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G20 Whacks the US & ABC News did it!
G20 “Wordsmithing”
I was hoping for some fireworks this weekend at the G20. I thought that
this would be a perfect opportunity to roast our boy, Ben Bernanke. At
this point in history the question, “Is US monetary policy contributing to global political instability?” has been asked and answered. The answer is “yes it is”.
The only question is to what degree. I was expecting that this issue
would be put on the table rather firmly by the economic leaders of the
world. That didn’t really happen. Or did it?
The wording of the final communiqué (they spent most of a night drafting
“acceptable” language) has some words that seem to be directed at Ben/
the USA: (Note: I edit out some the verbose language. Full text here)
We stressed the need to reduce excessive imbalances.
Interesting. This sounds like it is (as usual) directed at the Chinese.
The G20 agreed to come up with specific targets regarding those
“excessive imbalances”.
We agreed on a set of indicators that will allow us to focus on those persistently large imbalances which require policy actions.
Very interesting. What is suggested is that there will be names and
numbers established as to who actually has these “excessive imbalances”.
This information is supposed to be made available at the next G20 in
April. The G20 gives a hint on who will be on that list. The first
category is:
(i) Public debt and fiscal deficits; and private savings rate and private debt.
That category has little to do with China. This is directed squarely at the USA. The second category appears to be pointed at the Chinese:
(ii) and the external imbalance composed of the trade balance and net investment income flows and transfers.
What the grunts at the G20 argued about for 12 hours is which would come
first (i) or (ii). A shot at America, or a shot at China? America came first.
Both (i) and (ii) were mushed together with this:
Taking due consideration of exchange rate, fiscal, monetary and other policies.
To me this suggests that the G20 is equally upset with the US and China.
China’s exchange rate policy now ranks the same as the USA’s fiscal and
monetary policies as disruptive "excessive imbalances". As well it should.
No one really cares about the G20 meeting and their limply worded
communiqué. But it would be a mistake to ignore these signals. Over the
next few months we will see more of this. The leaders of the world will
be pointing their finger at the US for the problems that are exploding.
The “excess imbalances” of fiscal and monetary policy in the USA will
trump the exchange rate abuses of China.
Whether this is right or wrong is irrelevant. It's going to happen.
When it happens, this stink will force a change in US monetary policy.
(the fiscal side can’t be fixed short-term). In my view this means that QE3 is dead on arrival. If Bernanke tries to play this card the world will rise up against him. Obama will have no choice but to agree. If he wants to retain his role as a world leader.
Want some proof of this thinking? Down toward the bottom of the communiqué was this.
5. We discussed concerns about consequences of potential excessive commodity price volatility and asked our deputies to report back to us on the underlying drivers and consider possible actions.
There are many causes of the commodities price explosion that we are witnessing. At this point it is impossible to not include US monetary policies as a contributor.
There will be a report out to that effect before the next G20. That’s
in April. Not so long at all. Interesting to me is that this is exactly
the time frame that Bernanke MUST give us some information on his next policy step. His hands will be tied.
*************************************
ABC Done Hosni In??
I have been blaming Ben B for a fair portion of the problems in the Arab world. He deserves some heat. But so does ABC news.
That Hosni Mubarak and his family looted the till in Egypt is a surprise to no one. The question is, “How bad was that rip off?”
In the early days of the crisis in Cairo information came to light that
the amounts involved could be between 40-70 billion dollars.
I was staggered by this information. It implies that Hosni is
worth more than Bill Gates (57b) and Warren Buffet (45b). This was not
some feathering of the family nest. The suggestion was that this was the
crime of the century. The prior record was Madoff, but that was only
$20b. No wonder the crowds went wild. This comes to nearly $1,000 per person. It is twice the entire external debt of the country.
So where did the estimate of 40-70b come from? ABC News. They did it on 2/2, very early on in the Egyptian crisis:
I have been waiting for some confirmation of this story. There has been none. The ABC News story is not correct.
