(Disclaimer : I am not nor have I ever been a speculator. I do have an MBA in Economics (minor Finance) but have never worked in either an economic or financial position.)
I have been troubled for many years by allegations made by politicians, some economists and financial writers that the actions of speculators are the cause of the rise in prices – especially oil. I have spoken to and corresponded with such people in an effort to ascertain whether their statements are true. So far, the best response I got was an “appeal to authority” by a New York papers financial columnist.
For any “trolls” reading this diary, let me explain the difference between a thermostat and a thermometer. A thermostat is a device that is used to regulate temperature. A thermometer is a device that shows the themperature.
If speculators are thermostats, their actions would have an effect on prices. However, if they are thermometers, they only report on the effects of other actions on prices.
From what I have been able to determine, speculators are thermometers – thermometers that forecast future events, yes, but only thermometers.
If anyone can show credible proof that speculators are thermostats, please produce your evidence.
Moe Lane
PG DeFreese
Victoria Coates
Daniel Horowitz
Dan Spencer
Defective thermometers
rasvar (Diary) Tuesday, April 5th at 6:04PM EST (link)Yes, they are thermometers but they might be a poorly placed one. They are like a thermometer sitting right in front of the airvent. They overreact to events and tend to go either too high or too low based on if there is heat or cold being put on the market.
They just have a habit of overreacting and estimating impacts of events skewing the result at times.
Thermostats!
ntrepid (Diary) Tuesday, April 5th at 6:45PM EST (link)“Credible proof”? Come on…these people are too connected and too powerful to leave that kind of stuff sitting around for those here in the Lower Orders to find.
Seriously, a dispassionate assessment of the functional realities with respect to ICE in 2008 (see CTFC Release 5511-88 referenced in some of the links below and ask yourself: why?)…injecting no judgments as to motives or integrity and certainly not (as best I can remember) allegations of illegality…there is little doubt that SOME OF THE SPECULATORS were/are “thermostats”.
(To refine your definition, they were a driving force…with both investments and press releases…with some but maybe not total control).
Please start here:
http://www.businessweek.com/lifestyle/content/jun2008/bw20080626_022098.htm
http://www.businessweek.com/lifestyle/content/jul2008/bw2008078_706271.htm?chan=search
Or, just for the entertainment value, through the ntrepid filter:
http://archive.redstate.com/blogs/ntrepid/2008/jun/28/i_don_t_fully_grasp_what_they_are_doing_but_i_sure_don_t_think_it_s_called_speculating
http://www.redstate.com/ntrepid/2008/10/15/revisiting-that-120-day-warning/
http://www.redstate.com/ntrepid/2008/11/16/clearly-the-heritage-foundation-doesnt-mind/
http://www.redstate.com/ntrepid/2009/01/10/2008-oil-futures-truthers-there-may-never-be-a-smoking-gun-but-there-is-definitely-gsr-all-over-cftc-release-5511-08/
Ntrepid
Proud Redstate Member since April 2006…?
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
These are allegations
Michael M. Keohane (Diary) Wednesday, April 6th at 8:13AM EST (link)not evidence. Of course speculators speculate based upon what they believe will happen in a particular market – if they are right, they are correctly working thermometers. If they are wrong – they lose money. The question remains – how do their actions influence the market? If the market is influenced by the fact that they are reliable thermometers, what is the problem?
Tell me how a speculator’s determination that the price of a barrel of oil will reach $ 110.00 in six months and his exercise of “Puts” & “Calls” to take advantage of that judgement causes the market to reach that level. That is why the posts you cite will admit that there is no “smoking gun.”
Even if all the oil speculators had met in secret and decided that the price of a barrel of oil would/should be $ 110.00 in six months, you still have to explain how they could do it. That is, as Shakespeare said, the rub.
The “experts” you rely on and that I have tried to question can make their assumptions all day long but I require proof.
To believe that speculatorsdrive market prices is akin to believing that the rooster summons the sun.
Do not classify the words or deeds of your opponents as being hatefull, malicious or criminal in nature if they can also be easily characterized as simple ignorance or gross stupidity. Anon.
Now I see…
ntrepid (Diary) Wednesday, April 6th at 3:20PM EST (link)…and I can offer no more assistance to your stated quest beyond the specific wording and other content of my original comment.
Ntrepid
Proud Redstate Member since April 2006…?
