Misery Economic Theater 2011

[R.D. Silverman]

Originally Posted by moebius

Not the first statesman who is accused or convicted for such an act.
I refer to Moshe Katsav, Muammar al-Gaddafi, Bill Clinton.....

Bill Clinton was NEVER accused of a sexual assault of any kind.

He was accused of lying about getting a blow job (consensual!) from Monica.

[moebius]

Originally Posted by R.D. Silverman

Bill Clinton...

may be, at least he was embroiled in a sex scandal, and is just the shining exception in my series of evil

[markr]

Originally Posted by ewmayer

My Comment: I wonder if there is a subtext here, of financial despots - like despots of all kinds - believing themselves to be above the law. My guess is that Mr. Strauss-Kahn believed himself to be diplomatically immune.

Allegedly a pattern for this individual at least, according to a local paper:

A TV program aired in France in 2007, and shown again on Sunday, showed Tristane Banon, the god-daughter of Mr Strauss-Kahn's second wife, describe her escape from an attack by a man she likened to a ''rutting chimpanzee''.

Banon, who had been writing a book in 2002 and had asked Mr Strauss-Kahn for an interview, said she was forced to fight him off. ''It finished very badly, very violently … I kicked him. When we were fighting I mentioned the word rape to make him afraid but it didn't have any effect. I managed to get out,'' she said.

Thierry Saussez, a former adviser to the French President, Nicolas Sarkozy, [...] was reported in The Guardian as saying that those who expressed surprise about Mr Strauss-Kahn's alleged behaviour were displaying sheer hypocrisy. ''Everyone in Paris has known for years he had something of a problem. Not many female journalists are prepared to interview him alone these days.''

[Christenson]

Originally Posted by R.D. Silverman

Amen. Actually, commodities trading is IMO, little more than legalized
gambling using borrowed money. It should be outlawed ENTIRELY.

Why should e.g. Internet Poker be illegal? Can you say "hypocrisy"?

There is some value in commodity trading and commodities futures...if, for example, you know you are going to need a barrel of oil in december, but you don't want to take all of the risk of the higher price then, then a contract today for christmas delivery of a barrel of oil at a fixed price makes sense...you might pay a little more or a little less than otherwise, but you get to move on with things and have your barrel of oil at Christmas...

I vote simply for large effective margin requirements (like 25%) on all this stuff -- that is, the detachment from preparedeness for delivery is the problem.

[R.D. Silverman]

Originally Posted by Christenson

There is some value in commodity trading and commodities futures...if, for example, you know you are going to need a barrel of oil in december, but you don't want to take all of the risk of the higher price then.....

It is still legalized gambling and the brokers are little more than bookies
(Trading Places......). I will accede to commodity trading but 25% margin
is far from adequate IMO. It is gambling with borrowed money.

[Christenson]

Originally Posted by R.D. Silverman

It is still legalized gambling and the brokers are little more than bookies
(Trading Places......). I will accede to commodity trading but 25% margin
is far from adequate IMO. It is gambling with borrowed money.

In the end, unfortuneately, the real difference between gambling and investing is the fact that investors all afford business suits, and it's called leveraging when someone else's money is borrowed.

Little different than the meaningless distinction between amateur and professional olympic athletes.

Would you settle for half, or do you want 80-100% margin?

[Prime95]

Originally Posted by Christenson

Would you settle for half, or do you want 80-100% margin?

No. How about forcing the person contracting for a barrel of oil in December to actually take delivery of that barrel. No reselling the contract. That should curb speculation and allow legitimate hedging of risk for businesses.

[ewmayer]

Originally Posted by Prime95

No. How about forcing the person contracting for a barrel of oil in December to actually take delivery of that barrel. No reselling the contract. That should curb speculation and allow legitimate hedging of risk for businesses.

Exactly. Note that some of the big iBanks have even gamed that somewhat by investing in physical storage facilities - but at least that limits the amount of speculative trading to what's for sale (or what their facility can handle), instead of this insanity of every barrel of oil "changing hands" multiple times before someone actually takes delivery. And there are costs and very real risks associated with such physical storage.

McClatchy newspapers had a nice piece recently on the price of speculation in the oil markets - I love how they take all the various "reasons" for high oil prices given by sell-siders and folks profiting from the speculation and rip each and every one of them to pieces using actual data:

Speculation explains more about oil prices than anything else

WASHINGTON — Feel like you're being robbed every time you fill the gas tank? Not sure who to blame? Try Wall Street.

That's not the conventional explanation, but it's the one the facts point to. Usually analysts say today's high prices stem simply from "supply and demand." They mean demand for oil and gas is rising and supplies aren't keeping up, so people bid up their price. But global and U.S. supplies are plentiful and demand is stable, so that's not it.

