Why speculators are good for us

[Fransisco]

jensen said,<blockquote>"...free enterprise is wonderful but it doesn't exist in many places anymore..."</blockquote>

Oh contraire my cynical friend. The surest path to prosperity is free market Capitalism and the world is steadily embracing it more and more each day.

Take a look at this website

http://www.heritage.org/Index/

and the executive summary of their 2008 report.

http://www.heritage.org/research/features/index/chapters/pdf/index2008_execsum.pdf

It is no accident that, "The world’s freest countries have twice the average per capita income of the second quintile of countries and over five times the average income of the fifth quintile." Or that countries that
increase their levels of freedom experience faster growth rates than countries which don't.

Freedom equals prosperity, free markets equal prosperity. The freer the country, the freer the markets, the greater the level of prosperity.

No one has yet successfully figured out how to regulate themselves into prosperity. Though countries like Zimbabwe and Venezuela are still giving it the the old college(Marxist)try.

While party poopers such as yourself and your pals at the Globe and Mail keep trying to show us that markets don't work the evidence clearly shows that they do. The run up in the price of wheat and rice the last couple of months for example, what happened because of that? A record number of acres got planted. The market gave the signal, and farmers responded. Would they have responded as much without the hedge funds participating? No they wouldn't have.

So while the chicken little/fascists at the globe are getting their jackboots on, looking for a scapegoat and hysterically talking about how "This could have catastrophic economic effects on millions of already stressed U.S. consumers. It literally could mean starvation for millions of the world's poor." The market, thanks in part to speculators and voluntary trade, is already taking care of the problem.

Voluntary trade, not coercive force(regulation) is always the right answer.

There is a reason why high prices cure high prices, but you have to let them.

And I for one am very happy that there is possibly a hedge fund somewhere willing to take the trade when I sell canola for $14 a bushel like I did last week. It beats a cheque from the government hands down every day of the week.

Williams a fraud? No, he's right on the money.

[Fransisco]

Okay cotton now we're getting somewhere, yes there are various reasons why the funds have gotten into commodities. The question being posed is, is it right or wrong for them to be allowed to trade these markets.

I argue that it is perfectly fine for them to be here, the more money and players in the market the better. jensen I believe is arguing the opposite, that they are too rich and can therefore "control" everything. We can't have private interests "controlling" everything someone needs to regulate them into submission for the greater good or some other nonsense like that.

I don't buy that argument, no one fund is that rich and no regulator is smarter or better at allocating resources than the market.

[GrainBeetle]

Score:

Cotton: 4, Fransico 0

[Fransisco]

Really GrainBeetle?

Okay, can you explain to us then how cotton proved that Walter Williams is a Keynesian economist?

Or how currency devaluation shows that it is right or wrong for index funds to speculate in the commodity markets?

Or that Cottons Socrates quote is correct? And if it is how does that have any bearing on allowing speculators into a market?

Or that inflation is actually running at 12% using the standard measurements? And again what bearing does that have in allowing speculators into the market.

Hmm...

...No?

Oh wait a minute, let me guess, you're using the same methodology that tells you the CWB gets you premiums while actually you're getting hosed.

[Fransisco]

Some excerpts from the latest edition of the Economist on the subject related to oil.

http://www.economist.com/opinion/displayStory.cfm?Story_ID=11454989


...It is clear that high oil prices are hurting many economies—especially in the rich world. Goldman Sachs reckons consumers are handing over $1.8 trillion a year to oil producers. The wage-price spiral of the 1970s has been avoided, but the income shock is painful. Beset by scarce credit, falling asset prices and costly food, developed-country households are hardly well-equipped to foot the oil bill. America's emergency tax rebate, voted this year to help people cope with the credit crunch, has in effect been taken right away again.

Stuck for answers, <b>politicians have been looking for scapegoats. Top of the list are the speculators</b> profiting from other people's hardship. Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? <b>But that is plain wrong.</b> Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.

If the speculators are not to blame, what about the oil companies, which have failed to increase output in spite of record profits? Profiteering, say some. However, that accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused. Others fear that<b> oil is pricey because it is running out.</b> But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.

The truth is more prosaic. Finding and developing new oil fields is an expensive and time-consuming business. The giant new fields in the deep water off Brazil are unlikely to produce oil for a decade or more. Furthermore, oil is perverse. <b>When prices are low, oil-rich countries welcome the low-cost, high-tech and well-capitalised oil firms. When prices are high, countries like Russia and Venezuela kick them out again.</b> Likewise the engineers, survey ships and seismic rigs that oil firms need to find and produce new deposits are expensive right now. The costs of finding oil have, temporarily, doubled precisely because everybody wants to give them work...


