Speculators: Good or Evil?

[Carnevil9]

Interesting essay from John Stossel on RealClearPolitics.com. His thesis is that speculators (in oil or any other market) are good for the economy, in that they provide stability in an unpredictable world.

Your thoughts?......Carney

(all bolds courtesy of poster)

***************************

Does McCain Understand Markets?

By John Stossel

"I believe there needs to be a thorough and complete investigation of speculators to find out whether speculation has been going on and, if so, how much it has affected the price of a barrel of oil. There's a lot of things out there that need a lot more transparency and, consequently, oversight."

Those are the words of presidential candidate John McCain. This man is the Republican?

There's more.

"I am very angry, frankly, at the oil companies not only because of the obscene profits they've made but at their failure to invest in alternate energy to help us eliminate our dependence on foreign oil. They're making huge profits and that happens, but not to say, 'We're in this so we can over time eliminate America's dependence on foreign oil,' I think is an abrogation of their responsibilities as citizens."

Let me get this straight. A potential president of a putatively free country scolds companies for "obscene profits," failure to invest in competing products, and therefore irresponsible citizenship. Why? Is McCain running for national economic commissar?

This is not the first time McCain has displayed what I would call an anti-capitalist mentality. In an early presidential debate he countered former businessman Mitt Romney's claim to superior executive experience by saying, "I led the largest squadron in the U.S. Navy, not for profit but for patriotism".

Why the put down of profit?

It's clear McCain does not understand how markets work or why they are good. He certainly doesn't understand the role of speculators and other middlemen. He's not alone. Speculators are among the most reviled people in history. When they were members of ethnic minorities, they have been easy targets for economically illiterate people who were jealous of their success.

McCain wonders "whether speculation has been going on." He needn't wonder. Speculation always goes on. Speculation means to take a risk on what the future holds in hopes of making a profit. The world's stock and commodities markets are based on this principle. Sen. McCain must have meant it when he said, "I know a lot less about economics than I do about military and foreign policy issues".

I doubt that speculators are responsible for much of the run-up of oil prices. Why didn't they run them up sooner? Besides, there are too many other explanations: increased demand from China and India, the declining dollar and Middle East tensions.

Even if speculators did play a role, what McCain apparently doesn't understand is that speculators perform a valuable service. Most people don't realize this because on the surface speculators don't seem productive. They buy what already exists and resell it. How does that help society?

In fact, the hated speculator is a good guy because his buying and selling reduce volatility and uncertainty in an unpredictable world. He may only be out for his own profit, but that doesn't matter. As Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest".

The prices of commodities often change unexpectedly, making business risky. The speculator brings a degree of certainty to otherwise risky ventures. When supplies of a commodity are plentiful and prices low -- but speculators expect the price to rise later -- they buy -- cushioning the collapse of prices. When supplies become scarcer and prices rise, they sell -- easing the shortage and lowering the price. Also, speculators may agree to buy a commodity in the future for a price locked in today. This reduces the risk for an oil producer or farmer who fears investing because he doesn't know what price his product will sell for next year.

As a result of these activities, volatile supplies and prices are evened out over time. Occasionally, speculators increase volatility. Markets are never perfect. (Although they are better than government regulation.) But in general, speculators increase liquidity and keep the market on a more even keel. This makes long-term planning easier for everyone.

It would be nice if McCain would finally learn some economics.

Copyright 2008, Creators Syndicate Inc.


source:

http://www.realclearpolitics.com/articles/2008/06/bless_the_speculator.html

 

[keeblercrumb]

Interesting essay from John Stossel on RealClearPolitics.com. His thesis is that speculators (in oil or any other market) are good for the economy, in that they provide stability in an unpredictable world.

Your thoughts?......Carney

(all bolds courtesy of poster)

***************************

Does McCain Understand Markets?

By John Stossel

"I believe there needs to be a thorough and complete investigation of speculators to find out whether speculation has been going on and, if so, how much it has affected the price of a barrel of oil. There's a lot of things out there that need a lot more transparency and, consequently, oversight."

Those are the words of presidential candidate John McCain. This man is the Republican?