Then the analysts say it's because the market's afraid Middle East turmoil will interrupt oil supplies, so nervous buyers are bidding up prices to ensure they lock in a contract for oil now, just in case it's scarce later. There's probably some truth to that, but after five months of turmoil, there's been no significant impact on Middle East oil supplies, even as prices have see-sawed, so that's not credible either.

Here's what's credible: 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.

They both point to a $15 weekly swing in oil prices in early May and $5 a barrel moves on oil prices in a single day — with no obvious change to supply or demand.

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.

But Tillerson declined to opine about the role of speculators, saying only that the price of oil "will be wherever it will be."

Hundreds of billions of dollars are being made through this speculation — both in the regulated futures market and on the larger unregulated over-the-counter swaps market, where private bets about the movement of oil prices take place. It's producing lots of new billionaires on Wall Street and driving oil company profits through the roof.

And it's punishing everyone who drives.

"The sheer volume of new capital coming from hedge funds, financial traders and other long-term passive investors — interests that mostly buy oil futures to turn a quick profit — is creating artificial demand and driving up the price for consumers," said Sen. Maria Cantwell, D-Wash., in a statement accompanying a letter she and 16 other U.S. senators issued Thursday. They, like Greenberger and Masters, urge the CFTC to impose rules limiting speculators' ability to do this.

Masters and Greenberger advocate a return to limits that prevailed for much of the past century. Those limits effectively reined in speculation to about 30 percent of the oil market.

"We need some speculation. We need enough to provide grease for the wheels of the hedgers, but not so much that they drive price formation," Masters said.

A McClatchy review of two decades of data compiled by the CFTC documents the boom in speculative trading amid rising prices. In the 1990s, the ratio of speculative trades to trades made by commercial users of oil was tilted heavily toward users of crude. But from 1991 forward, the big financial players such as Goldman Sachs and J.P. Morgan Chase won exemptions that freed them from limits on how much they could speculate in futures markets.

They became classified as commercial traders, as if they were an airline hedging price risks in jet fuel. The big banks needed to invest in futures contracts to hedge bets they made in the unregulated swaps market. And the government, in the tenth year of Reagan Republicanism, was happy to reduce regulations on markets. Oil "swaps" increased from $13 billion in the 1990s to more than $313 billion in July 2008 at oil's peak price, Greenberger said .

In mid-2006, CFTC data began distinguishing Wall Street's trades from industrial users, calling the strictly financial ones "non-commercial." Suddenly, the record shows that speculative trades raced past commercial trades.

Prior to the 1990s, speculators made up about 30 percent of the futures market. In the latest reporting period, the ratio on May 3 stood at 68 percent speculators to 32 percent users of oil. Meanwhile, the volume of total reported trades has grown five-fold since 1995, underscoring the impact of speculation on futures markets.

"It tells me that there are more speculative positions than there has ever been in history, particularly in the energy sector, I don't mean only crude oil," said Bart Chilton, a CFTC commissioner who thinks excessive speculation is at least part of the cause of soaring oil prices. "In all of the energy sector, we've seen a 64 percent increase in speculative positions since the (oil price) high of 2008."

While those numbers are stark, the numbers on supply and demand make it clear that the high prices aren't coming from there. There is no shortage of oil stocks by historical standards. There's an estimated 3 million to 4 million barrels per day (bpd) of excess oil production capacity in the world today. That's much more than when supplies were tight in 2008.

U.S. oil production, too, continues to grow. It rose from 4.95 million bpd in 2008 to 5.36 million bpd in 2009, followed by 5.5 million bpd last year — even with the BP disaster in the Gulf of Mexico. The Energy Information Administration forecasts U.S. production to hold at that level this year and rise again next year, to 5.54 million bpd.

U.S. crude oil stocks on April 29, the date oil peaked this year above $113 a barrel, stood at 1.768 billion barrels, according to the EIA. That's about 700,000 barrels more than in July 2008, when oil prices hit all-time highs.

And that's plenty to meet U.S. needs, because consumption isn't growing.

The U.S. consumed 20.68 million barrels per day in 2007. Then came the financial crisis, and consumption dipped to 19.5 million bpd in 2008. Last year the number was 19.5 million bpd. This year's projection is 19.28 million bpd.

So if supplies are plentiful and consumer demand isn't rising, why are prices?