On Friday the Swiss government released information regarding the
holdings of the Mubarak family holdings in Swiss banks. The report was
oddly worded (typical Swiss obfuscation): (WSJ 2/20/2011)
ZURICH
-- Switzerland has frozen tens of millions of Swiss francs in assets
belonging to members of the former Mubarak regime in Egypt.Bern said late Friday that it had blocked "several dozens of millions of francs" belonging to figures associated with former Egyptian President Hosni Mubarak
Two things on this. (1) When the Swiss say it is “several dozen million” they are talking about an amount that is less than $30mm. (2) While it is likely that additional money will be found in Swiss banks, it is not going to take the total up by a big amount.
The Swiss government has this number to the penny, there will be no
significant surprises. If the Mubarak money in Switzerland is less than
$50mm there is no way the total could add up to $70b.
The most significant clarification comes from non other than ABC News. Their top investigative reporter, Brian Ross had this to say on 2/11:
I can tell you from personal involvement that Ross is an SOB, he also gets his numbers right. The initial reports by ABC on 2/2 were way out of line.
Would it have mattered if at the beginning of the crisis in Egypt that
information on his wealth outside the country were accurately reported? Maybe. I think so.
You hear a lot of criticism about the financial blogs. That there is
information that has not been properly vetted. The funny thing is that
this criticism always comes from the mainstream media. Nothing could be farther from the truth. In the case of Egypt, ABC’s faulty reporting contributed to a change in government.
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So riddle me, why did you conveniently respond to everybody else, but ignore my response to you below? Maybe because it blows your specious theory out of the water.
Your other argument about QE2 not affecting agricultural prices globally is also bogus - simply showing charts with no parabolic move in prices of selected ag commodities during QE1. You cannot look at QE1 and QE2 in isolation. The effects of both are CUMULATIVE (e.g. check the Fed balance sheet today vs. March 2010 if you don't believe so). It's like smoking - the adverse health effects of smoking a pack a day after a year could be negligible, but the cumulative effects over time eventually prove to be fatal.
Well, but do you realize that this supports my argument that physical supply & demand forces are king in setting prices? :-)
Lets assume what you say is true (although physical delivery steel futures certainly feed into iron ore prices).
Under your assumption, the chart shows that iron ore prices went up by more than 100% - with no financial speculation going on at all, with no Fed and no USD channel: just because the supply & demand picture changed significantly.
So why are you surprised that food prices went up by 40%, when the supply & demand picture changed significantly in mid 2010?
I don't see how my comments even remotely support your premise. Your argument is one big circular-reference. First, you say that iron ore prices dropped during QE2 and than you say the chart shows that iron ore prices went up by more than 100%.
(1) If it was excessive liquidity and the Fed that is driving up global commodity prices then how do you explain the following inconvenient facts:
(2) the chart shows that iron ore prices went up by more than 100% - with no financial speculation going on at all, with no Fed and no USD channel: just because the supply & demand picture changed significantly.
QE1 + QE2 injected massive liquidity into the FINANCIAL system. With respect to commodities, some of this liquidity found it's way into the actual purchase of the physical commodity, but I would argue that the vast majority of this liquidity flowed into the financial trading instruments (spot & futures where there is a tradeable market). This vast flow of speculative, "hot money" created a huge imbalance in supply / demand. Again, the effect was most pronounced in commodities where there is an ability to trade and speculate via financial instruments. Note the size of these trading markets dwarf the size of the underlying commodity / instrument (gold, silver, CDS, etc.) and therefore has a huge impact on price!
Simply put, multi-trillion dollars of liquidity injections by the Fed have a much greater influence on commodity prices via demand vs. weather-related supply disruptions.
I'm just trying to point out the obvious to you: the above sentence highlights your problem and demonstrates your misunderstanding of the situation.
Hot money flowing into futures contracts flows in a 'balanced' way: they are created in pairs, for every futures contract sold there's a contract bought. Money can be made and lost that way - but in the overwhelming majority of the transactions it's between consenting speculators. 95% of the positions get closed before the futures contracts expire, making it a dominantly zero sum game.
Yes, volatility can (and will) increase in the short run, but for every futures contract there's a timer ticking and you either have to close the position or take physical delivery and physical delivery is obviously limited by physical supplies.
So hot money can only create "huge imbalances in supply / demand" if they take physical delivery. At least for food commodities there's little proof that that's happening: global inventories are at record low levels.
