The speculation that is killing us - oil, food and greed

You have read my article So why are gas prices rising? of course, right? (Short answer: speculation, and bonus material: this speculation plague also affects food stuffs, leading to the global food crisis happening now).

You have read my article Oil prices to be probed by US regulator CFTC also, right?

This is another installment of my series on the oil (and really all commodities) trading phenomena.

Der Spiegel, a German magazine, has an interesting article on this recent trend which is literally killing people around the world (ah, the joys of unregulated free market!).

How Speculators Are Causing the Cost of Living to Skyrocket

After investing in high-tech stocks and real estate loans for years, legions of speculators have now discovered commodities like oil and gas, wheat and rice. Their billions are pushing prices up to astronomical levels -- with serious consequences for ordinary people's quality of life and the global economy.

Jaeggi, a 47-year-old Swiss citizen, is a petroleum trader. He and his partner, Marco Dunand, own a company called Mercuria. It is one of the world's 10 largest trading companies. At its offices in Geneva, approximately 110 employees analyze markets, handle contracts and track tanker routes. Last year Mercuria traded in petroleum products worth a total of almost $30 billion (€19 billion). That included millions of barrels of oil destined for China.

The next paragraph is key; pay attention!

"For decades, oil was too cheap. Until 1999, a barrel went for less than $10 (€6.40)," says Jaeggi. Of course, rising economies like China, India, Russia and Brazil have stimulated demand, driving up the price of oil. But what really changed the market were the big pension and investment funds.

Searching for secure and long-term returns, major investors turned their attention to the commodities indexes, investments that promised substantially higher returns than investing in the stock market. The more the funds invested, the higher the prices went, especially since the market for speculative commodities securities is very small. Even minor shifts in the portfolios of large mutual funds can quickly drive up the price of oil.

"major investors turned their attention to the commodities indexes, investments that promised substantially higher returns than investing in the stock market. The more the funds invested, the higher the prices went".

Effect of speculation on the oil market? Here you go:

"The oil price has gone up by about $10 in the last two days," says Jaeggi, adding that in the past it would have taken the market years to achieve the same price increase. Later on Friday, US crude would hit a record price of over $139, up $11 in the largest-ever single day increase.

Ernst Tanner is asking himself the same question, but he is thinking about cocoa, not oil. Tanner is the CEO of Swiss fine chocolate maker Lindt & Sprüngli. He has had to look on as the price of cocoa beans jumped by 40 percent since early 2007, despite abundant supply. "It hardly has anything to do with supply and demand anymore," says Tanner.

""It hardly has anything to do with supply and demand anymore," says Tanner."

And how about the effect of this rampant speculation, this unbridled greed on the poor around the world?

Hundreds of millions of consumers around the world are now wondering what will happen next. For weeks, high food prices have led to unrest in many countries. Demonstrators in Indonesia and Thailand, for example, demanded "more money for workers and farmers." In April, the citizens of Haiti drove their prime minister out of office because of food prices, and the people of Burkina Faso brought their entire country to a standstill for days by staging a general strike. In Somalia, where the situation is particularly extreme, soldiers fired into a crowd of tens of thousands of angry Somalis in an effort to get the situation under control. Rice prices in Somalia had doubled within the space of a few weeks.

And the world's rich; the first world?

Many European countries, including France, Italy, Great Britain and Spain, have seen protests in recent weeks by those most affected by high gasoline prices. As gas prices consume an ever-increasing slice of their income, farmers, fishermen, taxi and truck drivers are increasingly concerned about being able to make ends meet.

And what does the American government think can be done to combat this?

"This is not about blame," US Treasury Secretary Hank Paulson recently said. "It's about supply and demand." According to Paulson, "speculators have had very little impact."

Short and simple answer: nothing. We like speculation; it keeps our banks and hedge funds and Wall Street alive after the housing bubble burst.

You, my readers, must realize that American TV is in full spin, in damage control mode, and all the "experts" on CNBC and other cable and non-cable "news" shows lie through their teeth and say that the prices are only due to bigger demand for oil from China and India, and smirk at any mention of speculation and market trading as having an effect.

