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A Contrarian View On Commodity "Speculation"
In response to the president's moronic witch hunt of oil "traders" which, for a POTUS so set on distinguishing himself from the prior administration, was only missing the phrasing "read my lips, no more speculators" for people to suffer the biggest glitch in the matrix to date, we decided to present this note from Jared Dillian, editor of the Daily Dirtnap published back in January discussing the imminent surge in food prices, which however is just as applicable to the surge in any commodity, and most certainly crude. Dillian's point is so simple we are not at all surprised that it is lost on all sock puppets in Washington. "I say that speculators have a very important role to play in setting commodity prices, and the very idea that we would limit the role that speculators play in commodity prices is an early signal that world food markets are about to get a good deal more unfree, which means we are about to undo all the progress we have made in the last fifty years. This is why speculators are important in setting prices. They make money. That is their job. Making money is an end in itself. But an interesting by-product of a speculator setting prices is that he forces the producers of the commodities to respond, and consequently, adjust production." To be sure, there are always those speculators who in their pursuit of price disequilibria, through the wager of capital, will break the law, just as there are those who will commit criminal acts in every aspect of life. But for the most part, speculators operate within the confines of the law, as poorly drafted as it may be. Yet the core point remains: by pushing the clearing price substantially from the equilibrium due to excess demand (or supply) specs merely precipitate an equal and opposite reaction which promptly corrects this disequilibrium. As Dillian concludes when observing a hypothetical explosion in food prices: "Well, guess what: when prices are ten times higher, the market is
going to be full of farmers, and nobody is going to complain very much
about that." Q.E.D.
Blaming speculators for price surges is beyond short sighted, especially when the proximal cause is infinite supplies of Fed produced liquidity which is merely looking for the path of least resistance to the highest possible returns. Yet it does bring up a point - while in most commodities price surges are short lived, when it comes to crude there is almost never any price elasticity to the downside. Meaing that suppliers, of whom the marginal block is a production cartel are either unwilling to, far more likely, unable to provide excess supply. Which is in line with what we have seen out of Saudi Arabia recently: instead of increasing production in March in the aftermath of Libya, Saudi came up with the most ridiculous excuse for demand destruction one could conceive, and lowered output. It is this act, in addition naturally to the excess liquidity provided by Bernanke that should be pursued by the Dynamic Duo of Obama-Holder. But to do so who distrurb the far more sensitive equilibria of the petrodollar bond producer on one hand, and, of course, the Wall Street capital base on the other. Which is why it is always easiest to blame the nameless, faceless "speculator" scapegoat. After all it worked so well for Greece which said it was all CDS traders' fault... At least of course until Greece went banrkrupt for the first time... and then for the second time.
From Jared Dillian's Daily Dirtnap "Food Fight", January 2011:
Jared Dillian
You do not want to mess with food.
You know, we are not so far away from a time where we did not take food for granted. We are not so far away from a time in history when people really went hungry. Nobody goes hungry now, and I am not being exceedingly glib. We have an obesity problem, not a hunger problem. We have solved the problem of growing and delivering enough calories to everyone in the country at incredibly low prices. We have tamed agriculture, something our ancestors had been trying to do for millennia, and we can now feed everyone easily, with room to spare. To the extent that someone goes hungry in a developed country, it has to do with something else, not the production and delivery of food.
We have arrived.
Does everyone realize how incredible this is? Yes, there is still hunger in the world. But it is better. And it seems like the really, really bad famines on the planet these days are man-made (North Korea). Overpopulation? People were worried about being able to feed the planet when we were 4 billion people. Now we’re at 7 billion. To the extent that agriculture and markets are free and freely traded, there is literally no limit to what we can do.
But we go through periods of time in history when things get ugly (remember Kondratieff, he was all about agriculture), and the price of food can get very, very hairy. I am all about the prices of things getting hairy, I have said that it is going to happen to apparel (another commodity that comes out of the ground), but there is a tendency for the prices of things that had previously been dormant for decades to suddenly come alive. Do we care why this happens? Do we need to know? Or can we profit off it without knowing?
