Posted on 05/23/2008 9:32:18 PM PDT by gleeaikin
“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.
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