Could it be that refineries aren't able to produce enough gasoline? No. Refiners are running their plants at below cruising speed, and they've got lots of room to produce more if consumers need it. The latest data from EIA on the rate at which refineries are utilized showed a rate of 79.8 percent in February. That's 20 percent below full-blown production, and it hasn't been that low since 1986. If demand for gasoline were soaring, these plants would be cranking at a higher rate.

The American Petroleum Institute, the oil industry lobby, disputes this last example, noting that gasoline production continues at near record levels despite the low refinery utilization rates.

"The amount they're squeezing out of the barrel (of oil) has gone up significantly," said John Felmy, the group's chief economist.

Asked if excessive speculation is to blame for high prices, Felmy said no. He said growing economies such as China and India are gobbling up oil and that global energy data shows the price is "pretty consistent with fundamentals," and that "it really tells the tale of a tight market."

That's not what the Paris-based International Energy Agency said Thursday. It forecast flat global oil demand this year. It dialed back its projection for growth in consumption to 1.3 million bpd, less than half last year's growth of 2.8 million bpd.

The report said, "Our own estimates for global oil demand show a marked slowdown, with preliminary March data suggesting near zero annual growth for the first time since summer 2009."

My Comment: The problem of course is that the iBanks have captured the CFTC just as they've co-opted most of the other government regulatory apparatus. And our feckless political leadership lacks the guts to call bullshit on that.

[Christenson]

sold!

Assuming the theater continues, how long before we get a serious crash and serious reform? Guesses?

[ewmayer]

Originally Posted by Christenson

sold!

Assuming the theater continues, how long before we get a serious crash and serious reform? Guesses?

Predicting the when with any precision is always the trickiest thing, but the global warning signs seem to be aligning now:

- Europe debt crisis erupting with renewed force

- Signs of slowing (mainly as government can-kicking Ponzi schemes reach their limits) worldwide

- Signs of credit-bubble stress in China and the BRICs

- U.S. Housing market in a second major downleg, job market (with a few notable exceptions, mainly Wall Street and Tech) still sucking hard, Fed money-printing now clearly stoking hard-goods inflation while wages stagnate.

I predict before end of the year there will be major turmoil, with the obligatory photos of panicked traitors traders on the covers of the WSJ and major newspapers. They didn't give a rat's ass about the millions of "panicked underwater borrowers" (at least not in the headline-photo sense) for the past 2 years while the markets were buoyed by trillions in central-bank money-printing, but as soon as they see some "anxious traders", well, stop the presses.

When Black Friday comes
I'll stand down by the door
And catch the grey men when they
Dive from the fourteenth floor...

-- Steely Dan, Black Friday (1975)

[cheesehead]

Responding out-of-order:

Originally Posted by Prime95

That should curb speculation and allow legitimate hedging of risk for businesses.

Would you want to curb stock market speculation by requiring that common stock could be sold only to the company that issued it, and that no one could purchase stock except directly from the issuing company?

If not, how does that significantly differ from your oil-contract proposal? (Actually, it's more generous than your proposal; it allows reselling back to the one who issued it.)

No. How about forcing the person contracting for a barrel of oil in December to actually take delivery of that barrel. No reselling the contract.

Suppose I'm in a business where I legitimately need a barrel of oil in December. I buy a contract. Then events beyond my control eliminate the anticipated use I had in mind for that barrel.

There's another person who will happily buy that contract from me for his anticipated use for the barrel of oil in December. But you would have me forced to retain the contract which has become useless to me, and not allow someone else to purchase it from me.

Alternative A: In December, I take delivery, then the other guy buys it from me and arranges transport to his place.

What is the purpose of making the other guy wait, then get the barrel from me, instead of just purchasing the contract from me, then presenting it to the oil's owner with the new shipping address (or however those things are handled)?

Alternative B: The other guy deals only with the oil's direct owner by purchasing a fresh new contract. Except ... the oil's owner sadly informs the other guy that he can't legally sell him a contract because he's already sold contracts for all the barrels he owns that will be available in December. It would be fraud to issue another contract for the same barrel that I already have contracted for.

Again, you make the other guy wait, find me and my barrel, and arrange transport from me to him after it's delivered to me, instead of just a single transport from owner to other guy -- What is the role of this double transport in curbing speculation?

Alternative C: I can sell my contract, but only back to the oil's owner, so that he can re-sell/reissue it to the guy who needs it.

But then -- why do you require that rigamarole instead of my directly selling it to the other guy, who presents it to the oil's owner with the new shipping address (or however those things are handled)?

- -

The basic problem with your proposal is that it affects all commodity contract transactions -- both speculation and ordinary legitimate business -- instead of being aimed only at the undesirable speculative transaction.

(I'm rather surprised that this comes from someone who previously expressed distaste for unnecessary government regulation. :-)