Here are two little anecdotes to help me segue into the juicy commentary this morning:
First, I recently read about waivers being granted that allow select recipients to avoid Obamacare mandates. That is, several large unions and corporations are getting a free pass where the majority of businesses are not. That is, they don’t have to comply with the new healthcare legislation. That is, several of these organizations who lobbied hard for this new legislative suppository saying, “You know what … on second thought … this would raise our costs and negatively impact the business we are trying to run. That’d be great if you could make an exception for us … Thanks.”
Exception made. In fact, several exceptions have been made.
Secondly, I cannot help but share this little exchange from my all-time favorite, The Natural:
Pop Fisher: Hobbs! I’m sending you down Hobbs, Class B ball. Tomorrow you go to the Great Lakes Association.
Roy Hobbs: All right. You make the rules?
Pop Fisher: That’s right, that’s right and you ain’t been playing by ‘em. All these other guys play by ‘em. Don’t you remember signing a contract?
For those who have somehow never had the opportunity to sit down (and memorize) this movie or read the book, Pop Fisher had given Roy Hobbs not a single inning of playing time. But he made the decision to send Hobbs down to the Minor Leagues anyway.
It’s hard to play by the rules when someone else is making them up as you go.
Now let’s look at commodity markets for a minute …
The CFTC is stewing over potential regulations that would limit position sizes for commodity futures trading. The end: mitigate speculation. The means: limit position sizes of large traders. The unintended consequence: among others, handcuff the activity of medium-sized hedgers and physically-backed ETFs.
And now the European Commission, perhaps following the lead of one Nicolas “It is time for government to rescue the world” Sarkozy, is seeking to implement similar restrictions on commodity trading in the European Union.
In a “duh!” and a “huh?”moment from World Bank Chief Robert Zoellick to Reuters:
The world faces a broader trend of increasing food and commodity prices and more countries should wake up to the need to curb price volatility, World Bank President Robert Zoellick said on Wednesday.
In a phone interview from Berlin, Zoellick called on G20 global leaders to "put food first" to tackle the surge in prices and increased volatility threatening the poor and driving up inflation in developing countries, mainly in Asia.
"We are going to be facing a broader trend of increasing commodity prices, including food commodity prices," Zoellick told Reuters.
Rising food prices are obvious now. The need for countries to curb volatility is not.
For discussion on the unintended consequences of regulation, see: A Demon of Our Own Design, by Richard Bookstaber.
So we have three instances where commodity price speculation is being put under the gun. Is the reason to stem commodity speculation an efficiency or safety concern for smaller investors? Or is a political concern? Or a moral concern? Here is one reaction from a newsletter writer:
Unintentionally, the speculator often plays a benign role in buying low and selling high. Ideally, this helps to narrow peak to trough swings in prices, while adding liquidity to the markets. That is the main reason why speculators have seldom been discouraged from trading in commodity markets.
However this happy outcome can be reversed if speculators are sufficient in numbers and size to distort commodity markets, driving them to heights which do create hardship for consumers and mainly among the poor. This last happened in 1H 2008, when we had similar discussions, as veteran subscribers may recall. Grains and beans are well below those former heights today, but more importantly, they are heading in that direction once again, due to fundamental shortages which also attract speculation.
Subscribers are more than capable of making their own assessments of these issues and I speak only for myself. However I have pointed out that staple commodities were never intended to be buy-and-hold investments. Tracker funds in particular can distort commodity markets because the holders seldom take short-term profits. This can have unintended but very damaging consequences, as I pointed out with crude oil’s recession inducing spike in 2008, which was fuelled primarily by speculation.
When I bought wheat and rough rice last Friday, during a small setback in prices, I was allowing my trading instincts to get the upper hand. Tactically, it was the right decision but ethically, at least for me, it was the wrong decision given my earlier misgivings. Therefore I closed my wheat and rough rice long positions today and I will give the profits to the children’s charity, UNICEF.
Ah, the conscience of a commodities investor. [P.S. That might make a good book title for all you aspiring authors out there.] I wonder whether it would have made more sense to keep on the profitable position with the chance to donate even more money to charity. Anyway …
But what about the conscience of a Treasuries investor? The Federal Reserve has become active in the Treasury market with its series of QE. The intent: drive down interest rates. But I suppose abnormally low rates, for the benefit of the common good, are different than a large commodity position taken by a single investor.
Wait. What’s that you say? You say interest rates are rising in the face of $600 billion of promised Treasury purchases? Hmmmmm … Then maybe the Fed doesn’t have the potential to manipulate markets in the way that some mysteriously large, surprisingly indefinable commodity speculator might. Well, at least not the Treasury market anyway.
So what’s the solution to ever higher commodity prices? Higher prices.
Higher prices incentivize growers and producers to crank up production and bring more supply to market. Greater supply then will reduce the market tightness, satiating demand. Regulating the Federal Reserve might also help, as the impact of low interest rates naturally encourages malinvestment and/or speculation. But then again, we may not need to regulate the Fed; the market may work this out alone … the way it always seems to do no matter what wrench is thrown into its gears.
US 10-Year Treasuries, daily: prices plunging (rates surging) this week after more than a month of consolidation … could this put an end to the speculative free-for-all? Maybe, but only as long as those dang commodities guys start playing by the rules.
And if you want to tie currencies into this – there are two currencies obviously benefiting from the current free-for-all: the British pound and Australian dollar. As for the pound, in the last 34 days it is more than 88% correlated to the S&P 500 … which lately is considered to be defying gravity; and the pound is facing a UK stagflation scenario.
And we all know the connection between the high-yielding Australian dollar and the commodity market …