Posted on 05/23/2008 9:32:18 PM PDT by gleeaikin
The global financial system these days is beginning to look like a giant Whac-a-Mole game--when we think we've knocked down one speculative bubble, another one just like it pops up.
The latest is the commodities bubble--everything from oil and natural gas to gold, copper, wheat and rice....Like the credit bubble, this speculative bubble in commodities has badly distorted the workings of key markets and sectors of the global economy....this bubble is creating vast new wealth for some, including brokers, traders and investment houses who have gorged on fees and trading profits.
The difference this time, however, is that even before it bursts, this bubble is causing economic discomfort for households and businesses around the world, and misery for hundreds of millions of hungry people who suddenly cannot afford a bowl of rice or scrap of meat. Speculators have always played a prominent role in commodities markets, but in the past year, they have literally overwhelmed them, causing a dramatic increase in trading volume, volatility and prices and disrupting many of the normal relationships between producers and end-user....But perhaps the biggest push came from pension funds, foundations and university endowments.... To meet the needs of these investors, Wall Street and Chicago's commodities houses came up with all sorts of new vehicles, including exchange traded funds, index funds, and structured investment vehicles--the commodities equivalent of mortgage pools and asset-backed securities.
The [Commodities Futures Trading Commission] last week decided to hold off on plans to raise the limits on how much any one fund can speculate on any commodity. I suspect...the industry, which has always called the tune at the CFTC, fears a backlash in Congress that could usher in an era of tough new regulation of commodities trading as part of a broader package of financial regulatory reforms.
(Excerpt) Read more at washingtonpost.com ...
The business press is now full of thumb-sucking articles about the “commodities bubble.” Is it in fact a bubble and how long will it last? If it is in fact a bubble, it will eventually burst. It may, however, reflect some long term adjustments to supply and demnand.
Unfortunately, since the purchasers of these instruments are not the end users like refineries or grocers, this has nothing to do with supply and demand in the conventional sense. I hope it does burst and get these speculator types out of this market.
Dang me, go get a rope and hang me! Somebody finally figured out these modern vampires are sucking the life out of America
just to get rich. Perhaps they might reflect on the French Revolution and its result.
Just to make myself clear, I am not against someone getting rich when they are producing, or providing a good or service that people need. I am against pure speculation just for getting rich. Like these guys who were buying up companies, spliting them up, selling off parts, and could care less who they hurt or if the company continued to be productive.
> Just to make myself clear, I am not against someone getting rich when they are producing, or providing a good or service that people need. I am against pure speculation just for getting rich. Like these guys who were buying up companies, spliting them up, selling off parts, and could care less who they hurt or if the company continued to be productive.
The service provided by the speculators is called “liquidity”. Without the speculators there is no market. Speculators that purchase company shares in the expectation that they will be able to resell them at a profit create stock market (and 401K plans and IRAs, etc.). Those who trade commodities create commodities market. When a farmer would like to get a guaranteed price for his product prior to planting it, he turns to a speculator. When an airline wants to get a guaranteed price for the fuel it will need next year it turns to a speculator. The speculator earns his keep by assuming the risk others do not wish to carry. Some times he wins, some times he loses.
BTW, Karl Marx referred to speculators as “parasites”.
Here is my most recently posted thread. I know this isn’t exactly GGG or Catastrophism but I thought you might find it interesting since it is affecting several billion people, including you and me. Actually, maybe it is Catastrophism, at least a little. :-)
I hope you read the whole article as what is happening here is not business as usual. This is a whole bunch of new speculators who have entered the commodities market in the past year or two. It is a distortion of the market which is having negative effects on just about everyone including the farmers. These are the same guys who were doing things that helped distort the mortgage market which has now ended up with the forclosure bust.
Do you have the faintest clue about regulation in futures mkts? It sure as the devil doesn't sound like it, mate.
Just what these mkts need: more ignorami.
And, before you start in, be advised that I've traded futures for 36 years, been a broker, runner, a desk man, a back room specialist, margin clerk, and compliance officer.
I've written extensively on the futures industry, some hundreds of articles and a book ('Trading Options to Win', John Wiley & Sons, 2003). In 1974, I and several colleagues were specifically requested to confer with Tom Foley, who was at the time chairman of the House Agriculture committee, and was drafting the 1974 Commodity Futures Trading Act.
Now, go right ahead. Parade your ignorance about ''unregulated, unsupervised.''
I can always use a good laugh.
Just like the rest of us in the futures industry, this group NEEDS to be regulated. Their excesses to date would have made Jesse Livermore blush.