There's more.

"I am very angry, frankly, at the oil companies not only because of the obscene profits they've made but at their failure to invest in alternate energy to help us eliminate our dependence on foreign oil. They're making huge profits and that happens, but not to say, 'We're in this so we can over time eliminate America's dependence on foreign oil,' I think is an abrogation of their responsibilities as citizens."

Let me get this straight. A potential president of a putatively free country scolds companies for "obscene profits," failure to invest in competing products, and therefore irresponsible citizenship. Why? Is McCain running for national economic commissar?

This is not the first time McCain has displayed what I would call an anti-capitalist mentality. In an early presidential debate he countered former businessman Mitt Romney's claim to superior executive experience by saying, "I led the largest squadron in the U.S. Navy, not for profit but for patriotism".

Why the put down of profit?

It's clear McCain does not understand how markets work or why they are good. He certainly doesn't understand the role of speculators and other middlemen. He's not alone. Speculators are among the most reviled people in history. When they were members of ethnic minorities, they have been easy targets for economically illiterate people who were jealous of their success.

McCain wonders "whether speculation has been going on." He needn't wonder. Speculation always goes on. Speculation means to take a risk on what the future holds in hopes of making a profit. The world's stock and commodities markets are based on this principle. Sen. McCain must have meant it when he said, "I know a lot less about economics than I do about military and foreign policy issues".

I doubt that speculators are responsible for much of the run-up of oil prices. Why didn't they run them up sooner? Besides, there are too many other explanations: increased demand from China and India, the declining dollar and Middle East tensions.

Even if speculators did play a role, what McCain apparently doesn't understand is that speculators perform a valuable service. Most people don't realize this because on the surface speculators don't seem productive. They buy what already exists and resell it. How does that help society?

In fact, the hated speculator is a good guy because his buying and selling reduce volatility and uncertainty in an unpredictable world. He may only be out for his own profit, but that doesn't matter. As Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest".

The prices of commodities often change unexpectedly, making business risky. The speculator brings a degree of certainty to otherwise risky ventures. When supplies of a commodity are plentiful and prices low -- but speculators expect the price to rise later -- they buy -- cushioning the collapse of prices. When supplies become scarcer and prices rise, they sell -- easing the shortage and lowering the price. Also, speculators may agree to buy a commodity in the future for a price locked in today. This reduces the risk for an oil producer or farmer who fears investing because he doesn't know what price his product will sell for next year.

As a result of these activities, volatile supplies and prices are evened out over time. Occasionally, speculators increase volatility. Markets are never perfect. (Although they are better than government regulation.) But in general, speculators increase liquidity and keep the market on a more even keel. This makes long-term planning easier for everyone.

It would be nice if McCain would finally learn some economics.

Copyright 2008, Creators Syndicate Inc.


source:

http://www.realclearpolitics.com/articles/2008/06/bless_the_speculator.html

That pinko, commie McCain..... What the hell is he thinking?

Everyone knows that unbridled and unregulated market speculation is good for the ecomony!!!

Well that does it, you have convinced me. I am definately voting for Obama.



-KC

 

[Carnevil9]

That pinko, commie McCain..... What the hell is he thinking?

Everyone knows that unbridled and unregulated market speculation is good for the ecomony!!!

Well that does it, you have convinced me. I am definately voting for Obama.



-KC

Actually, I was looking for thoughtful analysis, not sarcasm. Personally, I am undecided on this issue, and was hoping for some insights. But thanks for playing!.....Carney

 

[keeblercrumb]

Actually, I was looking for thoughtful analysis, not sarcasm. Personally, I am undecided on this issue, and was hoping for some insights. But thanks for playing!.....Carney

You're right.... The barbs fly pretty easily around here on this politically charged stuff..... You in particular, my friend, frequently come across as angry and insulting.. and hence my response in kind, albeit sarcastic. Perhaps it is not deserved in this case. My apologies…

Remember the old SNL parody of "Count-Counterpoint"? Dan Akroyd typically beginning his rejoinder to Jane Curtain.... "Jane, you ignorant slut..." not that any women here would likely be insulted by it. It feels like that here. And it deserves only ridicule in response.