You also have to consider the practical difficulties: to speculate with just 1 billion dollars you have take physical delivery of 3 million tons of wheat. So whatever speculation is done is not done on the financial side really, it's done by those who have ready access to the supply side: i.e. producers.
Which is my whole point: it's physical supply (and demand) that sets prices.
So hot money can only create "huge imbalances in supply / demand" if they take physical delivery. At least for food commodities there's little proof that that's happening: global inventories are at record low levels.
False. Physical supply and demand sets prices for commodities in a world without tradeable financial instruments / derivatives (e.g; spot, futures and options with CASH SETTLEMENT as an option). The imbalance is not the result of demand of the underlying commodity through physical delivery. Less than 1% of futures are settled by actual physical delivery. The supply imbalance (and the commensurate increase in price) is the result of QE2 liquidity migrating into the financial instruments for the underlying commodity that are cash settled. More cash flowing into commodities via financial proxies is your supply / demand imbalance. It's no different than speculating in any other financial instrument (stocks, bonds, CDS, etc.).
P.S. Every market, not just futures, is "balanced" or a zero-sum game based on your logic (a buyer for every seller and vis-versa). Somebody is a "winner" and somebody is a "loser", but it certainly doesn't stop directional moves in the market.
Cash settled futures are created in pairs too: your loss is another speculator's win, the funds do not flow into the physical market. They are a completely hermetic system as far as cash flow for physical supply and demand is considered.
That implies that the size of the futures market is fixed and that funds do not enter or exit that market. Looking at the level of open interest and trading volumes would say otherwise. Money is absolutely flowing into these markets thus driving prices upward.
You clearly do not know what you are talking about.
Check the definition of open interest: it's the number of short and long contracts. Just look at the raw data for cash settled CFTC futures:
http://www.cftc.gov/dea/futures/financial_lf.htm
Add up the long and short columns for CAD futures, and see them match up precisely. For last Friday's data it was 136490 long contracts and 136490 short contracts.
A shift in the spot price does not upset this perfect zero-sum balance: it gives to winners what it takes from the losers.
The open interest is strictly increased in matching pairs: every new long contract also creates a short contract.
This isn't rocket science, it's basic arithmetics.
Even if you knew nothing about the COT data you'd have to know it as it's also common sense: a cash settled futures market cannot create the underlying commodity [or currency, or stock] out of thin air - it's neither a magician, nor a central bank, nor an entity who has the right to issue new stock. It's one big wheel of roulette, shuffling money between consenting adults.
You clearly do not know what you are talking about.
Check the definition of open interest: it's the number of short and long contracts. Just look at the raw data for cash settled CFTC futures:
http://www.cftc.gov/dea/futures/financial_lf.htm
I think YOU are the one who doesn't know what he is talking about. An increase in open interest results in a larger market in aggregate dollar size, hence greater influence on the price of the underlying commodity. This is my central point. The greater the market size of the financial trading instrument, the greater the impact on prices of the underlying commodity. Simply look at the growth rate of exchange and OTC derivatives for various commodities over the past 15-20 years. If the size of the derivative market for wheat was only 10 contracts globally its impact on the price of the underlying spot price would be neglible. Obviously, that market is significantly larger.
Your comment about futures and matching pairs, perfect balance, rewards simply flow to the winners from the losers (zero sum game) totally misses the point. By your logic, because there is a long counterparty and a short counterparty on every contract there should be no aggregate wealth creation because it's a zero sum game. That's certainly not what happens with respect to the stock market (where there is a buyer for every seller), bond markets, commodity markets, swap markets, etc. The fallacy in you argument is your premise that trading and price action in financial instruments have zero impact on the price of the underlying commodity. The price movements in many commodities says otherwise.
That's exactly what happens in cash settled futures markets (the example you brought up): it's a pure speculative venue, there's no "aggregate wealth creation". It's one giant wheel of roulette between participants.
The stock market is not a zero sum game: there are more long positions than there are short positions. (Nor are stock markets cash settled: they are settled in street name and you can even get a paper certificate of the stock you own if you insist. So it certainly creates (and destroys) wealth - and there's also a steady influx of new stock issued by companies to finance themselves. It is very much not a zero-sum game.)