Very nicely said. My compliments, FRiend!
Paper clips.
The answer is paper clips.
Buy as many as you can now, the price will be rising! I’m tellin ya, fill your closets. When the SHTF, they will be invaluable. Life saving even! I’m series!
;^)
I don’t know if you read the whole article, but “unregulated, unsupervised” is what I got out of the author’s statement: “But what turned a bull market into a bubble was the sudden arrival of large numbers of new investors and an array of new investment vehicles, many of them involving derivative instruments traded outside the confines of regulated markets.”
Can you tell me a better description of the above than “unregulated, unsupervised” if so, I will be happy to use. Also, I am wondering if your extensive experience in the futures market includes the past two years, when all these bubble producing activities were introduced. I admit that I don’t know a lot about this market, but how relevant is your experience of 34 years ago to these new conditions? If you could explain to me more about these new investment vehicles which he mentions in the article, I would love to learn more about them.
FWIW, your first mistake was posting a financial article from the Washington Post analyzing current market conditions. The second mistake, was commenting on said article. Third, a mini-debate with SAJ. Fourth, .....
The group you say NEEDS to be regulated is probably what I and the author were referring to.
Also, I have been looking more into the oil market than the food market, and particularly the oil ETFs. Try Googleing USA OIL ETF for a number of interesting links. Food, as you say may have started earlier, but the oil change is mostly the past two years, and especially since the “supersized” instruments were made available to the institutional investors. See this 2007 link for more info: http://www.247wallst.com/2007/01/supersizing_the.html
You’ve heard the term “peak oil”.
I’m not sure I believe it, but that’s another thing.
Peak oil might imply peak food.
The author is on the staff of the Washington Compost, and if that's not enough of a clue for you, you have my sympathy. You'll need it.
In the past two years, I've traded actively, as always, attended the usual conferences, screamed at a couple of Congresscritters for being jackasses on a couple of regulatory proposals (geez, they get more and more stupid over time, unfrickinbelieveable!) and developed a website dedicated to historical and seasonal research in futures mkts. Visit Time & Timing for all the historical information about commodities pricing that you care to see in 60 major markets, in US and Europe. Sorry, no Asian mkts, technical problems in including those mkts.
My 'experience' continues right up to the present date, m'friend. We saw this same type of game, on a smaller scale, in 1979-80. Remember Bunker Hunt and his machinations in the silver mkt? Same deal as here and now, but w/o the funky ''products'' invented by slimeballs like Goldman, plus the fact that Bunkie had an ego as big as all outdoors and WANTED publicity (arrogant fool!), whereas the big specs today want to avoid publicity at all costs if possible.
As Mark Twain once quite trenchantly noted, ''History doesn't repeat itself, but it does rhyme.''
There have been several very fine articles in the last two weeks on these new index products, one especially good one by a man named Masters, with whom I've a slight acquaintance. Knows his onions, for certain, and has excellent practical suggestions for chasing the overparticipating specs (read: cheating MFs) out of the energy mkts. I don't have a link to it at the moment, but I can surely dig one up over the weekend.
:’) Thanks gleeaikin! Not really a catastrophe, merely a disaster. Catastrophe has pieces of bigger disasters than this in its crap. ;’D
But seriously, this is pretty interesting. I think you (hubel458) will find it pretty interesting as well.
There’s A) too much money around, and B) it’s in the hands of herd animals who produce bubble after bubble, because C) it always works in the short- and middle-term and D) is easier than actually doing the research and diversifying portfolios which in any case will E) be really boring and lackluster compared with the bubbles.
Peter Lynch wound up taking an early retirement from managing Fidelity Magellan back when he was at the top of his game, while he still looked like the man with the golden arm. The money regularly deposited in 401K and IRA and mutual fund accounts had to go somewhere, and had as much as anything credit for that lovely long bull market.
http://www.freerepublic.com/focus/news/2017389/posts?page=67#67
“chasing the ‘overparticipating’ specs...out of the energy market.”
Since the big runup in the oil market seems to be since the large batch sale instruments costing over $4 million were the trigger for the big influx of speculators, would it make sense to regulate the amount down a bunch for anyone who is not an end user?
One MAJOR difference with ICE as opposed to NYMEX. For some reason (I can guess, but that's to no purpose) ICE is effectively unregulated by CFTC, and that's where the big boys go to stay outside the light of public scrutiny. NYMEX, contrarily, is required to publish open interest, breakdaown by mkt participant category (commercials, hedgers, large specs and small specs) weekly.
