land is merely a reflection of the fact that the bloodletting days of 2008 have placed hedge funds and similar profit-seeking enterprises wearing different name tags into a position where they must pedal in hyper-drive to try to get back even a modicum of the sums they lost back then. Many financial firms have yet to come back into the ‘black’ despite double-digit gains they boasted about in 2009 and 2010.
More than 35% of hedge funds find themselves in that predicament and the industry is bracing for a possible shaking-out this year. No surprise then, that we have seen all sorts of strange investment ‘bedfellows’ popping up on the balance sheet of various hedge funds since the dark days of 2008. Stocks now live alongside commodities in investment baskets that would normally not tolerate such ‘contamination.’ However, when collecting the customary 20% after profits “management fee” is not an option so long as a fund’s assets stay below their peak, we have such a paradigm on hand.
The other part of the explanation for such tandem tango trades is of course the generosity of the Fed (up to this point, anyway) and the virtually free bucks it has placed on the platter since that very time. The withdrawal of the “party tray” by the Fed may thus have more repercussions than the mere bolstering of the US dollar or the perception that it is keeping up with the ECB. It may finally bring some semblance of order to various asset classes and reestablish some of their historical inverse correlations.
Such “normalization” may present additional danger to certain funds that may have placed the highly explosive mixture of commodities into their basket of goodies in a desperate quest to re-make a buck or five. All of this bears watching, even if it will turn out to be less than…pretty. Why, it could even be blood-curling, at times.
Until tomorrow, oil remains in the driver’s seat. Everyone and everything else, remain in tow.
Jon Nadler is a Senior Analyst, Kitco Metals Inc.North America