Think about it.

In one day, the price of oil jumps up $11, a world record. And this is due to demand from China and India? What, the businessmen and the power that be decided that "Gee, the demand from India and China is more than we taught!", and this happens every day?

Perhaps there is something to this speculation bit, eh?

Of course China and India's demand for oil increases the price of oil, but like the article states, these increases take years, not a single day.

But it's OK - ignore my blog, ignore the articles, and listen in to the "experts" on TV. Don't forget to vote for McCain and send your son to die for Israel in Iran, while you are at it...

Are Americans (and the world) sufficiently woken up to the fact of the threat of global starvation and misery, and lowering standard of living for first world (USA, Europe, Canada, parts of Asia) just so the American and multinational banks and hedge funds can recover from the housing bubble?

Only the few who have to deal with this problem.

But the people who are affected by rising commodity prices see it differently. "The flood of money from Wall Street and hedge funds is driving up prices -- and the effects are potentially destructive," says Tom Buis, president of the US National Farmers Union.

And what will this rampant speculation lead to?

Think - it is not hard to figure this out.

What did every speculation, where the prices rose up not taking into account the real supply and demand?

Think back not that far ago, when the houses' prices went up and up, and the people on TV gushed and smirked and predicted that this trend would continue, and that houses are the best investment, the safest investment to put your money in, to rely on it as your retirement vehicle...

That's right, you got it - the housing bubble!
Gee, the prices of houses fell down rather rapidly lately.

Of course, this will never happen in the oil market - why, demand from China, India, why, peak oil, scarcity of oil...

OK, settle down.

Like I said, watch the TV "news" "experts", vote for McCain, and send your child to die for Israel in Iran.

Or start to think - logically and critically.

What does Der Spiegel say?

As prices become further removed from reality, another risk begins to grow: the development of another bubble similar to the one fueled by overinflated stock prices in the so-called New Economy. A crash would be unavoidable.

A crash would be unavoidable.

The next paragraph is key - a crash, it

would be good news for drivers in Germany and the people starving in Africa. But it would also send the financial markets into turmoil once again, causing problems for hedge funds and perhaps a few banks.

Got that?

The current economy, the current speculation is good for banks, hedge funds, Wall Street and the elite, multi billionares.

But it is bad for the starving poor, and for the ordinary Americans, Europeans, Asians who buy their food and gasoline at ever increasing prices.

The counter argument runs something like this: But but but...but... but... the FED did the right think bailing out the financial industry, the banks and hedge funds - it stabilized the market?

Well, frankly, no.

What the FED did was rescue their buddies and cronies in the banking, hedge fund, speculation world of smoke and mirrors.

The FED did not rescue American (and world) economy - it destroyed it.

What is more important - that the few global big money players breath a deep sigh of relief and now invest in future commodities trading?

Or is it more important that gasoline stays at sane levels, that food prices globally stay at sane levels, so that people around the world have enough money to feed their children? Remember, oil is used not just to power cars, but also to make plastics, in chemical processes, and in virtually every sphere of the world economy.

So, in my view (perhaps not in yours), making a few rich people cry at losing a few billion here and there is a good trade off price to pay to keep the world economy going, the world economy which DEPENDS on cheaper price of oil, and the world poor from starving.

Yes, if the FED would do the right thing and NOT take action to rescue their cronies, the Wall Street market would shudder, and the hedge funds who invested in junk bonds, junk loans, and made stupid financial decisions (to exploit the housing bubble and getting caught in the crash) would suffer.

And many financial analysts would be selling cars.

And the global economic players, would take a hit and perhaps make a few billion less that year.

But the world would not have to deal with the ridiculous gas prices, and the world (and American) economy would be much better off.

And the world would not have to deal with the ridiculous food prices, and the world (and American) economy would be much better off. Instead, a few rich people get to keep their billions even after almost bringing America (and the world) to its knees because of their greed in making the housing bubble.

So, despite what the propaganda specialists on American television say, the FED took an action against the American people, and for the elite, big money global power players.

