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Interest-Rates / Government Intervention May 23, 2008 - 02:13 PM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis ArticleUnited States Senate, 23 May 2008
Findings of the Committee on Homeland Security & Governmental Affairs "Trading Commodities – a Very Bad Thing"

AFTER DOZING OFF through the expert testimony of five young visitors from the financial and farming communities this week, the Senate Committee on Homeland Security & Anything Else That Takes Our Fancy was today persuaded by the opinions it had already formed in the cab on the way over.


Speculating in the commodity markets is a bad thing, a very bad thing indeed. Congress ought to do all it can to protect the public interest – starting with its own re-election.

The Committee therefore recommends closing the US commodity futures market, and imposing sanctions on any foreign state that doesn't do the same, to prevent speculative funds simply moving elsewhere

This policy – undertaken for the good of the international community – will thereby force speculators back into more socially beneficial activities, such as trading those subprime-mortgage backed bonds now stuck on the balance sheets of New York investment banks.

Fixing that crisis is what both the economic stimulus package and the Federal Reserve's cash-for-crap liquidity injections are intended to achieve. Sub-zero real rates of interest should in no way be allowed to encourage or fund trading outside socially "good" speculations like residential real estate.

Thanks to their funds fleeing the securitized debt markets, one in 33 current homeowners in the United States may now be heading for foreclosure, according to the Pew Charitable Trusts' latest research. This ratio rises to one in every 18 homeowners in Arizona ; in Nevada , it stands nearer one in eleven. So herding financial speculators back into the housing market ought to become the No.1 priority for any politician seeking another term in office.

As for the matter in hand, and despite what Jeffrey Harris – chief economist of the Commodity Futures Trading Commission (CFTC) – claimed in his testimony on Wednesday, the surging price of energy and key foodstuffs has nothing whatsoever to do with a "weak Dollar, strong demand from the emerging world economies, geopolitical tensions in oil-producing regions, supply disruptions, unfavorable weather, and [Congressionally-mandated] production of ethanol."

Mr. Harris's detailed refutation of our knee-jerk conclusion also fails to stack up. Because he appeals to the "evidence" while there are clearly votes to be won by horse-whipping speculators live on PBS.

"Prices have risen sharply for many commodities that have neither developed futures markets (e.g. durham wheat, steel, iron ore, coal, etc.) nor institutional fund investments ( Minneapolis wheat and Chicago rice)," claimed Mr. Harris. "Markets where [big fund] index trading is greatest as a percentage of total open interest (live cattle and hog futures) have actually suffered from falling prices during the past year.

"The level of speculation in the agriculture commodity and the crude oil markets has remained relatively constant in percentage terms as prices have risen...[while in agriculture and crude oil markets] speculators such as managed money traders are both buyers and sellers."

Moreover, futures-market participants in general would have us believe that for every bullish speculation pushing prices skywards, there's another trader taking the other side of the deal, betting that prices will go down! But that preposterous idea would undermine the bar-room logic of the Committee's pre-hearing decision. And the fact is that speculators trading wheat, pork bellies and crude oil are as good as stealing bread, bacon and a nice drive to the coast this weekend from hard-working American families. The fact that one trader sells a futures contract every time a speculator buys one is entirely irrelevant.

The Committee found it constructive, therefore, to have its conclusion humored by Michael W. Masters of Masters Capital Management, who told us that "what we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets – institutional investors.

"Specifically, these are corporate and government pension funds, sovereign wealth funds, university endowments and other institutional investors," he explained – naming pretty much everyone if you follow the money all along the chain! But with the key figures of "mom and pop" investors being absent from Masters' list – and with the players who do appear depriving Wall Street investment banks of much-needed capital every time they go long bananas or whatever – it's highly dangerous that "these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant."

Ha! That made a nice retort to the assertion by Thomas Erickson, chairman of the Commodity Markets Council (CMC), that the extra volume brought into the raw materials markets by hedge funds and institutional investors "boosts liquidity, aids in price discovery, and enhances market efficiency.

"Futures markets today reflect global economics and trends," he went on, forgetting that there's no votes in macro-economic trends, least of all in the downward trend of the US Dollar's purchasing power as dictated by the currency markets – another bolt-hole for speculative wrong-doers that the Committee should like to investigate and shut down in due course.

"Speculative activity in futures markets may influence day-to-day prices, but it is powerless in the face of larger, fundamental forces," Mr. Erickson continued as if anyone cared. "If prices begin to retreat tomorrow, speculative activity will follow that retreat, not cause it."

Erickson then made the scandalous and thoroughly anti-social claim that "markets are generally the most efficient filters of information." But how does the wider community benefit from information? What communal good is achieved by seeing the Dollar shrink against virtually every essential asset other than housing and common stocks?

Amid these difficult economic times, therefore, the Committee hereby proposes a new Bill. Once passed, it shall:

i) Identify & shutdown all speculative trading (other than that required by producers and processors needing a counterparty to hedge their commercial positions);

ii) Enforce the immediate closure of all overseas commodity futures markets, thereby killing all speculation worldwide and in no way driving it straight onto supermarket shelves instead;

iii) Establish a new committee to replace the open market, agreeing and setting price limits for oil, corn, wheat and whatever else takes our fancy;

iii) Imprison any private individual – including but not limited to hedge fund managers, foreign government agents and private US citizens – found hoarding key resources in their kitchen cupboards at home.

What with the Memorial Day weekend now upon us, the Committee has yet to finalize a name for this Bill to promote such social, communal controls and planning. But suggestions will be gratefully received c/o the Senate from Tuesday.

Something using the words "social...community...control...planning" will do fine.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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