We can profit off it without knowing. But I will tell you why this happens, and it gets back to Kondratieff, K-waves happen over time because of long-term cycles in social psychology, and over periods of time, people will develop some very illiberal ideas about how food should be produced, managed, bought, sold, and distributed, ideas that, in the best case scenario, cause prices to rise, and in the worst case, severe shortages and even famines.
There is ideology in this, I admit. I remember sitting back in seventh grade social studies class and us having this in-depth discussion about how senseless it was to have a planned economy, who is omniscient enough to decide who gets what and how much to pay for it? Senseless. And this was the mid-eighties, and we knew back then that the Soviet Union and Eastern Europe was having a tough time, or at least we had a hunch, and we knew that our system provided more for more people than theirs did. That was twenty-five years ago.
But time will go by and people will start to question the very ideas which they held to be absolute truths, they see food prices starting to rise, and they say, hey, this isn’t a game, people shouldn’t be making money off of food, food is a necessity, people need food, and we shouldn’t let this vast unregulated casino going around deciding how much people who are already strapped for cash are going to be paying for bread. And it is always true in capitalism that any time you are talking about things that people need (like food and health care), those have the potential to be the least free, and the things that people really don’t need at all (like iPods), those are the goods with the really free markets. Right?
This is the age-old question in political economy (what exactly is political economy?), which is: should markets be trusted with something as precious and as sensitive as food? To which I ask, rhetorically: should government be trusted with something as precious and as sensitive as food? But we are getting ahead of ourselves.
The problem that we will be faced with imminently is the idea that speculators are making money being long certain commodities, the prices of which have doubled or so, and people are starting to get pissed. Why should somebody be turning into Richie Rich when I have to pay twice as much for a cup of coffee? Et cetera. And listen: people I respect a great deal disagree with me on this, and reasonable people can disagree on this issue, but I say that speculators have a very important role to play in setting commodity prices, and the very idea that we would limit the role that speculators play in commodity prices is an early signal that world food markets are about to get a good deal more unfree, which means we are about to undo all the progress we have made in the last fifty years.
This is why speculators are important in setting prices. They make money. That is their job. Making money is an end in itself. But an interesting by-product of a speculator setting prices is that he forces the producers of the commodities to respond, and consequently, adjust production. Let me explain.
So let’s say that a speculator thinks the price of grain is going to go up this year, and the reason he thinks that is because he is some expert on weather, he can forecast the weather better than anyone else, and this is a very lucrative skill to have. So prices right now are low, and by buying grain forward, he is causing prices to go up. Other speculators with their weather geeks are also buying grain forward in advance of nasty weather, and in doing so, they are all driving the price up.
In response, the farmers are going to plant and grow a lot more grain, because the price is higher! They are responding to price, which is a market signal. The higher the price, the bigger their eyes get, and the more they plant. And by planting more grain, they will be able to avert the weather crisis that is coming and will be able to feed everyone in the world at a reasonable price.
It’s so easy a caveman can do it.
But the idea that a speculator would make money off of someone else’s misfortune is a pretty repugnant idea for people, especially when they look around and see that the market is full of speculators. Well, guess what: when prices are ten times higher, the market is going to be full of farmers, and nobody is going to complain very much about that.
But in not allowing speculators to profit from near-term price increases, we are setting ourselves up for big-time failure, because prices are not being allowed to rise to the levels that would induce people to quit their jobs as newsletter writers and strike out to get rich as farmers. Oh, prices will get there eventually, but by limiting the role that speculators play, they will get there at the worst possible time, when people are not ready for it, and there is not going to be enough food to go around.
Most if not all of the preceding applies to oil as well.
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LOL, tons of bitch posts. FOOD speculators are HUMAN TRASH!
A succesful food speculator buys food when it is cheap and abundant in supply and sells it expensive when it is scarce. This way he/she stabilises the supply. A very healthy thing.
