What do you do when you help cause an equity bubble (and crash) and a real estate bubble (and crash) within a decade?  Well, if you’re a bank you look for the next great market to profit from and (of course) crash.  A recent WSJ article will make you sick to your stomach.  They describe how Wall Street’s biggest banks are basically losing money in everything except their commodities businesses:

“Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.

A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks. After a disappointing 2010, commodities was the fastest-growing segment in banks’ fixed-income businesses in the first three months of this year, even though it still accounts for just 7% of banks’ total fixed-income revenues, Coalition said.

Commodities trading is a bright spot for institutions that face new regulatory clampdowns on practices that previously fattened bank profit margins, such as trading with their own capital and slapping customers with hefty “overdraft” fees. Oil is up about 10% so far this year, settling at $100.29 a barrel Wednesday, and commodities such as gold and copper are close to all-time highs.”

These businesses, which were once the oil in the engine of American capitalism have become nothing more than gigantic casinos and are helping to cannibalize the US economy.  The 3-6-3 model (borrow at 3%, lend at 6% and hit the golf course by 3PM) has been replaced by the 2-20-0 model (rape the client at 2%, then rape them again at 20% and experience 0% of the downside).  It’s not even remotely surprising that this financialization of the commodities markets has resulted in this:

And when it all comes crashing down Wall Street will lobby Congress to bail them out again, no one will go to jail and the big banks will change the casino game to another market.  Until then, pay your executives as much as you possibly can and extract as much wealth from the middle class as humanly possible.  Lord knows this revenue source won’t last forever….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Greg Merrill

    You know I’ve been bearish on copper for fundamental reasons for a while and I have been thinking about agency conflicts regarding commodity prices.

    Commodity miners/producers obviously have an incentive to talk up prices, as well as stock research houses because they need ‘good stocks’ to sell to people. Likewise the investment banks want to create commodity linked products to sell to pension funds, hedge funds, etc.

    Who has a desire to see lower prices? End users. It looks like a pretty unfair fight in the information war.

    Yes, I also wonder where the banks will turn to next as the ‘new, best investment’ . . .

  • Coolidge Low

    Martin Armstrong has been writing about this for a while now. Scroll down to “Behind the curtain”.

  • boom

    So tell me what day the commodity bubble is ending so I can get out. Otherwise thi isn’t actionable information.

    You might also want to tell Jim Rogers.

  • M.C

    Time to get out will be when the charts say so.

    Until then, as long as the music is playing, you have to keep dancing (especially if you’re a fund manager!).

  • quark

    boom…you got in on your own volition…i would look to the same source to get out. A hint…you won’t hear a bell ring.

  • godot10

    The banks cause the extreme volatility in the commodity markets and make vast profits from that volatility at the expense of commodity producers, but they are not responsible for high commodity prices, which over the medium and long term are set by supply and demand.

    20 years of underinvestment in stuff smashed into a tsunami of Asian growth.

    The bankers are parasites in the commodity markets, but they don’t cause the high prices. They suck profits out of the market via their volatility “tax”.

  • Rodger

    The vampire squid has made a public bet for crude oil to reach $140. The squid will do everything in its power to take it there.

  • Oz

    “long commodities” has been pushed by every investment house in the world for at least 12 months. Yet there is still so much debate about what role speculators play in price movements.

    How can any academic or economist seriously report that speculation doesn’t impact prices? I’ve seen a few such reports in the last 6 months – they’re absolute garbage.


  • Cullen Roche

    Actually, when you start paying me a fee for my research (which will be never) I’ll start jumping up and down trying to provide you with that service. Until then, you’ll have to deal with my generally macro commentary and rare market calls like when I shorted the silver bubble a few bucks from its peak and the few snippets I provide in the comments section….Sorry :-)

  • Mark

    Bubbles “R” U.S.

  • DJ

    I thought banks can’t prop trade anymore and prop traders were leaving banks to start their own hedge funds?

  • billw

    It is good to see that some of the main stream financial sites are finally commenting on the fact that all of the bailouts ( Fed QE has been to take care of the big banks at the expense of main street. What is sad is that it has taken over two years for our elites to reach the same conclusion that working people reached right away when they were solidly against said bailouts.

