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Socialist Shocked to find "Speculation" in the commodity futures pits
In an opinion piece submitted to The Wall Street Journal, U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."
I know, its shocking to hear that speculation for profit was transpiring in the crude oil pits. It appears that the First Socialist are still finding their way around the halls of our economy and are shocked to find free enterprise actions happening. So much so, they are banding to gether to have their people work with other peoples peoples to figure out ways to put a stop to people doing things for profit.
Their co signed letter after discribing market volitility continued saying the following...
We therefore call upon the International Organization of Securities Regulators to consider improving transparency and supervision of the oil futures markets to reduce damaging speculation and to take forward the recommendations already made by its taskforce in March. This would serve the interests of orderly and adequate investment in future supplies. Volatility and opacity are the enemies of growth. In the absence of transparency, consumers and importing nations are losing confidence in oil. Climate change is also altering government attitudes to energy.
The world's economy is still reliant on secure supplies at prices that are not so high as to destroy the prospects of economic growth but not so low as to lead to a slump in investment, as happened in the 1990s.
It is a thorny issue, but complex markets need not be volatile or damaging to the wider global economy. We are convinced that producers and consumers alike would benefit from greater transparency, greater stability and greater consensus on the market fundamentals. After two years of destructive volatility the time has come for both sides to work together to build on this common interest.
Mr. Brown is prime minister of the United Kingdom. Mr. Sarkozy is president of France.
At least, that is how I am seeing this. What say you?
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If we wanted better education and universal health care, we would asked them for their opinion. Until then, they can STFU.
If they can't afford bubbles, maybe they should embrace capitalism.
And another thing, Switzerland, if you turn over my name to the US government, I'll be out of jail faster than you can say "Privileged Elite", and then I'll short your whole country right in front of your fucking mothers.
(another 7 from CAPTCHA! This is turning spooky)
Is it me or does it seem that most commentary related to the commodity markets is bereft of historical context? Paraphrasing Ludwig von Mises, 'all activity is speculation'. That said...
First, the structure of the commodity markets has materially changed as a result of the Commodity Futures Modernization Act which has directly led to the "financialization" of commodities. Using the "hedging response" as a model to describe economically the impact: stable range-bound commodity markets pre-CFMA were predominated by producers' net short hedging response; post-CFMA which allowed for the introduction of index products (ie, perpetual bid) has resulted in the predominance of a net long hedging response (eg, inflation hedging). This is a material behavioral shift in commodity markets/valuations. http://cisdm.som.umass.edu/research/pdffiles/SourceofCTAReturns.pdf
Second, pre-CFMA the CFTC was the de facto "world regulator" of commodities since 1974 and professional speculators were mainly confined to managed futures. If one takes a look at the CRB chart going back to 1950s (see http://www.crbtrader.com/crbindex/ Excel monthly charts and data), you will note the following: (1) federal price controls as result of legacy Emergency Price Control Act 1942, and early reconstruction of futures markets after being shut down during WWII resulted in stable commodity prices until 1972 (Nixon unilaterally cancelling Bretton Woods); (2) during 1980s through 1990s the CRB spot index was higher than CRB continuous futures index, a time when the commodity markets were heavily regulated by CFTC/NFA (IMO this reveals a growing undervaluation of commodities which resulted in under-investment and lower production); (3) post-CFMA deregulation combined with wars (Afghanistan, Iraq) and increased emerging market demand (China, India, etc.) resulted in historical spike on par if not greater than commodity spikes during War of 1812, Civil War, post-WWI, Cold War (Korea, Vietnam, Nixon and oil shocks).
"Excessive speculation" (as defined by CEA 1936) is based on “eye of the beholder” standard, and is reliant on precedent and enforced by “political will” not “black letter law”:
*During World War I, the U.S. government suspended futures trading in wheat, sugar, cottonseed and cottonseed oil futures.
*In 1933, President Franklin Roosevelt prohibited ownership of gold by U.S. citizens. Gold was not listed on COMEX until December 1974.
*The imposition of price controls and the appropriation of commodities by the Federal Government after the U.S. entry into World War II in December 1941 postponed futures trading until the end of the war.
*Dissatisfaction with policing of futures markets leads to establishment of Commodity Futures Trading Commission in 1974 to patrol industry.
*In January 1980, the CFTC imposes “liquidation-only” in response to silver market corner by Hunt Brothers and co-conspirators (Saudis).