But the truth is this drum beat of "liberal" "socialist" "flower child" bullshit with anyone who dare questions the dogma handed down on high from his Proponderousness Rush Limbaugh.... well it gets as boring as it is ludicrous. Hence... the sarcasm.

So when the occasional independent and rational thought comes along... it is easy to miss. Sorry.

So on the issue.... I would suggest, as I did sarcastically above, that McCain's assertion of the need for oversight and some degree of governmental regulation of the market place in general, and of energy speculators specifically, is prudent, given the tendency of these folks to nibble at the edges of legality and collusion for self enrichment.

Discussions on the theoretical advantages of speculation on the economy MUST be predicated on some level of honesty and integrity in the market which has yet to be manifested in an unregulated environment.

Since arriving in Moscow a month or so, I have become acquainted (over breakfast at the Starlight Diner) with an American business consultant who has lived here for the last 20 years (just this morning he related to me his response to those who question why... "because I can still smoke in restaurants here").

In a recent op-ed piece in The Moscow Times on the subject of business ethics or the lack thereof in Russia, he offered this insight: "ambition is good; greed is not". The “profit motive” need not be synonymous with accumulating personal wealth by all means available.

So there you have my view.... I am sure you will be shocked to learn that I firmly believe that Obama would be a breath of fresh air to the world around us. The Presidency is first and foremost a bully pulpit, the President a spokesman and figurehead.

In the words of McLuhan, the "media is the message". We desperately need a new "media"... for our message to be heard with open hearts and minds.

So the sight of Conservatives/Republicans "eating their young".. it is hard not take some comfort in it.

-KC

 

[JAMESBJOHNSON]

CARNEY

Speculators buy market risk from producers. This is good.

But its bad when state & local government invest public money in commodities, trying to profit from inflation.

KEEBLER

The mistake most people make is assuming that Democrats are qualitatively different from Republicans.

 

[keeblercrumb]

KEEBLER

The mistake most people make is assuming that Democrats are qualitatively different from Republicans.

I guess on the grand scale including yourself (what do your call yourself? A neo-nazi anarchist or something?), you are probably right.

You keep doing that Floyd Patterson bob and weave thing here, JBJ, and if you just avoid getting in the ring with Muhammed Ali, it'll probably work out all right for you....

But that keeping your muses on the ranch if not in the corral thing... THAT was good.



-KC

 

[JAMESBJOHNSON]

KEEBLER

I'm conservative-center. There are tests to determine your politics, and conservative-center is where they peg me. If I buy a goddamned book from Amazon I expect to get it, if I hire a teacher I expect them to teach. I dont think this sort of thinking is radical. It's only radical if Amazon plans to fuck me and the teacher plans to fuck the students.

I pay attention to what people do and ignore their sermons. There is not an iota worth of difference between Dubya and Teddy Kennedy.

 

[Liar]

Let me get this straight. A potential president of a putatively free country scolds companies for "obscene profits," failure to invest in competing products, and therefore irresponsible citizenship. Why? Is McCain running for national economic commissar?

Everyone and their SUV-driving mother are frustrated at rising gas prices.

Candidate blurts rethorically inflammatory but practically non-committing soundbites that cater to that frustration.

Imagine my surprise.

 

[JAMESBJOHNSON]

Candidates are stymied by the oil inflation, too. But a real solution to the energy problem will piss everyone off, and especially so now that state-local governments are commodity traders to regain what they lost with ENRON and the bundled credit fiasco. Cheap alternative energy will fuck state-local government again.

 

[trysail]

http://www.nytimes.com/2008/06/28/b...gin&adxnnlx=1214666509-dBFVZklIcRJXxEeDqTJxBg

Easy Target, but Not the Right One
By JOE NOCERA
So now we know: it’s all the fault of those damnable speculators. They’re the ones to blame as the price of oil tops $140 a barrel.

It’s not our government’s fault for failing to come up with a credible energy policy — that can’t be it. Nor is the problem the weak dollar, or the voracious energy appetite of the Chinese, or those pesky rebels in Nigeria who are trying to blow up their country’s oil pipelines. And it’s certainly not the fault of you and me for driving gas-guzzling S.U.V.’s. It has to be those speculators. They are the only villains in sight.