  • prescient11

    Dear TPC,

    The big flaw I see is reflected in the chart itself. This manipulation is new after the housing bubble and financial crisis, eh? Well what explains the ’07 and ’08 move up, which is nearly as parabolic/significant??? Answer that and then we can get into fundamentals.

    One thought though, AND I AM SCREAMING THIS FROM THE ROOFTOPS HERE, TPC, may I present this to you and your readers (and full disclosure, I am long bigtime one rare earth company) == have you been looking at what has been happening in the rare earth market?

    This market has no exchange, has no banksters or speculators per se. It is purely suppliers and consumers. And the price rises have been beyond parabolic, and the domestic in the know suppliers continually expect SIGNIFICANT increases.

    I tell you buddy, watch this space. I think there are really going to be fireworks in this sector in 2011!!

  • GYSC

    I am glad your work is free TPC! Good stuff. Cannot believe how in size the big boys are on this stuff.

  • boatman
  • Oroboros

    I believe it was Whalen who commented that when banks get to a certain size, they effectively stop becoming profitable without govt assistance.

    – – –

    As for the second chart, it isn’t inflation adjusted. Thankfully some other blogger posted an inflation adjusted version …
    … where it doesn’t look quite so dramatic.

    Wait, this all seems familiar …

  • David Merkel

    Cullen, Wall Street has been in this business for over a decade. Salomon and Phibro for example? Lehman started as a commodities trading firm. This is a normal trading/storage business for Wall Street. I don’t see any problem here — they trade anything, helping hedgers and speculators for a fee.

  • Marco Nappolini

    Interesting story/links/comments. Here’s a piece trying to explain the commodities bubble:

  • Cullen Roche

    This is the same sort of free market thinking that convinced us it was great to deregulate banking. You don’t really think it’s a coincidence that as the US economy has become more and more financialized that we’ve suddenly experienced bubbles in every major product that Wall St focuses on? I certainly don’t.

    And the thing is, we don’t need housing speculators. We don’t need commodities speculators. We don’t need equity speculators. All of our markets are gigantic and liquid. The new breed of speculator is a leach who takes money in the middle, detracts from real growth industries while increasing market instability.

  • prescient11

    I believe this latest selloff is the last chance to “get in” before this goes to the next level.

    And yeah, Vale’s a biggie, plus GE just came out today urging congress to get their heads out of their asses on this issue.

    That’s big money alone to MCP and REE. Perhaps some canuck miners as well.

  • Skript

    Actually, commodity exchanges can’t exist without speculators. So, it’s not as simple as saying we don’t need commodity speculators, as most people think commodity exchanges are a good thing.

    That said, the CFTC is reviewing new regulations on “position limits” for speculators. It could be a very good thing . . . we’ll see how watered down it gets.

  • Mountaineer


    Nice post on an important and timely issue. Have you read any of Mike Masters work on the role of commodity speculation on the recent price spikes and generally increased volatility? He spoke at the most recent Minsky Conference at Levy here;

    And he supplied some pretty interesting testimony to Congress back in early 2008 during the first commodity spike;

    Masters, like the BOJ report, lays this at the feet of the financial sector and the financialization of commodities. Specifically the growing consensus surrounding commodities as an “asset class” for investment and the index funds rolling futures regardless of price fundamentals. He’s got a nonprofit called Better Markets, mentioned favorably at the Minsky Conference, that recently released an impressive open letter to the CFTC on derivatives. You can find it at the top of their website. You might want to look over it when you get the time. Keep up the great work!

  • Cullen Roche

    Good stuff. Thanks for the that. He really knows his stuff.

  • Danny Black

    Weird, the only people I ever met in financial services who did genuinely rape their customers whilst providing zero value-add were in the retail and lower end of the high net worth market.

    PS you know the difference between the banking model and hedge fund model right?

  • AWF

    Did we forget these “Banks” swallowed up the brokerage business

    –I’m shocked /amazed /astonished they trade from there own turf.