Markets and Trading

Samuelson on Why We Should (Not) Shoot the Speculators

by

Who are these offensive souls? Well, they often don’t fit the stereotype of sleazy high rollers: Many manage pension funds or university and foundation endowments.
 
… [Commodity investors] generally don’t buy the physical goods, whether oil or corn. Instead, they trade “futures contracts,” which are bets on future prices in, say, six months. For every trader betting on higher prices, another is betting on lower prices. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader’s gain is another’s loss.
 
Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in selling prices for their grain by selling grain futures. The markets work because numerous financial players — “speculators” in it for the money — can take the other side of hedgers’ trades.

Samuelson’s Conclusion: “If politicians wish to point fingers of blame, they should start with themselves.”

RTWT.

I Spoke Too Soon

by

A while ago I disparaged the Indian government’s backwardness (as I saw it) in considering a ban on futures trading. But now, not a few American pols, journalists and bloggers are sounding like the Indian finance minister, making similarly foolish suggestions in favor of restricting oil speculation.

Everybody always wants to punish speculators. But speculators, by following their self-interest, provide the rest of us with market liquidity, price information and generally lower costs of doing business.

Also, if you believe in freedom, free markets are good in and of themselves. Restricting speculation when prices are unusually high or low is like restricting unpopular speech: there’s generally an expedient argument for it, and it’s generally a bad idea because the long-term harm it does far outweighs any short-term benefits.

Quote of the Day

by

Americans have had it so good, for so long, that they seem to have forgotten what government’s heavy hand does to living standards and economic growth. But the same technological innovation that is causing all this dislocation and anxiety has also created an information network that is as near to real-time as the world has ever experienced.
 
For example, President Bush put steel tariffs in place in March 2002. Less than two years later, in December 2003, he rescinded them. This is something most politicians don’t do. But because the tariffs caused such a sharp rise in the price of steel, small and mid-size businesses complained loudly. The unintended consequences became visible to most Americans very quickly.
 
Decades ago the feedback mechanism was slow. The unintended consequences of the New Deal took too long to show up in the economy. As a result, by the time the pain was publicized, the connection to misguided government policy could not be made. Today, in the midst of Internet Time, this is no longer a problem. So, despite protestations from staff at the White House, most people understand that food riots in foreign lands and higher prices at U.S. grocery stores are linked to ethanol subsidies in the U.S., which have sent shock waves through the global system.
 
This is the good news. Policy mistakes will be ferreted out very quickly. As a result, any politician who attempts to change things will be blamed for the unintended consequences right away.
 
Both Mr. McCain and Mr. Obama view the world from a legislative perspective. Like the populists before them, they seem to believe that government can fix problems in the economy. They seem to believe that what the world needs is a change in the way government attacks problems and fixes the anxiety of voters. This command-and-control approach, however, forces a misallocation of resources. And in Internet Time this will become visible in almost real-time, creating real political pain for the new president.
 
In contrast to what some people seem to believe, having the government take over the health-care system is not change. It’s just a culmination of previous moves by government. And the areas with the worst problems today are areas that have the most government interference education, health care and energy.
 
The best course of action is to allow a free-market economy to reallocate resources to the place of highest returns. In the midst of all the natural change, the last thing the U.S. economy needs is more government involvement, whether it’s called change or not.

–Brian Wesbury

Contango

by

I learned a new word today, perusing this article that I found at Drudge (do I really need to give Drudge a hat tip?).

I don’t know a lot about the futures markets, but the article states that some contracts have become more expensive than the spot  price for oil, and that this is a rare event called a contango.   The article also states that this means that either the futures markets are unhinged, or that participants in this market are wagering that there will be a supply issue in the coming years.

I would be interested to hear what our commenters and blogmates (who know a  lot more about these types of things than myself)  have to say about this.

Official Stupidity

by

Indian pols revert to Third World type:

NEW YORK (MarketWatch) — India is reportedly considering a ban on futures trading in food commodities, as the government struggles to curb soaring inflation and the rising cost of food has become a major international concern.
 
India’s finance minister Palaniappan Chidambaram said Monday that he was considering a blanket ban on trading in food futures, according to a report in The Financial Times.
 
Chidambaram said that governments across Asia share his worries over speculation in the commodities markets, the FT reported.
 
India is “facing a very grave crisis on the food front,” the minister said on the sidelines of the Asian Development Bank’s annual meeting in Madrid, according to the FT.
 
India has already banned futures trading in rice and wheat. The latest remarks from India’s finance minister come as his government confronts growing pressure at home to curb rising inflation.
 
On Friday, official data showed that India’s inflation hit a 42-month high of 7.57% in the week ending April 19.
 
“It’s indicative of the fact that there’s a real issue here and governments are scrambling to find some kind of solution,” said Cameron Brandt, global markets analyst at EPFR Global, about India’s idea to ban trading in food futures.
 
“I don’t think it’s a great idea especially given that their food futures market is fairly modest,” Brandt said. “If you take that away, you lose pretty important market signals. One thing the food futures market is telling us is plant more food.”
 
[…]

There’s not much to say about this except that India still has a ways to go to become a first-rate country.

Also, the ignorance about basic economics of many of the commenters on economics and finance websites never ceases to surprise me.