Only idiots buy food when the price is up and it is scarce and sell it when it is cheap and abundant.
It seems you identify more with the idiots.
Your post is stupid: for the speculators to operate, they need people to sell when low and buy when high.
Of course, this situation is better to be engineered as not that many people agree with the scheme.
So, let's see. Speculators make money, REMOVE their share of money from the transaction but they aren't to blame from higher prices?
LOL, who the hell are you trying to BS here? Some posters have to be very stupid rednecks to think it's even worthwhile to try
hey oh bummer, stop bailing em out when they fail in their speculating, maybe they'll learn.
O lord I cant believe this is even being mentiioned, never mind national policy being based on it.
The problem is not speculators.
Look. So I buy 1000 barrels of oil in a month at X, price increases to Y. I sell my 1000 barrels at Y & make a bundle. The same amount of oil is in the market. I can't take delivery of 1000 barrels of oil, I mean, WTF? So the supply hasn't actually changed. The demand hasn't changed. Why would the price change?
Come on... Ask the question...
Where did I get the money to buy at X?
My piggy bank? No, I borrowed it. At, what? 0.25%, 0%, -0.25%. Basically for free. Oil is going up because money is free. The money the government and fed are printiing is going straight to the price discovery of commodities. The closer you are to the source of that newly printed money (and in reality I'm a long long way away), the wealthier you become.
Solution... Stop... printing... money...
++++++++++++
Speculators do not only cause production to increase, but also to reduce consumption. It helps on both sides to deal with the distribution of scarce goods.
Thank god for poor people reducing their consumption.
If it werent for their patriotic sacrifice inflation would have taken over by now.
They do God's work, just like Lloyd and the Bernank.
You're on a roll this morning........lol
Scarce goods? You've drawn the picture of an abundant good, more and more supply, less and less demand.
In the UK farmers are leaving the business because the few big supermarkets control the prices paid to them, input costs have soared yet they cannot get more money for their produce because of the big dominance that 3 supermarket companies have.
And more and more red tape caused by UK government and extreme strictness to EU rules compared to other EU contries makes it harder to compete even more
Exactly what the author argued. Price fixing creates shortages. Not great when the commodity is food and the population doubles every 40 years.
Farmers might plant mre but if there is a drought it won't grow. Idiot.
I wonder why he didn't discuss the issue of MALINVESTMENT!!!!!!!!!!!<sarcasm>
Obama reduces himself to G-Pap, bitching about how "evil speculators" are destroying a perfectly solvent, vibrant economy and national fiscal condition. Just as G-Pap did, Obama (and his opposition who remain silent on this move) have now given themselves up as flailers without direction or foundation and a mighty big dope habit to feed. And in feeding this ever growing dope habit the only dealers in "speculation" that will be countenanced are those TBTF to whose dog food he, and the rest of the political class are addicted and subservient to.
Bastiat's lawful plunder revs up another notch.
Stop it. You are scaring me.
good to see you miles.
So many different ways to break their economic plaything here, CDS, CDO , CDO squareds, buying mortgage shit shovelers, backdoor shorting of long clients, a bald MERS assumption of our notaries, lobbyist open staffing of reform writing "representatives" offices.
Anyways, its quite easy to fix.
Just repeal, undo, and unglue, ourselves, from both "Modernization" Acts created by Sen. Phil Gramm-TX, in 1999 and 2000. That's when all this new mischief started!!!
The Commodity Futures Modernization Act, and the Financial Services Modernization Act (aka Gramm-Leech-Bliley Act) of 1999. Allows for obscene derivative manipulation of energy markets (Enron Loophole). Will stop the absurd CDS 600 Trillion notional...Restore the Glass-Stegall...
I will keep posting this until it sinks in.
You believe that the farmer get rich from speculation. ????
You believe in fairy tailes.
Come on guys. You are smarter than this. Obama's words mean nothing. Hes not going to do anything. He may appoint a Czar. Thats about it. game on.
