Speculators

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

Its all BS. For every seller there is a buyer and vice versa. In the futures market it does not matter one iota whether I buy first and then sell. Or whether I sell first and then buy it back. Either way my loss is someone else's gain and vice versa. They are directional bets. That I have to buy back my short at a loss means I take someone else out at a profit.

It is not complicated. It is dead simple. That Congressmen are looking for someone to blame, that journalists are looking for a story to write, and that they find someone on Wall Street to make a few quotes to describe what is going on to make a good sound bite does not change the fundamentals.

Crude futures dropped 15% in a little over a week. More sellers than willing buyers, so the buyers keep dropping their bids. Simple.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

JohnDenver · Light Sweet Crude Joined: Aug 29, 2004 Posts: 1888

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

I am not sure what your point is? Higher prices spur research and development into energy alternatives. Higher prices encourage more production of food. Investors have surplus capital to invest and they want to protect themselves from government induced inflation and manipulation of financial assets by putting them into physical commodities. Can you blame them? Meanwhile some of the blame for higher energy and commodity prices rests squarely on the shoulders of government policy. Like export bans that curb agriculture prices. And energy subsidies that fail to curb demand.

I get really sick of this anti-market rhetoric all the time. Food in 1999-2001 was cheaper then at anytime in the past 200-years. Now we have bounced off a very low base due to higher demand, energy price increases, a weak US dollar and elevated global inflation. Speculators and investors are not creating those external conditions. Solve them and you go a long way to addressing food security issues. I am afraid that with higher energy costs that higher food and fertilizer prices are here to stay.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

JohnDenver · Light Sweet Crude Joined: Aug 29, 2004 Posts: 1888

Mr Bill, I basically agree with everything you said. However, when you say:

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

JD, you are right, of course! A stampede out of essentially 'unlimited' paper money and into 'limited' physical commodities such as energy, metals and ag commodities would cause the mother of all bubbles. The price would quickly get out of line with all fundamentals. Who could afford (just for argument's sake) $1000 oil, $100 wheat and $10.000 gold (all at the same time) in real, inflation adjusted terms if their salary did not also increase? Less than 0.01% of the population maybe? Collectively we cannot afford to pay more for those resources than the GDP (wealth) generated to pay for them. That may be a lot, but it is not unlimited.

That huge misallocation of resources would have devastating effects on economies. In developed countries perhaps 5% of the population are involved in agriculture directly. With more involved in secondary industries related to food production. In mining? Maybe less than 5%? Etc. I think someone once posted that most of our manufacturing capability could be taken care of with just 15% of the population. Okay, so with a stretch of the imagination maybe we have accounted for about 25% of the total workforce? The economy has to expand to include the other 75% of the population otherwise they would be like unemployed and have no income to buy energy, metals, ag commodities (or anything made with those inputs). That would put enormous downward pressure on wages for example. Making those high prices even more unaffordable.

Think of this production frontier graph in terms of 'basic essentials' like food, fuel, clothing and shelter, and the other end of the curve as 'discretionary spending' that is everything else. Resource scarcity means that as the potential economic pie shrinks we have to collectively spend more of our total production capacity to produce 'basic essentials' and this leaves proportionately less capacity (or the ability to pay) for 'non-essentials'.

But remember 'money' has no intrinsic value. It is like any other asset that trades relative to all other assets in value. If there is too much money we get inflation which just means that money loses its value relative to physical commodities for example. Just like surplus labor devalues the price of labor relative to those physical commodities. The flipside of demand is the ability to pay.

If all our surplus capital all of a sudden flowed into fuel, food and fertilizer there would be a huge incentive to produce more food; use alternatives to inorganic fertilizer made from natural gas; and make alternative to fossil fuels economically feasible. So like any bubble it would burst eventually. That is within our physical limits to produce more. Obviously capital alone cannot create more oil. Or create more land. But it can stimulate marginal land to come into production as well as make alternative energy economically more viable.

