On Speculators
My friend Rob Fraim on Speculators:
You know, we don’t mind it when speculators drive up the price of our stock portfolios. And we didn’t complain when speculators made our house values rise.
However, now that (arguably) speculators are said to be driving up the price of oil, we hear the outcries of outrage and the call for more regulation on energy trading. “Speculator” becomes a bad word all of a sudden and said speculators are evil and must be stopped. So many are saying at least.
But let’s take a deep breath. What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted.
If a price movement is purely driven by speculators, at some point the market will do what the market does and the aberrant price will normalize. If on the other hand the reasons for the movement of a market are fundamentally rather than speculatively based, then all of the grumbling and grousing about speculators is shown to be irrelevant.
If skyrocketing oil is the fault of speculators time will work it out, and some of the speculators will be burned. The risk we run is that in pointing fingers at market participants and blaming them for energy prices, we end up having our attention diverted from the fundamental issues that need to be addressed – energy exploration, governmental policy, energy conservation, improving energy efficiency and most importantly the need to develop energy technology and alternative energy sources to ultimately make oil a much less critical commodity.
Good stuff -- thanks, Rob!
Sunday, June 08, 2008 | 12:30 PM | Permalink
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Ditto
Posted by: John Wellman | Jun 8, 2008 12:40:25 PM
jimmy Carter wanted this energy policy 30 years ago.
Posted by: mel | Jun 8, 2008 1:13:15 PM
I keep hearing all this talk about the housing boom gone bust but I'm not seeing it where I live. Sure prices have dropped maybe 10-20%, especially in the condo and low end markets but relative to where they were 10 years ago, it's nothing.
ex. a tract house sold for $250k ten years ago, last year at the peak they were going for $850k. Now they're around $650-700k. Still almost a triple in 10 years? Heck, even if they drop another 20%, it still would have been a great buy.
It seems the complaints come right after the peak and by those who sought to profit from the rise continuing. Most likely, prices will remain flat for the next 5 years before increasing...at least if history repeats itself.
My point is that comparing housing prices to last year's prices is a self-fulfilling (ugly) prophecy. Compare current prices over the long term and it looks much different.
Posted by: Marc | Jun 8, 2008 1:23:11 PM
"What has always happened after speculative forces have driven the price of stocks too high? Eventually they corrected to reasonable levels (and beyond.) And what about the recent speculation-driven housing boom? It busted."
Wow. Does that ever gloss over a lot. Housing prices are still correcting and the balance sheets of the financials are a level 5 biohazard. The economy has yet to get dumped on it's head but oil is trying it's hardest. After that all we need are the Mongol hords to take to the streets and Rob's piece might look very egg-headish; like one of those who surface every now and then to say the New Deal prolonged the Great Depression when what they gloss over was the lost trust.
Posted by: Chief Tomahawk | Jun 8, 2008 1:28:12 PM
Marc, it took about 4 years to increase astronomically, it'll take a couple of years at least to hit bottom (which, you are correct, MAY not be bottom compared to 1990). That MIGHT be reasonable, but that depends on how hard the owners are hit.
One of the few bright spots this country still has is its graduate schools. We have been devoting far too much brainpower to the financial sector. IF we get off our complacent asses and actually try to solve some of the problems (agricultural production, climate, energy supplies) we may, oddly enough, find ourselves again as a manufacturer to the world. BUT we've got to start now. With shipping costs being what they are, there is no reason not to believe that we may begin producing our own goods again. Detroit may get (an absolutely unearned) second chance.
Posted by: bk | Jun 8, 2008 2:07:52 PM
Marc, it took about 4 years to increase astronomically, it'll take a couple of years at least to hit bottom (which, you are correct, MAY not be bottom compared to 1990). That MIGHT be reasonable, but that depends on how hard the owners are hit.
One of the few bright spots this country still has is its graduate schools. We have been devoting far too much brainpower to the financial sector. IF we get off our complacent asses and actually try to solve some of the problems (agricultural production, climate, energy supplies) we may, oddly enough, find ourselves again as a manufacturer to the world. BUT we've got to start now. With shipping costs being what they are, there is no reason not to believe that we may begin producing our own goods again. Detroit may get (an absolutely unearned) second chance.