That's just hilarious, but also a little scary. The world will be full of farmers? Yes, maybe but it will probably have 25% less people due to famine and riots.
Speculators set prices, but they set the wrong prices, to boost their p&l, bonus and squeeze consumers.
Is Tyler dead?
He hasnt posted yet today.
WAKE THE FUCK UP, TYLER
Addicts are waiting for more crack.
Markets closed and Tyler is sipping Pina Colada and watching boobies. Give hima break will you. Moreover nothing much happening in the USA. Same old, Inflation, Oil Prices and crooks running the show. O BTW, American idol was a success last night according to the sheeples and they are happy the show is still on before they get f'd in the USA.
Shit.
Markets closed today?
Oh yeah some kind of holiday, at least for the rest of you buggers.
The troll has to work. The whole weekend.
Thats ok though. Dont feel sorry for me. I'm Obama rich.
Maybe someday i will have time to spend it.
In the meantime enjoy my oversized contribution
to our social welfare state. Somebody has to fund it.
Contrary to the Contrarian
The underlying 'free market' precept, deemed to be incorporated into the OP, is far more akin to a religious belief than it is to a social-scientific, objective fact. As such, that is, as a 'belief' it is an item that further depends upon 'faith' and not upon reason for purposes of justification.
In connection with 'free market' ideology, whenever a disconnect occurs, it is almost always explained away on the basis that the market was distorted by not being allowed to be 'totally' free and that 'the gommint' interfered with the 'free market' and that, therefore, the then ongoing economic malady of whatever type it might be, is all the fault of 'the gommint' and not at all the fault of 'the free market.'
Grasp this: The concept of a 'free market' is a complete and total illusion.
As the Queen Of Hearts says:
"The rule is, jam yesterday and jam to-morrow, never jam today"
Any non delivery by free markets is explained by free marketers through an alien cause.
humanity has survived inspite of speculation and govt and big banks--not because of any one of them--
Remember the onion.
remember the tulip
Tulips are not food. Unless you are a deer.
"To be sure, there are always those speculators who in their pursuit of price disequilibria, through the wager of capital, will break the law, just as there are those who will commit criminal acts in every aspect of life."
Don't talk about the squid like that.
The biggest speculator of all is government. Paid-off politicians support "pet" industries with price supports, subsidies, limits on production, bans on imports, allowing flooding of markets with imports, legal protection against lawsuits, licensing, stockpiling and strategic releases, CIA actions on suppliers, and (most of all) by passing laws to create absolute monpolies over supplies. The more involved government is with a supply chain the more expensive the product becomes.
Total bullshit. If only those higher prices meant more money in the pockets of family farms. Speculators, just like proprietary trading desks, are cancers that extract real wealth from the economy while adding NO REAL VALUE. Speculators are just more middle men.
Again I say, crash the system, crash it now. The sooner we do, the sooner compensation will find its way to people who are actually worth a shit and bring real value to the economy.
After listening to Obama spout this drivel, it occured to me that he is a far, far better actor then Reagan ever was. Unfortunately he's been cast as the president.
than*
re posted, felt should be here too....
please keep in mind, what is a "speculator"
http://en.wikipedia.org/wiki/Speculation
Any asshole can write an opinion, where the break-down in this is the confusion between using an opinion verses fact to base a judgement, personal or otherwise.
So, what it boils down to is its just some assholes opinion, with ***RISK*** attached, akin to how in U.S. law, the BAR association, (engages in the use of private "legal opinion", and foreign linguistical verbiage in order to disguise/encumber fact). Verses how laws are written(to the letter) by our Congress and signed by the POTUS.<=== i want a refund for all the laws that have been written (and paid-in-full at the time of). For the writing of these laws (paid-in-full by the people at the time of), and subsequently "defunded" or otherwise "re-opinioned" since the writing of. As this "defunding of the enforcement of these laws" is nothing short of undermining the efforts deemed necessary by the US Congress, and the U.S.Constitution, and all the labors involved in drafting of laws. Its to my understanding that when laws are writing, funding for enforcement is also included, and agreed upon. This agreement has been violated by the actions of "defunding", and influences from the FED.
