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Monday, March 24, 2008

Links 3/24/08

Listen to this article Hospital bridles at horse in lift BBC

Taming the Beast Paul Krugman

Campaign silence over Wall Street Woes Clive Crook, Financial Times

The Long Dark Night of the Soul of the Monetary Economist: A Platonic Dialogue Brad De Long. He pointed to this archival post...

Lying for Jesus? Richard Dawkins. This is in lieu of commentary on Ben Stein's New York Times piece over the weekend.

Signs Of The Time, Part 8 Boom2Bust

Hedge funds cut commodities exposure Financial Times. So now it's official: speculation did have something to do with the run-up.

Catastrophic Bank Failures Do Not Necessarily Promote Economic Activity PGL, Angry Bear

"A Coordinated Effort to Destroy Effective Regulation" Mark Thoma

Antidote du jour. Some readers were so kind as to send pix or point me to good sources:

Posted by Yves Smith at 1:24 AM

3 comments:

Anonymous said...

"So now it's official: speculation did have something to do with the run-up."

eventually we'll have a better idea as to whether speculation drove commodity prices too high or whether the emergency need to raise cash drove them too low.

long-term charts of crude oil and natural gas don't suggest that speculative bubbles have now burst. crude hasn't come down much, especially longer-dated contracts, and nat gas doesn't appear to be in a bubble in the first place.

gold and silver don't support the idea. gold's pullback hasn't been that big so far, and silver has a tendency to plunge from time to time despite its long-term uptrend.

big agricultural markets are more supportive of your view, though i've heard (from donald coxe on thursday, for example) that recent rainfall in north america and australia has knocked down grain and bean prices.

some smaller commodity markets look like they ran up since late january on speculation, it's true.

but i believe we are still in a secular bull market for commodities and that we'll probably see new highs in many commodity markets before long.

March 24, 2008 8:16 AM  
Anonymous said...

"So now it's official: speculation did have something to do with the run-up."

No, it's still just wrong conventional wisdom, provided by people who have not done their homework.

Over the past five years, there's been a growth in assets in commodity funds, but that doesn't mean this money is all going into longs.

There's also been an enormous increase in speculators going short.

What you need to know to evaluate the claim that speculators are causing the commodities boom is the net spec longs and net commercial shorts. You find this information posted weekly at: http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm . But it's no good just looking at the numbers for any one week. You have to track these numbers over a long period (at least a year) to know what normal levels are, and when numbers are getting excessive.

Net spec longs in oil have been high, but no higher than they were in August 2007 as the price was approaching $78. Here are some specific numbers for you:

On 7/31/07, commercial traders were net short on WTI by 119,688 contracts. Large speculators were net long by 127,491 contracts. (The difference was made up by non-reportables--smaller speculators.)

That was the biggest extreme in at least the past five years.

On 1/8/08, the large speculators were net long by 94,923 contracts, while the commercial traders were net short by 100,506 contracts. That was the start of the January crunch from over $100 to $86ish.

On 3/11/08, large speculators were net long by 113,307 contracts, while commercial traders were net short by 97,231 contracts. This was before the crunch down from $110ish to $98ish. So, it was high, but not a record. It wasn't speculators who drove the price from $78ish at the high in August 07 to $110ish at the high in March 08.

Even if you look at total open interest in WTI contracts, it was higher in July 07 than it is now: 1,521,327 WTI contracts in July 07 versus 1,484,417 now (and by "now" I mean before the recent correction).

So people blaming the rise in oil prices on speculators haven't done even the most basic homework of looking at the Commitments of Traders report. Instead, all they do is report this rumor to each other, and you reify it here.

Overall, an increase in spec money will have no effect on prices other than making the markets more liquid. Commercial interests want spec money in the market. The purpose of speculators in the markets is to absorb price risk that producers don't want to take. Producers actually pay speculators to absorb these risks. For example, backwardation is really a premium paid to speculators to absorb price risk when prices are "high." Contago is a premium paid to speculators to sell when producers believe the price will go up.

Moe Gamble

March 24, 2008 5:00 PM  
Yves Smith said...

Anon and Moe,

Please note my observation was not "speculators are responsible for all the recent price appreciation in commidities" which seemed to be your interpretation of what I wrote, but "speculators did have something to do with the run up." Those are two different statements.

I am hearing from hedgies who are not in commodities (not permitted in their mandate) that their prime brokers are telling them that many hedge funds are selling commodities to meet margin calls (often in other markets; they may like the position and not want to trade it, or feel it's a good time to take some profits on a successful commodities bet).

Second, there is other evidence of deleveraging. From the Financial Ninja. He overstates his case but also has quite a lot of technical charts that apparently support his point:

Margin requirements have been raised at most of the major exchanges over the last couple of days. More importantly, margin requirements on CFD’s (Contract For Difference) have been raised DRASTICALLY. CFD’s are the weapon of choice for commodity investors. That is literally sucking the life right out of the usual suspects: Oil, and Gold. All other commodities, especially those that have gone parabolic, metals and softs, are getting the same treatment. This is MASSIVE de-leveraging at its best.

A simultaneous bounce in the US dollar isn’t helping any either. The US Dollar is bouncing from deeply oversold territory after a steep steady decline. A protracted bounce WILL SMASH commodities. A protracted bounce is quite plausible as the weakness in the Euro area economies becomes more obvious.

My view is simpler. The wheels are starting to come off the US financial system. As I have stated in other posts, the problem are so large in scale that the US government cannot shore up the underlying assets. Historical comparisons suggest we could be looking at a GDP decline of 5% over two years, with another two years to get back to our current level. That could prove to be optimistic. The Japanese have essentially said we are in as bad shape as they were in 1990.

That will most assuredly lead to a slowdown in India and China, which will put a big brake on commodities demand.

And I am not sure the Fed will be able to get away with turning on the printing presses. The last ten year Treasury auction was terrible. Further debasement of the dollar could precipitate a dollar crisis. If the Fed expands its balance sheet by issuing liabilities (a third world strategy), our trading partners might demand we fund in foreign currencies (we had to do this under Carter).

I am not saying that commodities do not have merit as investment. I still see them as overbought at their current levels.

March 24, 2008 10:40 PM  

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