That may sound a little cornocopian, so I apologize. I obviously do not believe that we can magically invent our way out of any economic or environmental problem. There are still physical limits to growth. But again going back to the production possibility frontier there is still a lot of room to switch capital into those areas of the economy that generate 'basic essentials' and away from 'discretionary spending'.

Crocs' share price is down 94% in the past 9-months. Down 45% yesterday alone. Obviously investors have found somewhere more interesting, and essential to the economy, to put their money into than plastic footwear and questionable fashion. Should the powers that be hinder that sober assessment of where we are and where we are headed? I think not.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

smallpoxgirl · Moderator Joined: Nov 08, 2004 Posts: 6470

skeptik · Posted: Fri Jul 25, 2008 7:42 am Post subject: Re: Speculators

cube · Fusion Joined: Mar 12, 2005 Posts: 3823

cube · Fusion Joined: Mar 12, 2005 Posts: 3823

BTW I think there are too many "JohnDenvers" in this world today (50%) who would want nothing more than to hang innocent people like me / speculators upside down by our toenails and give us a good shake down until all our money falls out of our pockets. *insert mental image*
I'm actually thinking about an "exit - strategy".
I think EVERYBODY here should have one whether you're a speculator or not.

my 2 cents

JohnDenver · Light Sweet Crude Joined: Aug 29, 2004 Posts: 1888

efarmer · Intermediate Crude Joined: Mar 17, 2006 Posts: 510

I understand the rudiments of how paper money is working and
is supposed to work as well as the market and how it works the
best when it is less rather than more regulated. In the last two
decades in the USA I have watched a huge amount of the population
directly or by proxy end up with a substantial amount of money in
the market. I have always held a notion (that could be totally
useless of course) that rather like a food chain there is a financial
chain and hierarchy that requires a large and stable base of
organisms to produce and exist in order to keep the system stable
for the more predatory and rarer life forms that occupy higher
levels on the pyramid. I think it is rather shaky up on the balcony
and penthouse because the foundation is unsound.

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

I started trading futures and options on the CBOT and WCE back in 1985. The fundamental concept of trading wheat, oats, barley, energy or the soybean complex has not really changed very much in the intervening 20-some odd years. One simply has to wonder how such an inherently unstable system has taken so long to blow-up? Why did we not see $10 corn and $100 oil back in the 80s if speculation is the only reason we see those levels today? I like to have a good debate, but I also feel very comfortable being right in the minority rather than wrong in the majority. I would be worried if eighty percent of the posters here agreed with me. But I have always been a bit of a contrarian.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

skeptik · Posted: Mon Jul 28, 2008 5:26 am Post subject: Re: Speculators

Rick Santelli oil speculation debunk
http://youtube.com/watch?v=6oGAX1g60HU

efarmer · Intermediate Crude Joined: Mar 17, 2006 Posts: 510

I am reminded of my high school days, where a great many
of us set out to be rock stars. We grew the hair, modified
our dress and behavior, and pursued rock stardom with
vigor. Needless to say, it was fun, but we didn't all become
rock stars although one of us did make it to the higher
portion of the heap for a flash of glory.

If I could tell my middle class and working class peers
one thing I have learned, it is that we are not all going
to get rich, bell curve of distribution and all that you know,
and it is OK and life can be quite fine and rewarding anyway.

Not to say that there is anything wrong with being wealthy,
but it is a relative status, just like being famous, and the
numbers are against a majority of us getting there.

If I had made it and was a gracefully aging, rich and famous
rock star, I would pick Mr. Bill to advise me on what to do
to make my money rock and roll as good as I could musically.
We are indeed all speculators and it makes like good, hope
is speculation, isn't it?

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

efarmer, I like to talk about markets, but believe me I am not a great money manager. I have always been a little too conservative and avoided fads. Some of those fads like the dot.com bubble were quite profitable at the time. Guys like Buffet and I just did not get it! Kinda like my taste in music. Call me a relic, call me what you will. Say Im old-fashioned, say Im over the hill. Today music aint got the same soul. I like that old time rock n roll But thanks for the compliment just the same! ; - ))
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.