So how long until people realize, the ABA, American Bar Association, under licence from the Excutive branch of government(IRS/FED), has "speculated" that defunding enforcement of laws, has not created this? I think we need to demand all members of the ABA to recuse themselves from this investigation.
It's my opinion that speculation is what keeps free market capitalism alive. If i can't take the risk(aka speculate) to invest for a gain. Why the hell should i participate, muchless trade/invest/risk my assets against others who have no down-side risks due to taxpayer funded subsidies/bail-outs/laws written to benefit, which manifest as a price discovery issue, and create market distortions not based upon the principles of "supply and demand"(either by way of tangibles<commodities> or intangibles<FRNs,$,credit>) aka free market trade.
disclaimer....i have been long and holding FAZ for about 3 years now..yes have lost my ass on that holding..think i can prove damages yet?
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
I have two things to say to Mr. Dillian that are painfully obvious. One, he clearly doesn't understand the economics of farming and, two, hunger kills millions of people a year all across the globe. What a douchebag.
This entire issue is off-point, anyway.
Speculators provide cheap insurance to commercial operators against harm from volatile commodity prices. A derivative is a deal coupling a speculator with a commercial operator. The deal cannot exist without both parties and the presence of the commercial operator in the deal provides a guarantee that sound market forces control the process. If commercials did not have derivatives to reduce this risk they would have to increase their margin or overhead to cover the risk which would increase the cost to the eventual consumer; thus, derivatives end up lowering costs to the consumers by providing a more efficient lower cost to manage the risk from volatile commiodity prices.
The current derivatives system has been comprimised, corrupted, and broken by the 1999 Securities Modernization Act tagged on as a rider to the last Clinton budget by Senator Phil Graham. This allowed Banks to act as commercials; thereby removing the commercial operator and the guarentee of sound market control of the drivatives market. We now have the banks printing money through debt creation facilitated by feeding insatiable speculators through contracts that no sane commercial operator would touch with a 10 foot pole. Enron was the first rupture in the bubble exposed by market reality and was addressed by revising the 1999 Securities Modernization Act to excluding natural gas contracts; however, the rest of the entire commodity market was left exposed. We are now witnessing an Enron sized bubble of all commodities on a global scale heading towards the same inevitable result.
Once again it seems the same posts are needed for those that want to surmise that the problem is something other than what it really is:
It is also much easier on the brain-housing-group to just assume that oil is not a finite resource and that there are endless fields of oil yet to be tapped. Better said, this is the route some folks take that don't do their homework. Do the homework! Check the meaning of EROEI and then follow up. Check how reliable the ME statements are regarding 'known' reserves. Also, check out what the real extraction rate is for known reserves. Then the next time you read an article about a 'huge' find of 20 billion brls you will know that the world consumes 33+ billion brls of oil a year and that the 'huge' field will have peaked at 10 billion brls of production. That is assuming that all the oil is actually extractable. Peak oil, check it out. It doesn't mean we are out of oil....it only means our production of oil has peaked and is slowly declining. This fact does not bode well for a global economy/financial paradigm that runs, indeed depends, on growth.
Yes, we have oil......but can't produce enough of it at reasonable price (EROEI). That is what peak oil means. It doesn't mean we are 'running out'. It just means the world can not produce enough to keep up with demand and indeed the world has reached 'peak' production. This is one reason the world economy is on the rocks. The world needs ever more inexpensive oil to continue growth and to service debt. That is not happening and we are seeing the unhappy results. The world burns through better than 33 Billion brls of oil a year. So a find of 20 billions brls, although seeming large, really is less than a year's supply and that is assuming that all of the 20 bil brls is actually recoverable.