(Nor are bond markets a zero-sum game.)
A cash-settled futures market, the example you brought up, is a perfect zero sum game. I linked to last week's numbers, you are able to perform simple addition, right?
You are confused and you are in denial. Check the numbers I cited and do the math. Really.
A larger open interest does not increase the aggregate dollar size, how could it?
Take the example I linked to: for every 1 CAD contract bought there is exactly 1 CAD contract sold. Put together it's a wash.
The price of the CAD changing does not have any effect on the 'value' of the open interest in the futures market: every 1 pip move up means a 1 pip win for the 136490 long contracts open, and 1 pip loss for the 136490 contracts short. What is the aggregate value for the totality of the open interest, in the CAD example I linked to? Exactly zero.
No confusing or denial on my part. You long-winded explanation of futures, matching pairs, zero-sum speculative game is just mindless blathering. My central point is that price action in derivatives (cash settled futures, options, etc.) can heavily influence the price of the spot instrument. FULL STOP. If you knew anything about derivatives, you would know that one of the benefits of derivatives is price discovery for the underlying instrument!
http://www.investopedia.com/study-guide/cfa-exam/level-1/derivatives/cfa...
Also, you appear to be mathematically challenged when it comes to the impact of increasing open interest.
A larger open interest does not increase the aggregate dollar size, how could it?
You are focusing on what I would define as the "net exposure" (e.g. longs minus shorts) which as everyone knows always nets to zero in a futures or options market. What you should be looking at is the "gross exposure" (e.g.; longs PLUS shorts). This gross exposure increases as open interest increases.
Let me show you mathematically why your statement is incorrect.
(1) Average contract price $10.00 * 1,000 contracts = $10,000
(2) Average contract price $10.00 * 100,000 contracts = $1,000,000
Again, larger open interest = larger aggregate dollar size. The larger the dollar size of derivative instrument, the greater potential influence on price of the underlying.
That's just happy talk from those pushing for more derivatives markets.
In reality most spot and futures (and other derivatives) markets are tightly cointegrated these days, spot and futures prices are being kept within their respective cost-of-carry models combined with the expected S&D curve.
Neither futures nor spot leads or lags on any consistent basis. Price discovery is volume-proportional on all venues - and the actual delivery prices are set by those contracts that result in delivery. The rest nets out to a zero effect.
In search of an explanation have you considered looking at the fine graph I linked to?
Hint: QE2 was not going on (it was not even close) when iron ore prices went up :-)
You have identified what I believe is a spurious correlation. The non-correlated prices movements in one commodity proves that QE2 has no influence on ALL commodity prices.
Again, I would argue that iron prices where not influenced by QE2 because there is no large, liquid trading market (spot or futures) for iron ore that upset the supply / demand balance. QE2 liquidity flows primarily into financial instruments including the highly tradeable commodities (oil, soft commodities, etc.).
There are many factors that impact asset prices, both supply & demand. However, to outright dismiss the influence of QE2 on the parabolic price increase in so many commodities seems intellectually dishonest or strict adherence to a political / academic dogma.
That was my original point, which started this discussion:
http://www.zerohedge.com/article/g20-whacks-us-abc-news-did-it#comment-9...
That it obviously cannot be 'ALL' commodity prices as there's clearly commodities that did not correlate with QE2.
Furthermore, if you look at the data I cited you will see that food prices started going up months before QE2 was actually injecting any real liquidity.
So not only is "free QE2 liquidity" inexplicably leaving out commodities, it also has a very efficient time machine function :-)
I simply disagree with that view on a well-founded basis and cited various pieces of data that contradict your view.
Firstly, a significant portion of the 'parabolic' rise in commodity prices is simply an USD accounting technicality, not affecting the real global value of commodities: it is due to the natural dollar weakening cycle that started after the EU debt crisis started easing off in the summer of 2010:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=lin...
That dollar weakening was accompanied by other currencies strengthening symmetrically - so they could buy more dollars for their local currencies, to buy food on the international markets.
