Wednesday, April 23, 2008

No More Secrets

It used to be fun, and exciting being the biggest swinging dick in the the commodity world. But with soaring prices, causing riots and unpheaval, and death, and with speculators (and their investors) laughing to the bank, the gist of the latest article about commodity markets gone awry in the English version of Der Spiegel is that we need a discussion of the ethics in speculation on foodstuffs.

They begin with how jovial ex-Tiger, alpha-male, hedgie, wundersomething Dwight Anderson used to talk about his exploits, travels and the market opportunity inherent in softs. Now, according to Der Spiegel, Anderson is so concerned and frightened for his personal safety that he is buying-up all the rights to his photographs and images. Of course you can still see him here on Bloomberg, or here in he New York Social Diary, or here in a thumbnail from a Credit Suisse conference on commodity markets. But after these, (at least on Google image search) they get thin on the ground.

The Indian government has raised the issue of speculation's effect upon prices at the highest of levels. Many other emerging governments, as well as China, have seconded the concern though have responded somewhat bone-headedly by imposing price controls, and other coercive potentially supply-throttling measures. In America, however, it is the soaring prices themselves that are capturing the imagination of the people and news organisations. Yet there, unlike Der Spiegel, few are viewing it through the ethical lens. And even fewer see the connection between stupidly inefficient and wasteful American energy use (that, by the way, they can not afford without sovereign assistance of reserve accumulators), and rising agricultural prices.

Mark my words, this issue will have legs, particularly its ethical dimensions. And Dwight Anderson is quite right to be concerned just as Paul Singer - Elliot Associates boogeyman of third-world debtors, and Warren Liechtenstein, a destroyer of enterprises and jobs, have scrubbed the web of any and all likenesses of themselves. For no one wants to be the next Eddie Lampert, kidnapped by Josey Bovey, PETA or Greenpeace activists.


werouious said...

pitchfork and torch manufacturers will be very profitable investments for the months to come.

Anonymous said...

I ask, Cassandra, with all due respect and with an open eye and mind to the ethical side of this issue; How else can capital signal to CB’s to stop their chicanery? Selling bonds short is such a fruitless exercise b/c of the peggers, it is hard for me to see how this nonsense of BW II is resolved but by inflation being realized in the social sphere which in turn will require the official sphere to respond.

"Cassandra" said...

There is chiccanery (though most is political spinelessness and demagoguery amidst general ignorance and wishful thinking), and BWII is on the ropes, (though the central banks (of the west) are only culpable in part.

Assigning blame shouldn't yield psychic income, and is only useful as a means to better policy and thus stopping behaviours that are inimical to better/more sustainable future outcomes. From this point of view, Asian CBs (for enabling unsustainable growth in US and for inflationary fuel of unsterilized inervention), US Congress & Administrations (for repeated failure to lead on curbing consumption in general and energy consumption in particular), and The American People, electing ninnies for office, for borrowing mondo-excessively from the future and thereby impoverishing subsequent generations, and for abusing their position as reserve currency. It is hard to fault the impoverished of the world for aspiring to something better than what they've been dealt, whatever the composition fallacy yield in the eventuality they achieve OECD living standards before the energy chestnut is cracked. We may not be able to directly control China's desire to acquire USD reserves, but we sure as heck can control the generation of deficits that provide the ultimate fuel for conjuring credit and bridge loan to pay for that which cannot be afforded directly, or presently.

I cannot think of more just rewards for the financial specs in commodities than the carnage that will follow the throttling growth, and proper taxation of energy to levels that encourage sustainable levels of use and consumption. That said, I have no issues with specs investing in mines, buying metals unleveraged (though I remain suspect of leveraged spec, and frown upon unleveraged pension-fund hoarding-like accumulation even if market supply eventualities ultimately right the wrongs by spanking such non-trade longs, though only after uber-volatility and inflation and pricking of bubble.

Of course I'd rather see us live within our means, with stable money, and with sensible redistributive tax policies to finance public goods that cushion the harsh reality and social unrest accompanying a globalization that means convergence, and in a direction that for most, ain't up.

Leveraged Commodity specs are neither the Lone Ranger, nor Robin Hood, but mere carpetbaggers preying upon a bad situation. The results of their actions while perhaps ultimately beneficial from the point of view of the emergence of more sensible policies, doesn't make leveraged spec right, good, useful, or ethical to the people suffering adversely as a direct consequence.

Byrne said...


Perhaps now is the time to recount the fantastic tale of onion futures. I wonder if the onion market is saner than that for other foodstuffs. It's not a controlled experiment, since onions aren't a staple -- but they do use land and labor.

"Cassandra" said...

Thanks for that!!! Having cut my teeth at a bullion-broker and an FCM, and despite my long years in the markets, I had never read this story before. Unsurprisingly, the trading mafiosi that benefit most directly, markets enthusiasts generally would love to bury its existence forever more.

kristiina said...

Agriculture has for a long time been the place where everybody has been eager to get away from. In every part of the world, be it EU, China or India, all the children who have any capabilities have been sent elsewhere, to cities, to universities, to other countries, to earn money and get a life. I, for one, do not think this dynamic turns around very quickly. Like onions, humans will be streaming to the promised golden future - even though, sometimes, it just turns out to be the dump heap.