Aug 2010: I think we can look at oil production throughout the time of the oil price spike in 2008 and see that production did not really increase. This says quite a bit in and of itself. I believe market price seeks a point at which increased production drowns further increase. This did not happen with oil in 2008. Instead, the economy crashed and oil crashed along with it. This is how I think it will be with peak oil. Each time oil price will increase to the point where it takes too much out of the economy, the economy then contracts and another oil price bottom is found. However, the tops and the bottoms will increase in price as we go into the future. In times of relative peace and little in the way of really bad events the tops and bottoms will increase fairly slowly and within a fairly narrow band. However, were there to be a black swan or important geopolitical event (war in ME?) then those narrow bands will be broached and quickly.
It is going to happen anyway. We consume about 25% of world oil production but only produce about 10%. Do we really think that the rest of the world will continue to foot the bill for our lifestyle? Don't think so. So, either we make the changes ourselves, just as I did, or it gets forced on us when the world decides not to buy our debt anymore. I am open to constructive suggestions as to how we can best help change along (no, and I don't mean Obama change either). Our populace refuses to accept that resources are finite. What is worse, our leaders don't tell the truth about it. They keep feeding us platitudes like if they stabilize the economy with massive money printing that everything will somehow be ok. I have yet to hear them really talk about resource issues and yes I know why. All we need to do is look at how Carter was excoriated (much deserved for other things but not for this) for telling us that we were heading into problems with resources.
Just a question.......does anybody here think that the TPTB will ever admit that there is a peak and decline of oil production? IMO no, they won't. Why? Because of the havic that it would cause in the markets and society in general. So, how do you keep things going? ....think extend and pretend, using somebody else's money. Has anybody here seen the patterns of this game over the last two years? Not enough energy to continue exponential growth to service debt etc. But, we can't address the real problems because if we do then we get chaos.
Nuff said.
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
What a complete crock. "Don't blame us - we are only doing what the law allows us to do...Don't blame us - it's the system...We are providing important market signals...We are providing liquidity...blah blah blah. Capitalism without individual morality is not a very good system - it's just marginally better than the others.
I always wonder how these folks would feel if they broke down on the side of the road and the tow truck driver said "What's it worth to you?" and then the repair facility said "How bad do you need to keep driving?" How about if your municipality said - if you want water - start paying now and I'll let you know when I have enough. It could be a brave new world out there...
Junk away boys (and apologists)...
Sorry for the duplicates - the board was not updating...my sincere apologies.
We sure didn't blame them when the price of oil was in freefall at then end of 2008. Hard to blame the current circumstances (read predicament) on something that can't be changed (read the post before your double repost) so we blame it on some faceless people because that is easier than choosing to make lifestyle changes before they are forced on us with no choice available.
Oil Demand as % of Oil Supply (ODOS) at peak of early 70s boom before crash was 88%, ODOS at peak of early 80's boom before crash was 92%, ODOS at peak of latey 90's before crash 96%, ODOS in 2009 before crash was 98%. When the current global recession, depression, downturn, or whatever you want to call it ends the Oil Demand will execced Oil Supply and the price will explode; however, we have not reached that Rubicon yet. The current oil prices are purely speculation driven via Bank profiteering on short and long contract issue via debt driven money creation and oil prices will crash hard before really going nose bleed in the long run. The short and medium term market demand does not support the price; however, the market is irrelavent in the current comprimised, corrupt and broken derviatives market. Every calorie of food produced requires 1.5 calories of energy to create; therefore, food prices will be captive to the schitzophrenic volatilty of the oil commodity market.
Riiiiggght.....2% fudge factor wow. The fact remains: We sure didn't blame them when the price of oil was in freefall at then end of 2008. More wishful thinking.
I agree that speculation is important and necessary in any market. But, it’s not so important that we need to provide market favors to those who do it, e.g., HFT, Supplemental Liquidity Programs, Position Limit Exemptions, etc.) Let speculators find their natural balance and role in the market on a level playing field like everyone else must do.