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
here is the problem with some speculators
Beaglescout (Diary) Wednesday, April 6th at 7:45PM EST (link)For instance Credit Default Swaps are essentially insurance you can buy against the possibility that you lose a mint on a speculative security. They are a derivative without any underlying value. One of the problems with CDSes during the crisis was that people could buy them without possessing any of the security they were insuring. So if someone bought enough of them, the legitimate owners of the securities couldn’t buy credit default swaps to hedge their securities, so they sold securities at a loss because they were too risky to hold, which made the underlying securities tank and the Credit Default Swap pay off. Combine that with all these tranches of NINJA mortgages and you had a market where people didn’t want to dump their tranches even though they were crashing.
So is that a speculator being a thermostat or thermometer? It is someone taking advantage of a poorly regulated market by using a large bankroll that can distort the market. I am sure there are other markets with similar problems, for instance short selling is susceptible to some of the same issues when it’s allowed to be done naked, without actually owning any of the stock to be shorted.
With oil we know that most who speculate on oil own large fleets and need to be able to forecast their costs 6 months or a year in advance, so they buy oil futures. But we also know there are those who speculate purely on the daily movement in prices. They’re trying to make money off that minor wave action without having any underlying need for the oil. Those are the people who, taken together, drive up the price of oil futures by increasing the trade volume and stimulating panic buys from those who really use the oil. They are part of a positive feedback loop on oil prices and increase instability, so they aren’t just thermometers. But they aren’t able to control oil prices either unless they have absolutely huge bankrolls on the order of a sovereign nation like Saudi Arabia or Bahrain. And since those last two countries profit from increased oil prices there is a reason for them to engage in this kind of tomfoolery.
“A nation which can prefer disgrace to danger is prepared for a master, and deserves one.”
Sir Beaglescout and Thermostats
ntrepid (Diary) Thursday, April 7th at 11:02PM EST (link)First, just a little semantic jab…I would argue that the first group you describe should be referred to as commodity futures traders (or futures reliant businesses). The second group are the speculators
Second, this little “either-or” game greatly oversimplifies the situation and ignores a vast gray area between the choices. Understanding that “thermostat” implies some measure of precision control, I don’t suggest that is at all directly applicable. The speculators in oil are/were just a driving force…that is all that is required to make their money. They just need to get the ball rolling. Being a layman in this area, I may argue that something like the “over-the-counter swaps contracts” referenced in some of the links that “effectively circumvent the position limits on normal trading” allows these major speculator entities to appear much bigger than they are…maybe like a sovereign nation…for little to no cost or risk. Then they create momentum…from my last link:
“So what caused the huge spike in oil prices? … Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures…”
“Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices… predicted a “super spike” in oil prices, forecasting a rise to $200 a bar”
“But it wasn’t the consumption of real oil that was driving up prices — it was the trade in paper oil. By the summer of 2008… speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined.”
“The pensioners whose funds invested in this crap got massacred…”
As I said before…for this little exercise, I “inject no judgments as to motives or integrity and certainly not (as best I can remember) allegations of illegality”. I just believe it is very hard to credibly argue that the major players in the oil speculation game were/are mere thermometers.
Thanks for your thoughtful reply.
Ntrepid
Proud Redstate Member since April 2006…?
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
In Which Goldman Sachs Agrees: THERMOSTATS!
ntrepid (Diary) Wednesday, April 20th at 7:51PM EST (link)Please look for phrasing such as “have pushed…prices up…” in the following passage:
“Goldman Sachs (GS) advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman’s advice as warning: ‘The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities.’” (1)
Ntrepid
Proud Redstate Member since April 2006…?
(1) http://www.businessweek.com/investor/content/apr2011/pi20110419_786652.htm
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
Don’t Look Now…More Thermometer Deniers
ntrepid (Diary) Saturday, May 14th at 3:33PM EST (link)Hmmmm:
“… Some 70 percent of contracts for future oil delivery are now bought by financial speculators — largely big investment banks and hedge funds — who never take control of the oil. They just flip the contract for a quick profit.
Only about 30 percent of oil contracts are bought by a purchaser that actually intends to use the oil, such as an airline. That’s according to the Commodity Futures Trading Commission, which regulates trade in those contracts.
‘I’m convinced … that speculators are actively manipulating (prices),’ said Michael Greenberger, a University of Maryland law professor who in the 1990s headed the CFTC’s trading division.
‘It’s harder and harder for any reasonable observer to dismiss the role of excessive speculation in this market,’ said Michael Masters, a professional Wall Street investor who knows how this game works. He’s testified before Congress repeatedly that speculators are pushing prices up well beyond what supply and demand would warrant.”