This dynamic is one part of what will make the future prices of edible stuff really interesting. Other parts are all those hungry and desperate entities that have pledged to show profit in all circumstances.

There was a news piece that said there's no butter in shops in Japan, as they have not been able to buy it in the world market. Is there a butter mountain somewhere? Don't think so.

Anonymous said...

To Kristina et al.

Butter in Japan is made from powdered milk and local supplies. There is a shortage of powdered milk because it takes about 5 years to build a dairy herd and there has been a surge in new consumers of dairy products (think China again). Japan is also hamstrung on the import front by a quota system (for protecting domestic producers), so I suspect it is the import quotas which are creating the shortage of butter rather than a lack of moolah for buying the stuff.

kristiina said...

There's all sorts of things going on - Japan may have shortage, in Germany producer price for milk is going down because producers have amped up the production.,1518,549226,00.html

I'm still asking is there a butter mountain somewhere? The export subsidies for butter were ended a year ago here in Finland and nobody said anything as the prices were high enough for export to be profitable anyway (because producers are getting subsidies, as almost everywhere). And the price has been going higher since then. But farming is still far from being profitable without subsidies. Fertilizer price has gone up 27% in a year. So the farmer has a hard time keeping the paltry margin s/he has, in spite of rising prices. It will be interesting to witness what all this leads to.

Anonymous said...

Fascinating, the onion story!

On the theme of silliness in tiny ag futures markets, a certain very large macro co-op of olive oil farmers' co-ops has engaged in a 50/50 JV with Cargill to pack and market house label olive oil to chain stores world wide. The entity (presumably a natural defender of high prices, given that it is owned by growers), made up of 49 individual co-ops, currently produces 90,000 tonnes of olive oil a year. The JV has its sights set on shipping 100,000 tonnes within five years.

The relevance of all this is that the mentioned co-op also happens to be the sell side market maker on the MFAO, and is now conflicted in its role as price setter. But what do - seeing as the counterparty MM, the largest bottler in the world, is investing huge amounts on locking up production, either through pacts or by planting its own lands?

Agriculture as we know it and globalization of markets are probably incompatible. Perhaps a UNESCO cultural patrimony designation...?

Anonymous said...

despite the fact that you are practically diametrically opposed to most of his policies, this is the second time in a week that you have (quite involuntarily on my part) reminded me of Lyndon LaRouche.

I found this post insidious and mean-spirited. And seriously, do you really believe the economic bullshit you are shoveling? I guess we could solve the world's food difficulties with a few well-timed lynchings.

Anonymous said...

Isn't this just illustrating how the US and, to some extent, the West have moved into financial engineering? Something like 7.5% of GDP in the US is now in financial services, I believe. The number was something like 2.5% four decades ago or so.

The funny thing to many of us not in the finance industry is how the folks there seem to think they are necessary and productive. The alternative view is that the system turned parasitical some time ago, and we're now at risk of systemic collapse.

Low food prices have also been a result of countries abusing farmers and subsidizing the middle class, who are supposed to go to University.

"Cassandra" said...

Anonymous -1;

Lyndon Larouche?!?!? THAT hurts...

"Insidious" and "mean-spirited"? Are we referring to the same post ? The Hillary rant had some venom, but this was wholly innocuous. Insidious and mean spirited would be something like

".... hey Strom, what do you say we go down thar to Washington and leg-ee-slate them god-darned jew-boy speculators before they burn down the place..."

Of course, I don't believe that for a second. I am not even morally against speculation. But we are in uncharted territory with respect to the impact of outsized participation and money flows of pure leveraged financial speculation in the markets of real stuff. The resulting volatility (particualrly in softs) and in many cases (particuarly metals), divergence of price from underlying supply and demand (read John Tumazos mid-March thoughts on this) should be great cause for concern. I don't have answers, but the main point is that ethical examination of the issue is essential.

More mean-spirited is Randian pursuit of The Objective without consideration of the adverse impacts upon innocent others of that which you pursue.

Anonymous said...

ok, i apologize for the LL reference, it (the association in my mind) did happen but i should have kept it to myself.

I have never read any Rand, but did plow through about 40% of Human Action once. Sometimes you remind me of Aaron Brown's comparison of the economies of Scotland and the Netherlands in the sixteenth century (in his book "The Poker Face of Wall Street", which contains an excellent analysis of the role of gambling in economic growth). You're Scotland.

Look, I'm American and I make my living trading. I love your blog but sometimes you make me defensive. There is a mob forming globally, for valid reasons, and I find it threatening, thought maybe you were encouraging it. And no, I'm not gambling, or I would be broke. Through hard work, I find out how to get paid to transmit information faster than it would be otherwise, via my impact on price discovery. And I end every day flat, so I assume I'm not pushing prices net one way or another.

The ethical issues are of course paramount, and your focus on them is something i admire and respect. My problem has always been figuring out which policies really, at the end of the day, achieve closest to what one's ethics wishes would happen. Making speculation the food bogeyman ignores the fact that e.g., global warming hysteria, and the policies it will engender, will kill millions (billions?) more humans on the fringe of survival than this temporary ag bubble ever will.