At the very minimum, speculators who are being subsidized with special allowances and waivers should have to admit that they are speculating and give some indication of how much. At the 2008 CFTC hearings on oil position limits, I was both amused and insulted when major Wall Street investment banks ( including JPM, Morgan Stanley, and Goldman Sachs) showed up and argued that speculation was essential to proper functioning of the markets. At the same time, all of them claimed that they did not do any speculating in their market making activities, in spite of the fact that their combined trade volume is about 75% of the entire market. Wow, who knew that so many doctors, dentists, and members of the AARP investors club were speculating in oil futures.
In terms of risk management, and planning for worst case scenarios, one scary secenario proposed is as follows.
The capital holders 300 years ago did not lend money they didn't have in comparison to today through the use of the fractional reserve banking system. What changed? The introduction of cheap energy that promised perpetual high growth rates which allowed an ncrease in risk tolerance to actually lend money that one did not actually possess. If this quantum state changes and reverses due to loss of cheap energy then low growth rates and tight money conditions may perpetuate. Stagflation Redux. The comprimised, corrupt, and broken derivatives market created via the 1999 Securities Modernization Act which spawned Enron as a precursor to today's global commodity market bubble exasperates rather than ameliorates the drivers toward this undesirable outcome.
Good points all except that I would add no growth and even contraction to that paradigm. Take away government printing and largesse and that is what we would have right now. Instead we are printing our way into oblivion mostly because we will not face the reality that is a world of finite resources.
Interesting how it all worked just fine from 1980 through 2007 and again in 2009 and 2010. Doesn't it seem just a little disingenuous to insist that the only time it doesn't work is when the price for oil is getting uncomfortably high. It is human nature to put a bullseye on the most convenient target but not on something that government can't really do anything about. Peak oil production and finite resources. Doesn't make it correct though.
r101958, I understand your concern about maintaining a market place unfettered from goverment interference and I think we agree more than we disagree on a most issues; however, we part on the definition of non-interferenece. We both agree that derivatives are a good thing including the speculators, as without them to cover the other side of the action there would be no derivatives market . You don't believe speculating banks acting as commercial owners via the government interference in the market through the 1999 Securties Modernization Act is a bad thing while I do. It is intereference whether you agree it is bad or not. Interference can lead to unintended consequences (i.e, the road to hell is paved with good intentions) and no one is all knowling about all possible outcomes.
My concern is that the banks have an unfair advantage over the original pre-1999 conmmercial operators. If original pre-1999 conmmercial operators were wrong on a derivatives contract they would have to take delivery, buy at market prices, or counter trade for a significant loss. Banks on the other hand can, mitigate a wrong call by flooding the market without opposite trades which eliminates the financial loss and also generate commissions and more cash flow. It is undeniable that they have a tactical advantage over the original pre-1999 commercial operators. The debate we should be having is what are the potential unintended consequences from this governement interference from a strategic long term perspective on the particpants (banks, pre-1999 commercial operators, the market, and consumers) rather than vague moral value statements about what defines interference in a free market.
Hyperbole.....I am afraid I am being misunderstood. My concern is that we are not addressing the true basic problem....instead we are dealing with symptoms. The real problem is finite resources. The most important of which is oil/energy. The cheap ever increasing availability of this resource over the last 100 years or so has allowed us to live like we do. What is more, it is the only thing that is propping up our consumption leverage based economy. The fact that production of this fantastic resource has peaked has huge implications that nobody seems willing to address. Instead we point fingers and decry that which was made possible by the very resource of which I speak. We can address the symptoms of our finite resource predicament, ad infinitum, and it will not change the basic fact. In other words, we need to address the real problem.
Yes!!! the same problem that's inherent in Western medicine--treating the symptoms, but never the cause or root of the disease/disorder. It's really too late now to build a new infrastructure before the crash happens, but hopefully we'll make good progress soon.
www.forecastfortomorrow.com
Same old crap, always someone elses fault when pricing structure isn't going your way.
For every buyer there's a seller. There have been speculators since the beginning of time.