Posted by: bk | Jun 8, 2008 2:10:04 PM
Hey no problem as long as you eat shit when you make a bad play. that's not happening in housing now is it? The game is rigged, privatize the profits and make the little guy (taxpayer) eat your losses. Sorry, but that never works out. Now we have a hedge in oil to cover poor equities and failing banks putting evan more stress on this huse of cards. Don't mis the forest despte the trees. I would imagine using taxpayer dollars. This is far from over and we will be amazed down the road how we thought this was just going to be a bump in the road.
Posted by: Ken H. | Jun 8, 2008 2:10:11 PM
oil prices will fall after surge. Governments should find ways to stop this speculative activity.
Posted by: VENKATAKRISHNA NALAMOTHU | Jun 8, 2008 2:14:28 PM
Slightly off topic, but I could not resist.
---
Quotable
"So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences."
Alan Greenspan, November 18, 2007
---
That is an UNBELIEVEABLY irrational statement to have come from an Ex-Fed Chairman. God help us. Well, I guess that makes us all World Travelers now, huh?
Source: PrudentBear.com
Posted by: BG | Jun 8, 2008 2:33:02 PM
Have enjoyed your posts for over a year. Thanks for the good work. Below is a CSpan link with testomony before a Senate Committee by, among others, George Soros and Michael Greenberger, former CFTC Director. Its a long one, but a real eye opener. Start 20 minutes in for Soros and Greenberger testomony.
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=205797-1&showVid=true
Posted by: Cal8invest | Jun 8, 2008 2:43:49 PM
It's amazing (but sadly predictable) that so many would rush to judgement, vilifying traders and speculators, while at the same time, having little or no idea how the market actually works.
For that reason, Rob's comments are a sorely needed reminder that speculators are not to blame for rising (or, falling) prices.
In actual practice, speculators help provide market liquidity and engage in price discovery by anticipating future supply and demand conditions and betting accordingly. In other words, they are making some judgement about the future and putting risk capital behind their opinions.
I forget where I originally heard this, but someone once summed up the issue like this:
"If an evil group of speculators were to blame for the rise in price of [object "X"], then an equally beneficial group of speculators were responsible for its subsequent decline."
Posted by: David | Jun 8, 2008 2:52:49 PM
The problem with the argument stated is that a lot of innocent people get hurt by the results of the speculation. For example, even those, like myself, who haven't taken out a mortgage in 25 years cannot sell our houses in order to relocate. This in a market that has not been part of the boom, but because no one can get a mortgage these days. We'll get over it, but many people don't have spare resources.
Similarly, many people who work in transportation are loosing their jobs and consequently houses, etc. because of the price of oil.
And, as we have seen, many of the worst offenders have the political clout to get bailed out when the market should crush them.
Posted by: Mike in NOLA | Jun 8, 2008 2:54:23 PM
This is all very reassuring for all of us living on more than $2 / day.
But oil is different than pets.com shares and McMansions in Orange County. When speculators drive up oil prices like they have, people die.
I'm not sure that this means there is anything we can do about it, or that we should if there was, but it _does mean_ that we can't take a nice luxurious 10,000 foot view of how this "recent unpleasantness" will all work out for all us rich white people.
Posted by: skeptical | Jun 8, 2008 3:40:35 PM
The speculators per se are not the main driver of high oil prices but they are aggravating a bad situation and should be barred from the oil and gas markets. The argument that they provide liquidity is just complete crap. The Exxons, Conocos, and Valeros of the world don't need their stinking money.
There are too many people who don't gallivant around in Porsches or Ferraris who are going to be faced with a decision to heat or eat this coming winter. It has been bad enough for them the last two.
Posted by: Tom F. | Jun 8, 2008 3:55:51 PM
skeptical "When speculators drive up oil prices like they have, people die."
What exactly is killing them?
Just how many are being killed, and how would that compare, for example, to the ~43,000 people killed in American traffic accidents annually with "cheap" oil?
Posted by: Estragon | Jun 8, 2008 3:59:01 PM
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Mealer Companies has something new and exciting!
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THIS IS WHAT JOHN McCAIN IS ALL ABOUT!
AND EXACTLY WHAT MEALER COMPANIES IS ALL ABOUT!
No fossil fuels are used for our MC vehicles, so OPEC can take a running leap. This is a funded operation, thanks to John McCain and a few supporting celebrities.
