The Price of Speculation
4 June 2008For the last few months I have become increasingly concerned that the large, unregulated pile of money sitting in the middle of the global living room (private equity, hedge funds, sovereign funds, private banking trades) is not only dangerous to the world because of its use in CDOs, derivatives, and other goofy instruments, but for another, even more serious reason: it is being used to create a new level of speculative behavior in the markets.
That’s right: speculation is as old as the hills. Everyone does it. But what if a few very large players realized that, simply by the fact of speculating, they could create a new landscape for making profits? What if, for instance, just by creating volatility, they could increase their profits ?
Well, I think not only, can they, but they are.
It is likely that prices for stocks, bonds and commodities have always carried a veneer of this, a small premium in speculation costs just for being an open market. How much? Maybe a few percent in calm markets, maybe as much as 5-10% in very active markets.
Members know I have long been convinced that consumers are being gamed in both the gas and oil markets. We’ll now use the oil market as an example.
Senator Maria Cantwell (D, WA) opened hearings this morning on the price of oil. While I’ve yet to see an investigation properly done into this question, Maria and her staff are coming about as close as one can get. She mentioned Enron’s gaming of California for all those troglodytes who think we can’t or wouldn’t be gamed by energy companies.
Two of her witnesses made estimates of how much of today’s oil price is due purely to speculation. Last time I checked this out, the figure out of Wall St. was about 20% – a record in this market, where the same figure used to be in the 10% or less range.
Today’s witnesses put the fraction of today’s oil price caused by speculation at 25% (a retail expert) or 50% (an oil commodity expert). I’m fairly sure the second figure is closer to the truth.
What good comes from those who drive prices up and take their profits from the froth? Other than paying their bar bills and mortgages, I’d say no good at all. Clearly, consumers are harmed, as are all legitimate players in the fuel supply chain.
Are these hyenas in wheat, too? And rice? And —
I expect they are in every market naive or thin enough to be manipulated with large investment sums. Perhaps vampires are a better name for these players, since they weaken others while filling their appetites for ill-gotten gains.
Can the world afford this new vampire investor class? The news is rife with stories of companies bankrupting, people going unfed, car companies suffering, consumers no longer traveling, inflation running out of control — no, we can’t afford them.
Would someone please drive a wooden stake through their collective hearts, and soon?
My heartfelt thanks to Maria Cantwell.
5 Responses to “The Price of Speculation”
June 10th, 2008 at 3:00 am
Speculators badly burnt by soaring oil prices
By Javier Blas
Published: June 9 2008 22:56 | Last updated: June 9 2008 22:56
For once, many speculators were caught on the wrong side of the oil market.
After being accused by US lawmakers of profiting from rising prices and driving energy costs higher, some speculators lost serious money last Thursday and Friday when prices jumped by a staggering $16.24 a barrel to a record $139.12 in less than 36 hours. …..
http://www.ft.com/cms/s/0/e34d30e0-366c-11dd-8bb8-0000779fd2ac.html
LOL
July 1st, 2008 at 1:51 am
Speculation must be defined before it is blamed
By Michael Gordon
Published: July 1 2008 03:00 | Last updated: July 1 2008 03:00
Debate has raged as to whether rising commodity prices owe more to the actions of speculators and less to an imbalance in supply and demand. Speculators have not come out well in this debate – not surprising in light of the food riots in developing nations and fuel protests in developed ones.
http://www.ft.com/cms/s/0/4edc42be-4708-11dd-876a-0000779fd2ac.html?nclick_check=1
July 14th, 2008 at 5:24 am
Welcome to a world with $500 oil
http://blogs.ft.com/maverecon/2008/07/welcome-to-a-world-with-500-oil/#more-276
August 13th, 2008 at 11:18 am
Much ado about oil speculation
“If regulators really wanted to limit speculation in the oil market, they should keep the shorter-term futures contracts and eliminate the more speculative six-month futures contracts.”
That’s the conclusion of a recent paper by Lonnie Stevans and David Sessions of the Frank G. Zarb School of Business, who also found that:
“For model specifications with short-term futures contracts, supply does indeed dominate price movements in the crude oil market. However, for specifications including longer-term contracts that are inherently more speculative, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlated with each other.”
http://ftalphaville.ft.com/blog/2008/08/13/15053/much-ado-about-oil-speculation/
August 15th, 2008 at 2:07 am
Quelle Surprise! Speculators May Have Had Something to do With Oil Price Runup
from naked capitalism by Yves Smith
Since roughly February, a solid minority of commentarors, including this blogger, have questioned the thesis that the rapid increase in oil prices was solely the function of supply and demand. It was disconcerting to see what reactions this stance elicited. There was often an unwillingness to read what was written, and instead turn the post into an exercise in projection. Use of the word “speculator” is taken to mean the author 1. thinks speculation is bad (no, depends on circumstances), 2. is economically illiterate and 3. is a Peak Oil denier (a lot of vitriol here).
http://www.nakedcapitalism.com/2008/08/quelle-surprise-speculators-may-have.html