…
“Exxon Mobil Chief Executive Rex Tillerson noted Thursday in testimony before the Senate Finance Committee that this year’s oil prices don’t make any economic sense, though that’s not quite how he put it. He said that current fundamentals and production costs would dictate oil in the range of $60 to $70 a barrel. That’s at least $43 cheaper than this year’s highs of $113 a barrel reached on April 29 and May 2.”
Things to remember the next time you fill up…and when “we” are eventually asked to bail out a couple of dozen public pension funds that lost their butts betting on this stuff.
Ntrepid
Proud Redstate Member since April 2006…?
(1) http://www.mcclatchydc.com/2011/05/13/114190/speculation-explains-more-about.html
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
Thermostats vs. Thermometers: GAME ON!
ntrepid (Diary) Wednesday, May 25th at 7:27PM EST (link)[In which I come one step closer to retracting the “injecting no judgments as to motives or integrity and certainly not (as best I can remember) allegations of illegality” portion of previous comments.]
First, the denial:
“…the defendants have told regulators they deny they manipulated the market.”
Now, the specific allegations (take deep breath now):
“In a matter of a few weeks in January 2008, the defendants built up large positions in the oil futures market on exchanges in New York and London … At the same time, they bought millions of barrels of physical crude oil at Cushing, Okla., one of the main delivery sites for West Texas Intermediate, the benchmark for American oil … They bought the oil even though they had no commercial need for it, giving the market the impression of a shortage … At one point they had such a dominant position that they owned about 4.6 million barrels of crude oil, estimating that this represented two-thirds of the seven million barrels of excess oil … This type of oil is also the main driver of prices of the futures contracts, and their actions caused futures prices to rise … ’They wanted to lull market participants into believing that supply would remain tight,’ the agency said. ‘They knew that as long as the market believed that supply was tight and getting even tighter, there would be upward pressure on the prices of W.T.I. for February delivery relative to March delivery, which was their goal.’
The traders in mid-January cashed out their futures position, and then a few days later began to bet on a decline in oil futures, with Mr. Wildgoose remarking in an e-mail about the ‘inevitable puking’ of their position on an unsuspecting market … In one day, Jan. 25, they then dumped most of their holdings of West Texas Intermediate oil, and profited by the drop in futures…The traders repeated the buying and selling in March 2008, and were preparing to do it again in April but stopped when investigators contacted them for information, the suit says.” (1)
Of course, the defendants do not appear to be saying the market cannot be manipulated, just that they did not do it.
I don’t make the mistake of assuming that these (alleged) bad actors were the only ones playing such games but I also don’t suppose any of this will convince the strict-thermometer crowd anyway.
Ntrepid
Proud Redstate Member since April 2006…?
(1) http://www.nytimes.com/2011/05/25/business/global/25oil.html?_r=1&partner=rss&emc=rss
“Everybody has an agenda. Except for me.” – Michael Crichton, State of Fear.
Very good arguement, Beaglescout
Michael M. Keohane (Diary) Thursday, April 7th at 7:10PM EST (link)If the regulated activity is being poorly regulated or mis-regulated, the speculator, acting as a thermometer, is just performing a useful function – pointing out the regulatory problems. The fact that, in doing so, they make money is to our eventual benefit if their actions lead to better regulation. In a way, speculators perform a “semi-whistleblower” function in that their actions should alert everyone of a problem. However, the causes of such things as the mortgage problem were many and varied. Most were the results of past legislation and government action not financial conspiracies.
Do not classify the words or deeds of your opponents as being hatefull, malicious or criminal in nature if they can also be easily characterized as simple ignorance or gross stupidity. Anon.
Very good arguement, Beaglescout
Michael M. Keohane (Diary) Thursday, April 7th at 7:10PM EST (link)If the regulated activity is being poorly regulated or mis-regulated, the speculator, acting as a thermometer, is just performing a useful function – pointing out the regulatory problems. The fact that, in doing so, they make money is to our eventual benefit if their actions lead to better regulation. In a way, speculators perform a “semi-whistleblower” function in that their actions should alert everyone of a problem. However, the causes of such things as the mortgage problem were many and varied. Most were the results of past legislation and government action not financial conspiracies.
Do not classify the words or deeds of your opponents as being hatefull, malicious or criminal in nature if they can also be easily characterized as simple ignorance or gross stupidity. Anon.