This was “first let’s kill all the speculators” week on Capitol Hill, and it was not a pretty sight. On Monday, the House Oversight and Investigations Subcommittee held an eight-hour hearing (!), the sole purpose of which was to decry “excessive speculation.” “Have speculators hijacked trading on the futures exchange?” asked the Michigan Democrat Bart Stupak. His answer throughout the day — as he “grilled” an array of sympathetic academics and futures market critics — was a resounding yes.

On Tuesday, the action moved to the Senate, where the Homeland Security and Governmental Affairs Committee held its hearing. “Speculation in the food and fuel markets is not illegal,” Senator Joe Lieberman of Connecticut conceded, “but that does not mean it is not very hurtful.” He continued: “They are artificially inflating the price of food and oil and causing real suffering for millions and millions of people and businesses.”

There were yet more hearings on Wednesday, and by Thursday evening, the House had passed, by a wide margin, a bill calling on the Commodity Futures Trading Commission to curtail “excessive speculation.” Indeed, the C.F.T.C spent the week being raked over the coals for allowing all this rampant speculation to take place. On Monday afternoon, for instance, Representative John Dingell of Michigan took unseemly glee in going after Walter L. Lukken, the agency’s chairman.

Jabbing his pencil at Mr. Lukken, Mr. Dingell described the founding of the agency as an effort to prevent farmers and consumers from being “screwed” by “those folks in the futures markets.”

“Now,” he said, “we find that those good-hearted folks in the futures market have figured out how not just to screw the farmers and the consumers in the city, but they figured out how to screw the farmers and the consumers in the city on a whole new product — oil.” As Mr. Dingell sneered triumphantly, Mr. Lukken seemed to shrivel in his seat.

Yes, it was wonderful theater, and great blood sport. And it had absolutely nothing to do with the price of oil.

•

It’s not just congressmen who are railing about speculators, of course. As oil prices have doubled in the last year, I’ve gotten e-mail messages from readers decrying speculators, who, many believe, are manipulating the futures market. More than once this week, legislators used that same word their constituents were using: “manipulation.”

So let’s take a closer look at what the speculators’ critics are saying. First, despite the loose use of the word “manipulation,” that is really not what is being alleged here, at least not in the classic sense. Remember how the Hunts tried to corner the silver market? They bought up silver and took it off the market, thereby creating an artificial shortage. I suppose OPEC could do something like that — one could even argue that OPEC does that already — but no mere speculator could.

I can already hear your rejoinder: what about Enron and its famous manipulation of energy prices in California? But remember, Enron was manipulating electricity prices, not oil, which was possible mainly because electricity can’t be stored. By getting power plants to shut down for hours at a time, Enron was able to create artificial shortages and jack up the price.

Instead, the critics’ thesis is that speculators are creating an energy bubble the same way investors created the Internet bubble. As speculative bets on energy have grown drastically in recent years, the sheer amount of money being thrown at energy futures is making those bets a self-fulfilling prophecy. All that money, in other words, pushes prices higher than they would go if the market simply consisted of the actual buyers and sellers of oil.

In addition, because of something called the “London loophole” and the “Enron loophole,” which allow speculators to use unregulated exchanges, they can evade the limits of the New York Mercantile Exchange, as well as C.F.T.C. scrutiny.

The leading proponent of this theory is a portfolio manager based in the Virgin Islands named Michael W. Masters. When I caught up with him on Thursday afternoon, after his week of testimony, he said that the problem was that institutional investors had stopped seeing energy as a commodity the world relies on and instead saw it as an “asset class” for their portfolios. “I am opposed to thinking about commodities as an asset class,” he said.

Several years ago, he continued, he began to notice that increasing cash flows were moving into commodities index funds. This was, he said, “long-only money” — meaning that it was a pure bet that prices would go up. By now, he told me, there is $240 billion in commodity index funds, up from $13 billon five years ago. As he also noted in his testimony before Congress, “the prices of the 25 commodities that compose these indices have risen by an average of 183 percent in those five years!” He claims that energy prices will fall by 50 percent if the speculators can only be driven out of the futures market.

