The great disconnect

The bond (especially MBS/ABS) market thinks the world is about to end. From the MBS/ABS markets via SIVs into money market funds, thence into auction-securities, and the adjustable-rate muni markets via the highly likely bankrupt bond insurers, this contagion has spread. On the other hand, the equity markets largely ignored these developments until last October.
Since then, they have dropped 10-20% depending on the specific index you look at.
Meanwhile, commodities have only strengthened within that period, and equities that apparently benefit from higher commodity prices have remained strong relative to the equity indices as well. This disconnect between bonds, equities and commodities needs explaining.

After all, they are all part of the same economy. Commodity demand comes not just from overseas countries (though much of the growth in commodity demand may have come from emerging markets, if you look at the absolute level, the US, Europe and Japan still account for the majority of THE LEVEL of commodities consumed). Assume we are about to hit a recession which could be quite severe and long-lasting in the U.S. (to take the savings rate from 0% to 5% requires about a 4% reduction in GDP in 1 year, or, alternatively, a 2% drop combined with 2% contribution from inflation, along with no drop in corporate consumption/household income). Also suppose that Japan does too with a short lag, and that Europe barely avoids one, growing at about 0.5% (ie Spain, UK drop, others grow). This implies a drop in commodities demand from the largest 3 blocks; even assuming that there is no drop in the growth rate in demand from emerging markets (which is quite unlikely since their biggest importers are: EU, US, Japan!), this requires a significant net drop in demand for most commodities.

Now the supply side - only oil and copper are in the realm of true shortages of production relative to demand. The rest are close, barring stories of wheat fungus spreading.
Nevertheless, futures both near month and out month have marched relentlessly higher until relatively late in March.

Are the bond market and the NASDAQ wrong, or is it merely that the commodities space is the last refuge of the momentum players pumping yet another micro-market up using the trumpets playing once again the siren-song of decoupling?

We subscribe to the latter view. We do not advocate building too rapidly an anti-commodity position or one that requires an abrupt fall immediately. Bubbles such as this have always tended to take just a little longer to peak, and certainly to fall. So selling calls into this, especially repeated selling of short-dated (e.g. near month) calls after temporary spikes, letting the time value eat away (esp given the high level of vol), right now seems more prudent than outright shorts, or, heaven forbid, the purchase of puts and via it the high time premiums therein embedded.

Patience, gentle grasshopper.