...governments should speed up the adjustment—or at least stop delaying it. <b>Half the world's people are sheltered from fuel prices by subsidies—which, perversely, have boosted demand</b> and mostly benefited the better off. Now countries like Indonesia, Taiwan and Sri Lanka have begun to realise that they can ill afford this. Cutting fuel taxes in the rich world makes no sense either (see article). There are better ways to return cash to struggling voters.

[FarmRanger]

From the article that jensend referenced:
Quote
“The modern-day commodities market was born in 1848, when 82 merchants banded together to create the Chicago Board of Trade. Until that point, the grain trade was unpredictable, at best, and utter chaos, at worse.

Buying did not take place in any organized fashion, and individual farmers tended to transact with separate parties, leading to wide discrepancies in pricing. Because farmers typically sold their wares after harvest, the glut of grain often resulted in low prices.”
Endquote.

Having speculators involved in a market adds liquidity and keeps it honest. This has everything to do with supply and demand and transparency and liquidity. Only the large players who could set prices in the absence of functioning markets would argue against allowing speculators into the markets. Francisco is quite correct in explaining a speculators function in any economy, regardless of whether they have fiat currencies.

[Fransisco]

Thanks Kemosabi, it was getting a little lonely in here.

[FarmRanger]

no problem, were you feeling like Bob in the Newhart show? It was fun watching you banter with Larry, Darrel and Darrel.

[jensend]

i'm in favor of free enterprise too. just not many places to find it these days. heck, even dwayne andreas is frank enough to say it's the last thing he wants and he'll work against it. free enterprise would fix a lot of the things that are wrong but just believing it exists doesn't make it so. guys like walter williams are like ann coulter - they cater to an audience and are willing to say what the audience wants to hear. from what i understand the ultra-rightwing commentators are being discredited with time and the stupidity of the bush administration so maybe they've had their fifteen minutes of fame. the real world is real - williams is just a columnist pushing spin.

[TOM4CWB]

Fransisco,

Any user of a futures is speculating... even more so if the product has yet to be produced.

The 'Hedge' users... who physically use or produce the product... are quite happy to have the "speculator' buy the other side of the market... if it benefits their position.

In the HRS market this Feb/08... there were cash buyers who paid the high futures prices... and then in basis actually paid even more to the seller of the wheat... if they were willing to supply at the specified time.

The US growers were given the opportunity to sell every last kernel... they chose to deliver... when the consumer needed it.

I don't see how black oil is any different.

I was able to hedge my fuel... and am glad some other party now is making up the difference of the additional 30%.

I still speculated that the price of oil was going to rise... when I locked it in last fall... even if I am going to burn/consume that oil!

SO;
In the end... we are all speculators... if we use the futures!

[wilagro]

Fransisco: From your article.

"Say that today's price of corn is $6 a bushel. I have a hunch that because of future supply and demand conditions, such as drought, war and increased uses for corn, that in May 2009 corn will sell for $12 a bushel. I stand to make a lot of money if I buy corn now for $6 a bushel, hold it, and in May 2009 sell it for $12 a bushel. Sure, I've made a bundle of money for myself, but is my speculative activity deserving of condemnation? The answer is no; I've served a valuable social function."

He also HELD his corn from the market and if others did the same they "created" a shortage which caused the price to climb. This climb very likely wouldn't have occurred otherwise. So, yes, he should have been condemned.

Most speculators are leaches who create no NEW wealth but manipulate the market for their own benefit.

[charliep]

wilagro

From a CWB perspective, are speculators a good or bad thing?

I have heard suggested that the CWB needs futures market volume to trade their risk management program. Over the course of a year, the CWB has somewheres in the 18 to 20 million tonnes of wheat they sell. Through the services they offer customers (buyers of western Canadian grain) to allow them to manage price risk, methodologies to manage the risk to the pools of the various producer pricing options and finally their stated methodology of managing timing risk of sales activity (page 42 of the annual report), the CWB is a very active user of the futures markets. Most futures market exchanges have very strict rules on the percentage of open interest anyone group can hold and the CWB would likely be close to them at various times during the year. Large trading volumes/market liquidity serve the CWB well and make their risk managment activities more effective.

The issues in previous threads have not be about speculators as such but rather a new breed of them in terms of funds who approach the CWB in terms of the size of transactions and are not driven by the same fundamentals as other traders (like a 300 pound clumsy person who tries to move around in a canoe). The impact (some would say) has been higher volatility which has been a topic in other threads.

Will note these evil new breed speculators created the opportunity to sell new crop wheat for over $10/bu (even over $12/bu). But I guess you would argue this was a bad thing.