here is an interesting bit of testimony from michael masters (his titles, etc are on the title page of the pdf, so in the interest of getting you to have a look, i'll be coy about them here) from 20 may concerning the price spikes in both petroleum and food
http://hsgac.senate.gov/public/_files/052008Masters.pdf
--his argument reinforces and to some extent explains soros' position outlined in the guardian article from 3 june that i bit for the op---and centers on institutional "index speculators"---
a cliff notes version from a blog i stumbled across, which was linked to the testimony:
Quote:
Commodities prices have increased more in the aggregate over the last five years than at any other time in U.S. history. We have seen commodity price spikes occur in the past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today, unlike previous episodes, supply is ample: there are no lines as the gas pump and there is plenty of food on the shelves…
What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant…
Index Speculator demand is distinctly different from Traditional Speculator demand; it arises purely from portfolio allocation decisions. When an Institutional Investor decides to allocate 2% to commodities futures, for example, they come to the market with a set amount of money. They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been “put to work.” Their insensitivity to price multiplies their impact on commodity markets… [ed: And this provides the perfect recipe for a bubble. Just as during the final stages of the tech boom, for these investors price and supply/demand does not matter].
There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets…
In the early part of this decade, some institutional investors who suffered as a result of the severe equity bear market of 2000-2002, began to look to the commodity futures market as a potential new “asset class” suitable for institutional investment. While the commodities markets have always had some speculators, never before had major investment institutions seriously considered the commodities futures markets as viable for larger scale investment programs. Commodities looked attractive because they have historically been “uncorrelated,” meaning they trade inversely to fixed income and equity portfolios. Mainline financial industry consultants, who advised large institutions on portfolio allocations, suggested for the first time that investors could “buy and hold” commodities futures, just like investors previously had done with stocks and bonds…
According to the CFTC and spot market participants, commodities futures prices are the benchmark for the prices of actual physical commodities, so when Index Speculators drive futures prices higher, the effects are felt immediately in spot prices and the real economy. So there is a direct link between commodities futures prices and the prices your constituents are paying for essential goods…
In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demandfor petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculatorsʼ demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!
Let’s turn our attention to food prices, which have skyrocketed in the last six months. When asked to explain this dramatic increase, economists’ replies typically focus on the diversion of a significant portion of the U.S. corn crop to ethanol production. What they overlook is the fact that Institutional Investors have purchased over 2 billion bushels of corn futures in the last five years. Right now, Index Speculators have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year. That’s equivalent to producing 5.3 billion gallons of ethanol, which would make America the world’s largest ethanol producer…
Furthermore, commodities futures markets are much smaller than the capital markets, so multi-billion-dollar allocations to commodities markets will have a far greater impact on prices. In 2004, the total value of futures contracts outstanding for all 25 index commodities amounted to only about $180 billion. Compare that with worldwide equity markets which totaled $44 trillion, or over 240 times bigger. That year, Index Speculators poured $25 billion into these markets, an amount equivalent to 14% of the total market…
Index Speculators’ trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits…
Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged.
Why is there not outrage over the fact that Americans must pay drastically more to feed their families, fuel their cars, and heat their homes?
Index Speculators provide no benefit to the futures markets and they inflict a tremendous cost upon society. Individually, these participants are not acting with malicious intent; collectively, however, their impact reaches into the wallets of every American consumer.
The fact that speculation is a substantial and rising component of the commodity bubble indicates that the trend is likely to continue to accelerate until it goes to extremes. There will be a point at which rising prices substantially impact the rising demand curve both in developed and emerging countries (in other words… they can’t afford food anymore), and that is already occurring to some degree. Hence, we will be monitoring the bubble in commodities for signs that we are nearing a top in emerging and U.S. markets, which probably will occur in early to mid 2009 — but it could occur earlier if this trend continues to escalate without a major break near term.
|
after reading the entire testimony (with a couple interesting appendices), i'll just say read the whole thing and treat the above as a teaser or trailer. the actual argument is stronger than this.
the conclusion that masters advances is that index speculation be banned in itself, outright. finito.
what do you make of the argument?
how compelling an explanation do you find this to be--personally, i just finished reading it and am thinking things over, and have only reached the conclusion that this has to be a bit too simple.
nonetheless, it does a job on the claim that there is a demand spike originating in china and india, arguing that there is indeed a splike, but it is in the futures market and is driven by index speculation.
which leads to another question: if this is true, then why is the american press not talking about it?
but maybe it's not.
that's all for the moment.