In short, ICE is both opaque, in the sense of information, and has no effective position limits. If you think this is -- always has been, too -- a recipe for trouble, you're exactly correct. So is SIMEX, but it's in Singapore, and we'd have a hell of a time regulating their asses, although the Singaporean gov't might not be averse to such a plan.
There are no ''supersized'' instruments, merely construct instruments. Goldman, et al., will whip up an ''index'' product on demand for anyone with enough buckos. There are various features to the financing of same which allow Goldman et al. a nice, heavy rake-off, but the net of it is that these products serve exactly no economic purpose.
The problem, at bottom, is this: every single physical futurs mkt there is is of finite size. In the front 3 months of NYMEX crude, as of last night, there were 544,xxx contracts open (the ''open interest''). At 7% margin and figuring $131/bbl WTI, it would take US 1.693 billion to control a NEW 1/3 of that mkt. Funds, capital pools, pension plans (who have NO business in futures mkts, per ERISA!) can easily raise that amount if they wish to -- as long as they can stay away from the regulators.
Ah, but now they don't need nearly that much capital. For the same effect on the mkts, Goldman and the boys can whip up a special ''product'' for them that trades crude and/or other mkts OTC, out of the sight of regulators, for FAR less.
Starting to get the idea, boyo? The bad news is that the Regress haven't a clue about what to do about this, and in any case are pleased as hell that energy prices have gone cuckoo, because the unwashed public is screaming at them to ''do something''. This, of course, gives them more power to abuse.
They'll ''do something'', too, yes they will. It's called a replay of the 1970s. You'll just love it.
H. L. Mencken once observed that ''Democracy is a system where the public knows what it wants, and deserves to get it -- good and hard.''
I see no reason whatever to quarrel with Mr. Mencken's sentiment. The public are too stupid to rein in the Regress, which in turn is too stupid to recognise and actually solve this particular problem (details? see any number of my recent posts on oil threads right here on FR). May they all go merrily to hell in a handcart.
However, just like Gloria Gaynor (oddly enough, from the 1970s, too, hmmm...deja vu all over again...), I will survive. Whether the Republic will or not, it's too early to say.
It would be entirely reasonable to re-regulate large specs. Suspend Section 1056 of the IRS code for them. Regulate ICE (this is a MUST!). Lower daily trading limits and make trading after a mkt touches a daily limit, for large specs, for liquidation only (there is precedent for this, btw). Put criminal sanctions, not just piddly-ass fines, on violation of position limits.
Above all, enforce ERISA. This chases ALL the pension funds out of futures mkts -- where they don't belong in the first place.
FReegards!
> I hope you read the whole article as what is happening here is not business as usual. This is a whole bunch of new speculators who have entered the commodities market in the past year or two. It is a distortion of the market which is having negative effects on just about everyone including the farmers. These are the same guys who were doing things that helped distort the mortgage market which has now ended up with the forclosure bust.
I was actually responding to a comment, not to the article. As far as the unusual commodities inflation is concerned, we should put the blame where it belongs - the ethanol lobby and the [new] farm subsidies bill - rather than the speculators.
Index funds? Index funds are not new, and are not -the commodities equivalent of mortgage pools and asset-backed securities. They are long term investments.
Exchange traded funds, also are not really all that exotic. They are simply a different form of buying and selling mutual funds. In themselves they are also not short term speculative instruments.
I would question whether the author knows what he is even talking about, unless I missed something.
Thank you for the interesting links, some of them are too technical for my level of education in this area. After I have my boyfriend explain some of them to me I may have more comments tomorrow. It is now 4 am and I am going to bed.
I was particularly interested in the big increase in oil ETF purchases beginning in 2007. Something new was introduced so that large institutional investors could buy huge lots of $4 million at one time. Google US OIL ETFs and check some of the articles. It is amazing to see how much the quantity of purchases increased after this happened.
FR bookmark , ... and , just in the time it took for me to do an “in-depth skim” of this thread ...
3 more posts appeared , ... I hope this thread goes on for days
That’s where I’m headed too. G’night!
Tough to raise cash for an enterprise if you can't find speculators willing to take a risk.
I think we need to be more specific about identifying the problem in this scenario. It's not speculators in general, but a combination of things all at once. Mostly with the American House and Senate strangling domestic supply by prohibiting the harvesting of our own natural resources. Otherwise, this never would have been an issue. These speculators are betting our government is too stupid to do anything and willing to flush our nation down the toilet.
They're probably on to something...
I heard a report this morning on Wall Street Journal weekend about a trend of people buying coins instead of funding their IRA's because they were tired of stocks going down. If this is the case, we are going to have another group of people living off just social security..