Btw., looking at that graph you will also have to explain how the 40% weakening of the dollar had no effect on (real) food commodity prices while the 5% during QE2 had an effect.
Once you factor out the technical USD pricing effect and separate out the various commodities measured in a global currency basket, you will see how they reacted to various key supply / demand events and how they shrugged to risk off periods.
And yes, I agree that the mechanisms setting commodity pricing are complex.
Again, no critical thought, only sophistry. You really should change your name to 'more bullshit sophistry'. The ZH board hasn't seen anything critical from you, only pure sophistry. Your name is a lie! Or an idiot's misunderstanding of his positions.
Oh no, one commodity didn't go up = Benocide's (and other central monetary bankstas) printing for fraudulent debt isn't the cause for the food prices.
....that's sophistry
Global food prices have been at the alter of monetarism for years. Hell in many respects DECADES. So once again we hear the SOPHISTRY...that because food prices were rising BEFORE QE2, therefore QE2 (which is an extension of all other monetary bullshit that caused the previous rises) didn't have an effect?
Again Pure sophistry.
One again, a bunch of sophistry from someone claiming critical thought. What a croc.
You seriously have to stop quoting from the Queen of England's monetary BULLSHIT as if they are actually reputable sources. (and that goes beyond the FACT that what you pulled out of your ass from them is really only to poorly support your idiot sophistry which doesn't explain anything.)
...and of course none of this will stop here, and I'm sure you'll have MORE BULLSHIT SOPHISTRY about the next 'inconvenient truth' about your MONETARY system and how swell it is(n't).
That is the point. The comment questioning the effect of Bernanke's policy went after the author made it clear that US monetary policy is one contributing factor among others.
Singling out iron is pure sophistry.
Your argument reminds me of:
Your argument that somehow evil, Fed-financed speculators 'forgot' about iron ore and left out one of the most important industrial commodities and left iron ore (you know, the stuff steel needs) free from the 'free money' frenzy is laughable.
The example of iron ore simply destroys your argument. It shows a fatal flaw in your reasoning.
To explain the discrepancy between commodity prices I'd rather point to the obvious difference between iron ore commodity and food commodities:
See how consistent things get if you actually use your brain?
No you really are an idiot, you try to "time" inflation in different commodities and claim there is no relevance, as if inflation moves in lockstep, amazing. Gold has far front run inflation, but hey, Hope your side wins.
Gold (and to a certain extent silver) are different again:
Most commodities get consumed almost immediately - there's at most a few months worth of oil and food production in the pipeline, globally. That is why these commodities react to supply & demand forces so strongly.
Commodities like gold have proven stockpiles worth many, many years of production. Gold, once it has been mined, does not get 'consumed' like oil gets consumed: it gets stored in vaults, and a small fraction gets used in jewelry.
So the price of gold is much less sensitive to supply & demand forces and it is much more exposed to 'investment' speculation, investments which affect the existing stockpile of gold. (That is also why gold is so exposed to the global sentiment of fear and greed - despite having very little industrial use.)
So if you compare oil, wheat, iron and gold (measured against a global currency basket like the DXY), you will see very different graphs.
Really, if you've never done it I'd suggest you do it right away: it's very educative and it is absolutely necessary knowledge if you want to make money with commodities consistently.
Deflationary arguments, much less observations, are not welcome here.
Reminds me of the cantina in the first ep of Star Wars: "We don't Serve Their Kind in here!" That, and being a wretched hive of scum and villainy.
There are holes in the "Last War" inflationary paradigm most ZHers so faithfully adopt from the mouth of Tyler. If they cannot bring themselves to face them courageously, they risk some awful surprises. Ah, well; 'Twas ever thus.
MIT Billion prices project says you're either a lying asshole or a stupendously ignorant one.
But asshole nonetheless.
The MIT Billion prices project actually very nicely supports what the CPI index says:
http://krugman.blogs.nytimes.com/2011/02/18/the-billion-price-index/
Hint: the MIT index includes goods but does not include services. Once you factor out services prices from the CPI index (or factor services into the MIT index) the two indices are in good agreement.
But you are not really interested in all that economics stuff, you are here to wave conspiracy tales, right? :-)