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Or better yet, have your own dream and let me keep mine!
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A Democrat lead welfare state is bad for the economy and worst for the world, as we all know that to be self-evident.
A STRONGER AMERICA IS A STRONGER WORLD, OWN A PIECE OF WHAT MATTERS MOST.
John McCain and the Mealer Companies will pave the path for all Americans to follow and live their own dream.
If the goals are not first American goals they are not viable goals at all.
Check out everything I am claiming and realize the proof is in the reality of what is happenign and not some distant convoluted, abject and lame "Change We Can Believe In" claim that have fooled so many people seeking the reality of what John McCain and Mealer Companies is offering.
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Wow.. I guess I am getting excited here...
To Hell With OPEC!
Posted by: jl mealer | Jun 8, 2008 4:00:25 PM
Of course demand has caused the price of oil to rise. The problem though is: What would the normal price of oil be? Look at Thursday and Friday. Demand didn't cause oil to go up by $10/barrel in one day. Or $15/barrel in two days. As others have said, sharp increases in the price of oil can lead to bad things for the economy.
Posted by: Joe Klein's conscience | Jun 8, 2008 4:00:33 PM
What I find amazing (and perhaps unforeseen) is that it looks like speculation in oil may be actively encouraging the producers to cut back on the supply. The sad fact is that there is tons of strain in getting out as much oil as they currently do, and a lot of the strategy was to build up a large amount of investments before the oil infrastructure fell apart completely. Now that they can earn enough to make those investments without much effort, they may be encouraged to cut back and let it ride.
Does anyone know of any research that has been down about how speculators can actually affect the supply/demand curve so that it becomes reality?
Posted by: mikkel | Jun 8, 2008 4:02:55 PM
Speculators typically only drive futures prices.
Physical oil can be driven up through hoarding, but speculators don't like getting their hands dirty.
Tom F. - Canadians seem to be able to both heat and eat even though prices tend to be higher. It's pretty cold there too. Likewise the Brits, Europeans, etc.
Posted by: Estragon | Jun 8, 2008 4:03:21 PM
High oil prices hit everybody sooner or later... I didn't see that happening with real estate prices. If Joe Blow decided to take out a loan on an overpriced house, that's one thing. But if Joe Blow is forced to quit his job because he can't afford to travel to work after the increased cost of food, heating, and gas is taken into account, well, isn't that different?
Thus the howls of outrage.
...If the profits are going to discovery and exploitation of new resources, then maybe we'll get lucky and the supply crunch won't be catastrophically disruptive.
For now, though, it hurts like hell.
Posted by: ben | Jun 8, 2008 4:04:33 PM
Stock portfolios and commodities indexes are two very different things. Equities were always meant to be paper assets. Grains, Fuels, Materials, etc + (extreme amounts of leverage) were not.
Posted by: spinchange | Jun 8, 2008 4:07:35 PM
spinchange,
Please explain the conceptual difference between me owning the stock of a company that deals in commodities futures versus me dealing with commodities futures directly.
Posted by: Estragon | Jun 8, 2008 4:11:39 PM
It would be nice if there were some kind of regression model which showed speculaton versus normal demand led prices. Maybe we need a new energy policy which explores alternatives. I read a statistic which said that the energy used in a nuclear reactor was approximately 30 percent. Ther rest was wasted. Focusing on recovering wasted energy would seem a worthy goal.
Posted by: estaban | Jun 8, 2008 4:16:17 PM
You have arrived Barry, now your getting yahoo board pump & dump spam (j l Mealer post)!!!
Posted by: MarkD | Jun 8, 2008 4:31:06 PM
A majority of TBP readers will agree that increased future regulation of the markets is a reality born out of the events of the past year, though I am certain that a lesser amount will agree that this is the appropriate course of action. Another regulation or limitation imposed will be who is allowed to participate in commodity markets- specifically, who is allowed to particpate in petroleum futures markets. Certain commodities, think crude and the grains, are too imperative to the world dynamic to be manipulated by speculators. Thusly, time is too crucial to let the cycle of bubble expansion-bubble bursting play out. Simply put, governments will not continue to allow commodity speculation at current levels. If further regulation doesn't happen, what's next? Fresh water futures, pure air contracts?
Posted by: AJF | Jun 8, 2008 4:38:27 PM