If Bear Stearns fell alongside other "respected" financial corporations because of bad loans and bad investing decisions, then... what exactly?

Would the economy fall?

Would loans be harder to secure (as if they are easy to get now)?

No, absolutely NOTHING would happen, except a few rich idiots would become less richer idiots.

I argue here that the high cost of oil, the high cost of food, the allowing of banks, investors and others to recoup their losses through the oil bubble while making 99% of the world miserable, and the poor people in Africa, Latin America literally starve, is worse for the economy and in the long run for us.

The high cost of oil and the high cost of food affects the world (and American) economy a whole lot more than a hedge fund company going bust and a CEO not buying a 5th jet plane for his pleasure.

What is the economy now?
The Ron Paul fan boys want to believe, desperately that the free market deals in real supply and demand.

But that is just not so - the world economy now is complicated and does not deal with tangible goods only - it deals mostly with pieces of paper, and now not even that - it deals with email communications.

Der Spiegel article explains it well:

"The financial industry," says Heinrich Haasis, president of the German Federation of Savings Banks, "has disconnected itself from the real economy."

This is both correct and incorrect.

It's correct because the transactions concluded in this sector no longer have anything to do with real goods. The industry deals in expectations, and in expectations of expectations, often on borrowed money. And it's also correct because it is an industry in which obscene amounts of money are being earned.

But Haasis's statement is wrong because these transactions can in fact end up affecting the real economy. They can fire it up, as in the years of the recent boom, or they can slow it down, as is the case today. They could also drag it into an abyss, as many still believe is possible in the wake of the most recent credit crisis.

Did you catch that?

"The transactions concluded in this sector no longer have anything to do with real goods. The industry deals in expectations, and in expectations of expectations, often on borrowed money".

Do you know what is a good phrase to describe the economy of today?

Smoke and mirrors.

Or perhaps one word will suffice: bullshit.

But what about proof AG? I don't trust you; I trust CNBC and FOX more than you. You are just a blog, and those cable "news" shows are respectable sources of information.

Blogs suck, it's blogspam, downmod downmod downmod!

It's a completely different story on the computer screens of Wall Street analysts, where commodities are the biggest growth industry of the 21st century. Vast sums of money are being invested in the markets for food commodities and energy. These markets, which have been relatively straightforward until now and have operated in accordance with the same principles for decades, are suddenly being overrun by financial investors.

In late 2003, they invested only $13 billion (€8.4 billion) in the food commodities business. By March 2008, that number had jumped to $260 billion (€168 billion), an increase of 1,900 percent.

Last year, new investments in the commodities markets amounted to roughly $100 million (€65 million) a day. At the beginning of this year, what had been a steady flow turned into a torrent, with more than $1 billion (€650 million) flooding the market every day. Hedge funds, banks, pension funds, investment funds -- in other words, groups that represent millions of small investors -- are all involved. At first they invested their money in the dot-com market, then in real estate, and now agriculture and the energy markets are the hot new investment opportunity.

My, my, my.

"In late 2003, they invested only $13 billion (€8.4 billion) in the food commodities business. By March 2008, that number had jumped to $260 billion (€168 billion), an increase of 1,900 percent."

But you keep on believing the spike in oil prices is all due to China, India, peak oil, supply and demand, or the tooth fairy and Santa Claus.

"More than $1 billion (€650 million) flooding the market every day."
Yeah, $1 billion a day invested in future commodities has no effect on the price of oil, food and other commodities.

$1 billion a day - peanuts, not important, no effect.

When a pipeline burst in Canada, "the price immediately jumped by $4," says Fadel Gheit, an oil analyst with Oppenheimer in New York with 20 years of experience in the industry. Gheit, also an engineer, knows how pipelines are repaired. "This isn't heart surgery. It's a plumber's job, child's play, finished in three days," he says. "The traders use every excuse in the book to drive up prices."

"The traders use every excuse in the book to drive up prices."

Want more proof that hedge funds and global banking cartels went from the housing bubble to create the commodity, including oil and food, bubble?