Thank you for this very clear and concise defense of speculators -- this thread and many others on Free Republic need to understand the role of the speculator. Another important function in our free market capitlist system is being demonized, just like "Big Oil".
It seams there is a base of support to raise the margins in oil to fully fund the futures market.
Can you give a brief explanation of how this will give us the food lines that the USSR had?
I guess I have two questions:
1 - When is the oil bubble going to burst?
2 - Who’s going to whine to the government that we bail them out when they lose their shirts once the oil bubble bursts?
An interesting situation. Gold bubble, Nazdog bubble, housing bubble and now oil bubble. We keep bubbling along.
If one can time the oil bubble bust right, a good sum can be made.
But these new speculators (if the exist) haven't changed the law of zero sum. Ninety percent of all speculators lose. How does that fit in with the notion that speculators are driving this commodities bubble and enriching themselves?
OK, I admit it. I’m thoroughly at a loss as to what you’re talking about and what it may have to do with my post to which you replied.
Better review your notes from your game theory course.
What you know about trading I could put under my fingernail chum. Stop getting so high and mighty. Chances are I was trading yen, soybeans, oil, bonds and gold when you were in diapers.
Very well said. And brief too.
Thank you.
You still don't know sod-all about game theory, or you would never have made that silly comment.
30-year bonds didn't have a futures mkt until 1977. Yen didn't have a futures mkt until 1974.
Chances are? No, the chances are very distinctly NOT.
Regarding the link “Berserker Funds in Commodities”, meat of the nut is the following quote:
“The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over the counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity swaps, which 85-90% of them do, they face no speculative position limits.”
Since the Senate is raking the oil companies over the coals, for something outside their control, the Senators need to be informed of the above as well as other information on this thread. This can be done by calling 202-CA4-3121, and asking the operator for Sen Lehey (sp?), and Sen Specter, and asking for their staff person(s) who is actually dealing with the hearings. Have at it FReepers!! Leaving for a meeting now, will be back around 6 pm.
And I'm sure you had many losing trades since. Why else would you come on here and play the "expert".
And your definition of zero sum is just that: YOUR definition.
Your hubris is uncalled for and unwelcomed around here.
I remember you now, you are the same guy who was telling everyone how bad inflation was and claiming you had a flattening trade on - notes/bonds. LOL
Every trader has losing trades. And the sun rises in the East, too. Tape at eleven.
''My'' definition, forsooth? Hardly. Try these sources:
... wherein the definition of a zero-sum game is given as follows:
''DEFINITION: Zero-Sum game If we add up the wins and losses in a game, treating losses as negatives, and we find that the sum is zero for each set of strategies chosen, then the game is a "zero-sum game."
In less formal terms, a zero-sum game is a game in which one player's winnings equal the other player's losses. Do notice that the definition requires a zero sum for every set of strategies. If there is even one strategy set for which the sum differs from zero, then the game is not zero sum.''
======
From a founder of the Vanguard fund family:
...wherein the following passage appears:
''Why do costs matter? Consider the analogy of the stock market as a casino, in which the investor-gamblers swap stocks with one another, a casino in which, inevitably, all investors as a group share the stock market’s returns, no more, no less. But only until the rakes of the croupiers descend.
Then, what was inevitably a zero-sum game—a fruitless search by investors to beat the market before costs—becomes a negative-sum game after the costs of investing are deducted. Beating the market, by definition, is then a loser’s game. Gross market return, minus intermediation costs, equals net investor return—clearly, a highly complex arithmetic formula.''
Or try, NegativeSum 2, which also discusses several studies of traders' results, and states baldly that:
''Trading is a negative-sum game''.
======
Hubris, eh? Got a mirror?
Ta-ta...rant at thin air if you like.
Matter of fact, if you'll do the same, I'll be happy to post my daily mark-to-market results, right here, and have my brokerage certify the figures.
Whatsamatter, boy, cat got your tongue?
Right. You and I are going to post our trading results on a public board. Be my guest. As for me, no thanks. I’m laughing all the way to the bank. And I don’t believe you for one minute.
Hurts to be in that position, huh? If you don't like my "attacks" then stop provoking them. I didn't start this ball game you know. In the futures market every contract has an off setting buyer and seller and a date in the future when that transfer has to take place. In the stock market one can buy a company on the day it has one store and sell it years later when the company has 100 stores. And the original transaction can be when the stock is first issued by the company.
So I'm glad that you can find a bunch of definitions for zero sum. I can find a bunch of definitions for lots of things.
Yawn.
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