Frenetic speculation on ever more opaque and complex, intensely rigged energy and commodity markets has generated a contango-dominated context where only high prices now, and higher prices further out can save the day - for market operators and players. This applies almost across the board and with few exceptions. The so-called market neutral change-on-a-dime flexibility does not apply for pure and basic financial reasons: equities have taken a solid beating and the loss has to be made up somewhere else in the "seamless asset space".
ONE ONLY RESULT: FAILURE
In market contexts like the present, their fundamental asymmetry is clear. Markets can go up, but in the current context there is massive risk of runaway collapse if they go down further. This is a "tail end phenomenon"', call it double or quits, well suited to late stage roulette wheel capitalism.
This specially applies in the energy and commodities space, signalled by market operator reaction to the MF Global collapse. The current most extreme example is the Nymex oil market: http://www.hardassetsinvestor.com/weekly-commodity-reports/contango-report/3181-contango-report-wti-moves-into-backwardation-but-brents-backwardation-narrows.html
MF Global Inc., a US commodities trading house which went bankrupt on October 31, left behind debts and currently unexplained missing funds in customer accounts presently estimated at more than $1.2 billion - but a US bankruptcy court has now ruled these customers will not be allowed to form a committee to represent their interests in court. This could first be interpreted as similar to green energy speculative failures, like the Solyndra LLC solar tech start up that collapsed in September, with the total loss of $535 million of US Federal government backed funding, but which is not likely to result in penal proceedings against its owners and operators, headed by Bill Kaiser, a well-known democratic party fundraiser close to Barack Obama.
In the MF Global case, customer accounts believed to hold $5.45 billion were frozen Oct. 31, the day after the New York-based company reported a shortfall in funds preventing it honoring its commodity market engagements. The initial estimates of loss, some $600 million in missing funds, was quickly raised to $1.2 billion by the trustee appointed to liquidate the company and distribute refunds to customers on a pro rata base. By 21 November, as the potential losses of MF Global across US and world commodity markets continued to grow, with the near-certain knock on effect of weakening the financial strength of commodity broker and trading firms in many key markets, one lawyer representing customers said out loud what this case means for global commodities trading.
He said “This case may determine whether there is a commodities market in the future. This is a far-reaching case".
LIKE AND UNLIKE
Unlike the Lehman Brothers investment bank collapse of 2008, often signalled by mainstream media editorialists as a "key event" in the continuing meltdown of the global bank, finance, insurance and sovereign debt system, lurching forward one day longer, the MF Global collapse concerns commodities markets. These handle real world things. These are the basics like oil, coal, gas, copper, aluminium, rubber, cotton, timber, maize, wheat, rice and other food products. While the world can do fine without Lehman Bros, it can't do without real world energy, metals, food and raw materials. While paper money can be printed and issued with fantastic ease - in the US case and under Obama some $ 7000 billion since 2009, exclusively to bail out government friendly corporate players - and share certificates for fragile high street insurers and banking companies can be rushed into print, raw materials cannot be printed. This may be a surprise to some, but not to sane persons.
Cracks and fissures in the global late capitalist liberal-free market system are now almost everywhere, but until now the supply of raw materials has held up. Producers and suppliers continue to accept paper money for their hard assets, they continue producing, and many go on investing to maintain or increase their supply capacities. If they lose confidence in the world's speculative-based commodity markets due to major brokerage houses like MF Global going belly-up, triggering chain reaction losses through the entirely interrelated global commodity trading system, commodity supply security is threatened.
Any downturn in commodity supplies caused by a spiralling loss of confidence in global commodity markets by producers and suppliers, will come at a specially bad time. Despite all appearances - austerity, mass unemployment, increased misery - and underlining the injustice and inefficiency of global late stage capitalism, world paper money liquidity has exploded. The amount of money in circulation and in reserve has spiralled since 2009. Probable growth rates, depending on world region and often not openly declared by financial and economic authorities, are likely above 15% per year. For economies in the OECD region, specially the USA, the EU 27 and Japan with typical economic growth rates ranging from well below 0% to 2% per year, the implied real inflation rate is easy to gauge.
Only for so long as there is no break-down discontinuity in global commodity supplies, starting with oil can this real inflation be prevented from surging into the consumer economy - at the worst possible moment.
Much higher oil and commodity prices, hyperinflation, would not only be the logical cause, but also the only logical result - inevitably triggering a defensive hike of interest rates. This would truly bring down the remaining house of cards in the debt strangled recessionary economies of the so-called Rich World, as bank after bank, company after company collapsed, and country after country defaulted on its sovereign debts. Hyperinflation would then switch to hyper-deflation, probably with civil war uprisings.
THE COMING COMMODITY PRICE SURGE
MF Global's collapse, Silicon Valley's failed scam to "reinvent energy", and the related attempt by financial market operators to generate a huge new market for emissions trading and carbon finance have the basic common factor of uncontrolled and unregulated, parasitic financial players feeding off a real world economy that is predictable if weakened, that continues to deliver the hard assets - even if its fragility is now stark and dangerous. The new threat is different: the choke point moves to real or hard asset production and supplies.
As we know from firstly the subprime crisis, then the sovereign debt crisis, the parasitic and dysfunctional financial-trading system can do massive damage to the real economy. But as yet this has not hit energy, food, other commodities and real resources. This is likely now changing, with the MF Global collapse, the collapse of credibility for Silicon Valley's green energy scam, and global carbon finance and trading scams underlining that the parasitic model cannot deliver the goods.
Signs of serious damage in global commodity markets, since July-September are multiplying. This especially features the key oil trading market. Major losses by brokerage houses, extending far beyond MF Global, even fragilizing the financial strength and depressing the profits gouged by "iconic players" including Goldman Sachs & Co, have resulted in a de facto financial context where these rightly named players have only one choice: push up oil prices.
This is observed and known by oil producers, whose tolerance of lower barrel prices is necessarily declining. The self-fulfilling prophecy will become exactly and only that.
Soft commodities as widespread as cotton, coffee, wheat and rubber also show similar trends, where brokers and broker-financing entities, from hedge funds to the world's biggest banks are placed in a context where they have only one possible strategy: push up prices now and doggedly roll over their futures contracts when the market fails to deliver higher day traded prices. As risk rises, and brokers as large as MF Global collapse, this one-way trend to higher prices - totally unrelated to supply and demand fundamentals in a world economy close to recession - will intensify and accelerate.
We can time this sequence and process as under way at present, and set to exponentially grow over coming weeks and months. The hyperinflation trend, firstly to 15%-a-year, and then 150%-a-year can trigger very fast, as oil, gold, metals and food prices shift to one-way price growth.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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