There are so many holes in this argument I scarcely know where to start. The C.F.T.C. says that some $5 trillion worth of futures and options transaction trades take place every day; can an influx of $240 billion, spread over five years, really propel prices upward to the extent that he and others claim? Then there’s the fact that the commodities markets don’t work like equity markets, where a small amount of trading can lift every share of a company’s stock. In commodities trading, every contract has a buyer and a seller, meaning that for every bet that prices are going up, somebody else is betting they are going down. Why doesn’t that short interest depress prices?

And what about all those commodities, like coal or barley or sulfur, that don’t trade on any futures market but have risen as fast as or faster than oil? Or how about the recent decline in cash flows into many commodity funds — why have prices kept going up if the money has stopped pouring into those funds? My speculator friends tell me that in the last two weeks, trading volumes have been cut in half. Indeed, what I hear is that much of the speculative money that remains in the market is betting against higher oil prices.

As for the London and Enron loopholes, I can pretty much guarantee they will be closed soon. There are some eight bills aimed at curbing speculation, and virtually every one of them calls for an end to the loopholes. That is probably a good thing — but I’d lay odds the price will not drop as a result. The loopholes are not the reason prices are going up.

In fact, I’d be willing to go a step further. Even if you eliminated speculation entirely, the price of oil wouldn’t fall. Thankfully, no one is proposing to go that far (though Senator Lieberman was toying with the idea), because even members of Congress understand that futures markets serve a crucial purpose. They help companies hedge their oil prices, and they help energy companies manage their risk, for starters.

The energy speculators I spoke to say that Congress has it exactly backward: the futures market is actually taking its cues from the physical market, where the buyers and sellers of oil do their business. Last week, the Saudis promised to produce an extra 200,000 barrels a day. But it is pricing that oil so high that oil companies are balking at paying for it. The Saudis didn’t arrive at their price by looking to the futures market — but if they get that price, it will certainly affect the futures market.

Both speculators and oilmen say that supply and demand is the real culprit. “Our supply is pathetic,” said Gary Ross, the chief executive of the PIRA Energy Group, and a well-known energy consultant. “Look at the data,” he continued. “The world economy is growing by 3.9 percent a year. World oil demand should grow by 2.3 percent just to keep pace. That’s an extra two million barrels a day. We don’t have it! It’s obvious.”

I also think there is something else at play. After years of ignoring the rather obvious fact that oil is a finite resource, the world has suddenly become acutely aware of that reality. Everyone in the oil markets is attuned to every little twitch that has the potential to damp supply or increase demand. That’s why, for instance, when Libya announced on Thursday that it might cut oil production, oil jumped more than $5. Meanwhile, when Brazil discovers a huge new oil field, the market shrugs. That is not speculation at work — it’s market psychology. There’s a big difference. If there is indeed a bubble, that’s what is causing it.

“Speculators have always been an easy target,” said Leo Melamed, the man who founded the futures markets. As Ron Chernow, the great business historian put it, “At times in history when you have vast and impersonal forces wreaking havoc in markets, there is always a temptation to villainize someone.” Centuries ago, it was Shylock; now it’s the speculator and the short-seller.

In his book “The House of Morgan,” Mr. Chernow has a description of Herbert Hoover, “moody and isolated,” convinced that short-sellers were behind the market’s horrendous downturn in 1929. “He came to believe in a Democratic conspiracy to drive down stocks by selling them short,” Mr. Chernow writes, adding that Hoover “began to compile lists of people in the bear cabal and even claimed to know they met every Sunday afternoon to plot the week’s destruction!”

I wonder whether Mr. Dingell has heard about them.

 

[xssve]

It's axiomatic: if Stossel thinks they're good, they are, by definition, evil.

And no, I'm not just being facetious.

 

[Carnevil9]

It's axiomatic: if Stossel thinks they're good, they are, by definition, evil.

And no, I'm not just being facetious.

What does that leave? Dogmatic?