Berserker Funds in Commodities
There was some very important testimony by Michael Masters before a US Senate Committee looking into commodity speculation. Here is a CNBC interview with Sen. Joe Liebermann about these hearings and possible regulatory moves. The entire hearing can be viewed here. Some of the themes should be familiar to my regular readers. What Mr. Masters described is a manifestation of crack up boom (CUB) behavior. The charts and tables below are from Mr. Masters’s testimony before the Senate Homeland Security and Governmental Affairs Committee.
The attempts of legislators here seem to be about re-regulating a loophole that has allowed this situation to go berserk. That’s all well and good, but the Congress should also step back and ask about the root causes of the persistent Bubble blowing and crash cycles that have gone on for more than a decade. The answers are:
- Interest rates that are often well below inflation, that is if it were truthfully reported. This in turn leads to a “cash is trash” crack up boom speculative mentality.
- Unsound money and a weak USD dollar, leading to more CUB trading.
- A monetary regime that gives speculators about everything they require and with little hesitation, in others words heavy doses of moral hazard.
- A lax regulatory regime with lots of Wall Street favored loopholes, and a misguided, false belief that we have free trading markets. In reality, they are heavily ramped and manipulated.
A smart policy would have never let what I am about to present to even develop. And if it did develop, it should have been popped early, just as what should have happened with the housing bubble in its early stages. Unfortunately the commodity Bubble has gotten so big and destructive that considerable forces beyond just tawdry “your nose grows if you lie” tricks and gimmicks must now be employed.
On to the task at hand. What Masters primarily focuses on are the huge permanent positions held by commodity index funds. Now you can argue all you want as to whether this is speculation, or a crack up boom, or just folks “diversifying” their holdings. But the bottom line is that this kind of hoarding through the futures market is counter to the public good and is not normal and has no historical precedent at all. The litmus test is this: if investors (or whatever) held a stable currency with accurately rated (rather than bogus) investment grade financial instruments, with a positive real rate of return, against a truthful inflation number, would they be loaded to the gills with everything from grains to oil to cattle? I submit that the answer is no.
Taking some of Masters’s high points he states:
“In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion to 2.8 billion barrels, and increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increases by 848 billion barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!
Unfortunately it’s not just oil that these funds have traded low yielding cash investments for. There is nothing that has not been picked over aggressively.
“Turning to wheat, in 2007 Americans consumed 2.2 bushels of Wheat per capita. At 1.3 billion bushels, the current Wheat futures stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta, and baked goods they can eat for the next two years.
Next we see what has happened in the major commodity futures price wise over the same period. Whodathunk, Sherlock?
From another angle, showing percentage open interest on the demand side, and the heavy hand of crack up boom commodity index funds.
And why 39% participation from this group matters, because it is not hedging, it is ALL one sided, entrenched and growing price insensitive longs.
And the growth and influence thereof:
And of course it is no small coincidence that Wall Street and its stooges have their hand in this turd filled sandbox as well. Again, whodathunk? And don’t be surprised if we get another too big too fail when this one blows up, but only after causing immense damage to the global public good. This Bust might take down a whole country.
The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over the counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity swaps, which 85-90% of them do, they face no speculative position limits.
The really shocking thing about the Swaps Loophole is that Speculators of all stripes can use it to access the futures markets. So if a hedge fund wants a $500 million position in Wheat, which is way beyond position limits, they can enter into a swap with a Wall Street bank, and then the bank buys the $500 million worth of Wheat futures.
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