All of the above are examples of government "intervention" or "manipulation" (depending on your philosophical persuason). Given this background, one can better appreciate the slow march towards deregulation, which is a result of jurisdictional issues eroded by exemptive authority/courts rulings:
*Forward contract exclusion: CEA Section 2(a)(1)(A)
*Securities contract definition: SEC v. W.J. Howey Co. (U.S. Sup. Ct. 1946)
*Economic reality controls: Precious Metals Assoc. v. CFTC (1st Cir. 1980)
*Forwards constitute futures: Transnor Ltd. v. BP (SDNY 1990)
*CFTC’s 1990 Statutory Interpretation and 1992 Exemptive Order
*Cash forward exception: Andersons v. Horton Farms (6th Cir. 1998)
*First Amendment rights: Taucher v. CFTC (D.C. Fed. Dist. Ct. 2000)
*1999 PWG “OTC Derivatives Markets and CEA” basis for CFMA 2000
*Words used to determine: CFTC v. Zelener (7th Cir. 2004)
*Definition limited to exchange traded: CFTC vs. Erskine (6th Cir. 2008)
*Commodity Futures Modernization Act of 2000 (Enron, London, etc. loopholes)
All of the above cumulated into the "securization of commodities" which is a recent phenomena (and one which IMO distorts price discovery). The recent development of commodity ETFs, for example, is discussed in this article and is an interesting read: http://www.wcl.american.edu/blb/01/3ritter.pdf
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Given the above, I find amusing the righteous indignation of commodity "investors" about "creeping socialism" into commodity space. I think that participants in these markets must recognize that "regulatory risk" is just another factor that impacts market prices and has the obvious potential to impact one's business model. To think that governments are not going to intervene into the commodity markets when prices may materially impact economic stability (read: gov't stability) and preferred vested interests is to believe the world as it should be and not as to what it is. Wake up and smell the coffee! Government interventions has always been a factor and always will be a factor (if not the most significant factor) in your trading and in market prices/valuations. In other words, there has never been such a thing a "pure" free markets and to parrot that line of thinking is to repeat a "red herring" philosophy. Godlman (sic) Sachs gets it... Stop bitching about regulation and get smart about it and understand how it impacts markets. That's the real world, get use to it. IMHO.
Thanks for your helpful insight.
Aside from the fact that it looks like Brown is about to eat Sarkozy's face I'd say whatever event transpired just then is too close for comfort.
Onto oil speculation. What does one expect when o/n interest rates are as low as their are worldwide? The only thing keeping oilin check is the accelerating rate of default (or continual rate) which is compressing credit expansion and keeping inflation in check. It's no coincidence that low rates have ALWAYS led to higher commodity prices, true price shocks are fewer and far between because of the nature of capitalism (rewarding effiecent production methods and means) etc.
Oligarchs shocked to discover guillotines with sharp edges sufficient to take care of business.
Please don't post pictures of those two men kissing. This is a family site!
"We therefore call upon the International Organization of Securities Regulators to consider improving transparency and supervision of the oil futures markets to reduce damaging speculation and to take forward the recommendations already made by its taskforce in March. This would serve the interests of orderly and adequate investment in future supplies."
May I partially disassemble the quote? The first sentence shows me these guys have no idea what a speculator is. Yes, a speculator can elevate the price of a commodity, but it is voluntary myopia not to see the implications of what that means. With the rise in price of the commodity in question, consumption is inhibited. When consumption is inhibited, the supply of resources extends further into the future. Ergo, the speculator's effect on the market is to cause the preservation of resources into the future by contributing to the price rise today. Put more bluntly, when things cost more now you use less now, so there will be more in the future for less cost. So with that in mind, lets look at the second quoted sentence: "This would serve the interests of orderly and adequate investment in future supplies." Bullshit. For the reasons I just laid out above.
Moving on: "Volatility and opacity are the enemies of growth. In the absence of transparency, consumers and importing nations are losing confidence in oil. Climate change is also altering government attitudes to energy."
Translation: 'you guys are making oil investment look more attractive than our publicly-subsidized corn oil games, stop it or we'll get really mad'.
Then this: "The world's economy is still reliant on secure supplies at prices that are not so high as to destroy the prospects of economic growth but not so low as to lead to a slump in investment, as happened in the 1990s." Bullshit, at least as written. If they wrote 'the de facto ruling fiat-emitting machinery dominating your economy is still reliant on prices that don't lead to a slump in the endless feedback loop of inflationary parasitic investment' Then OK, I'd agree with them.
"We are convinced that producers and consumers alike would benefit from greater transparency, greater stability and greater consensus on the market fundamentals." Well, I think I agree with parts of this. They want transparency? Get rid of central banks and their inscrutable fiat-spitting machinery. They want stability? How about removing the rubber yardstick of currency whose psychological value is determined by onerous well-connected first users who inflate-to-confiscate? How about rescinding every poorly-thought reactionary measure their parliaments and congresses passed that have cumulatively served to destabilize the system? They want greater consensus on market fundamentals? Me too, but it sure would help if they knew their asses from a hole in the ground.
Is this a joke? Where have they been hiding?
What about food futures? Hungry people?