Sending out the AG to look for 'fraud' is a huge waste of time and money. With what we're paying Holder I think we ought to get some good solid prosecutions / convictions, instead we get nuttin.
Does your historical reference and research identify any Kings, Emporers, or Caliphs who funded the the speculators at double digit percentages of there national treasury. If so what was the outcome?
I offer you King Loius Philippe of France (1830 to 1840).
While it's entirely possible Tyler is right about the free money being the problem (as opposed to the unscrupulous recipients), Dillan seems to have a weak grasp on the state of agriculture and hunger. We have tamed nothing, and in completing the rape that is the green revolution, we have arrived nowhere.
#1. We produce enough empty corn calories for most people in the U.S., but not food. Many are unable to afford even the empty corn calories. To produce actual food for the entire country in a way that can continue into the future would require a radical change in agriculture from the ground up, and it remains to be seen whether there will be enough to go around for 350,000,000.
#2. Most of the local small farmers (i.e. the people who make actual food) I talk with have problems securing the credit required to plant any size harvest. This is the first limiting factor to their harvest size. The second is the amount of land they have available to them. If they receive any market signals, it's the number of CSA shares they sell, not what some glass tower douchebag bids the price of wheat up to. As the green revolution fails spectacularly, these will be the only people left who actually know how to grow food.
# 3. "To the extent that someone goes hungry in a developed country, it has to do with something else, not the production and delivery of food." Really? Because it seems to me that most of the hungry people in this country are precisely those who have been forced from their rural, subsistence agrarian roots by the agribusiness green revolution miracle that's more dependent on glass tower douchebags than the soil. Same goes for "undeveloped" countries that have lately been devoured by land-grabbers. (Perhaps this is a different, "evil moustache" kind of speculation? I imagine all those who reject speculation reject both private and sovereign speculatory practices.)
#4. "To the extent that agriculture and markets are free and freely traded, there is literally no limit to what we can do." Nutjob. What else can you say but "nutjob"?
"Making money is an end in itself" -- Yes, we've noticed how awesome this has made America. May we please have more of the same?
This is NOT a moronic witch hunt but a classic attempt at misdirection planned and now in execution. Obama could fill a stadium with all the straw men he creates.
Here's an idea (bit of a joking scenario here).
The entire modern green revolution of agriculture is entirely dependent upon oil. That's why we have massive consolidated farms that are managed by a few people using machines and behind that we have mining operations based on oil to harvest things like potash to help generate fertilizers to speed up food production. Then we need machines to harvest, then trucks to transport unfinished product to processors - then trucks to ship to processors. etc etc. until it hits our supermarkets.
If there is no more oil, the green revolution will collapse and food security will become the new crisis. In a peak oil situation, only countries with access to oil will be able to produce food.
Oil needs to be high and pushed up by speculators so only those who can afford oil can buy it to keep not just their economies alive, but their food production rolling strong. So the affluent countries need speculators to drive the price up so only the affluent can maintain their lifestyle longer than others and perhaps reduce the populace of other countries.
Interesting article in the WSJ about how the automakers are lobbying against cheap oil because no one will buy the high priced hybrid vehicles. Question is, are they the spec's B.O. is talking about? Conspiracy and collusion meThinks.
Who can afford a hybrid with a "good" management job at Mickey D's?
Horse, buggy, bicycle, walk - Bitchezzz!
"But an interesting by-product of a speculator setting prices is that he forces the producers of the commodities to respond, and consequently, adjust production."
Too simplistic. Oil is a huge input to ag, and very shortly -- perhaps already -- there won't be enough around to increase production. That is the doomsday scenario for the poorest 80% of the globe. Unless there is a cheap subsitute found for liquid fuel and for fertilizer/pesticides, ag production will slowly follow the peak oil curve down.
The nightmare for greens would be for com prices to go down. Dah
From beginning to end in America, "speculators" are the real cardholders in the financial equation...the price of oil is not going to drop again, ever. We're stuck in this reality and the dollar will be inflated even more.
www.forecastfortomorrow.com