"The market is reacting to the fact that we might not have enough oil in the market 13 years from now -- excuse me?," says Edward Morse, chief energy economist at the investment bank Lehman Brothers. "You never recognize it's a bubble until the bubble is over." he says.

But how about the absolute proof that the speculation in commodity trading is affecting the price of actual commodities?

Signs of unusual behavior abound across the commodities markets. Take cotton, for example. In late February, the price of cotton futures jumped by 50 percent within two weeks. But cotton farmers haven't even been able to sell half of their harvest from the previous year yet. Warehouses in the United States are fuller than they have been since 1966. Indeed, all signs point to a price decline.

I rest my case.

But you go on, turn on CNBC, CNN, FOX, and listen in to the experts.

I am sure they have your best interest at heart.

After all, they would never, ever, ever lie to you to make money off your stupidity, right?


Bonus Material: About your 401(k) retirement fund

If you are like me, you wonder how all this affects you, yourself, the Joe Schmoe off the street.

Yes, the gas prices affect you now. Yes, the food prices affect you now.

But can it get worse?

Of course it will (you knew that, didn't you?).

I wrote about this bubble before (which American TV tries very hard to not see, with endless idiots shouting that it is all China's and India's fault). But lets let Der Spiegel speak its mind on the near future of your retirement money.

Despite all this, there is still plenty of speculative capital searching for high-yield investments. While subprime mortgage loans may have been all the rage yesterday, today's hot investments include gold and tin, wheat and soybeans. All of this means that the next crisis is already taking shape before the last one has even been weathered -- a bubble following on the heels of a bubble.

OK, we know that - if we agree with AmericanGoy - that this is a bubble which will burst and the prices will go down. But it doesn't affect my reitrement mone.... uh oh

They are all back at the table, the hedge funds and the major investors, the ones who will place their bets on anything that promises to yield a profit. But they're not the only ones. American pension funds, such as the fund that manages the retirement pensions for Californian teachers, have also joined the fray.

Uh oh - "American pension funds (...) have also joined the fray".

What, how do you think your 401(k) makes money? Off the market. And you think that you are invested in the safe option, the money market, the conservative option, the "safe" option, the "short term loans" option.

Hahaha!

Go ahead, call your 401(k) provider and ask the person answering your call exactly what they mean by "money market" and "short term loans". Does it include any commodity trading, per chance?

Go ahead, chump, sucker! Ask them!

"Uhm, uhm, ummmmm, let me get a manager.. uhm I don't know."

So you lost your money in the housing bubble... and now you will lose your 401(k), Enron style.

Make sure though to watch your TV, as the "experts" on CNBC, FOX, CNN, ABC et al will say that it is all China's and India's fault, supply and demand, as their faces sweat, their eyes dart all over the place and their hands shake...

Bonus Material: Liberal and Conservative criticism
It is funny as the fact that this common sense view is criticized by both those on the left side of the political spectrum and those on the right.

Those partisans of the left say that this is the peak oil effect (OMG we are running out of oil tomorrow, hence the $11 rise in price per day - the "LOL" expression applies here, me thinks), and that oil is running out (again, oil must be running out tomorrow, as we have daily record price increases).

Those on the right say that this is the demand from China and India which is driving the price spikes (again, I guess China and India's demand increases daily so much that increases in prices which took years before now take one day - again, LOL-factor 10). And I personally love the free market of supply and demand hypothesis, which the simple people who believe in it don't understand that it DOES NOT exist anymore, that in the age of computers, instant global communication, when pieces of paper, promises on promises on promises of maybe some goods being traded are being traded (smoke and mirrors, smoke and mirrors people).

The liberal vs conservative debate and viewpoints is passe.

It is over, it is only stoked by the media propaganda experts on TV and the American political establishment, which always looks for wedge, controversial issues to divide the stupified Americans and take their minds off real issues.

Like why the gas is so expensive, why the dollar is worth less and less, or exactly why and for whom we are in Iraq.

But you keep on fighting for abortion rights, for guns, for flying the confederate flag or not... Good luck!