diversification no longer a panacea.

[touchring]

Re: diversification no longer a panacea.

It is easy to put the blame on speculators, but can speculators really distort fundamentals over the long run?

The US is not the only major oil consumer. While US oil consumption has fallen by 1.5 million barrels since 2007, but has anyone seen statistics showing China oil consumption has risen by nearly 3 million barrels since 2009?

Do oil companies only make money from selling crude oil? If they do refining of oil to gasoline, they must purchase crude oil. I'm quite sure many oil companies refine more oil than they produce hence rising oil prices will surely reduce margins. This is just my speculation, I'm no oil industry insider.

[vinoveri]

Re: diversification no longer a panacea.

It is easy to put the blame on speculators, but can speculators really distort fundamentals over the long run?

I think most agree that "speculators" play useful roles in the markets.

What I'm suggesting is that their is an element of (to channel Michael Hudson) "rent-seeking" and "rentier privilege" in the way the current system is operated, and it is this element that should be identified and regulated.

If I work/save and use my savings to speculate in various asset markets, all is fine, win/lose, win big/lose big. My money, my wins or losses.

What we have though is large (e.g. TBTF) institutions speculating with leverage, obtained via the FED and on rigged terms, and who, when bets go wrong either pass the losses downstream or are bailed out.

Just like hundreds of billions of $ are being transferred every year from savers to banks, how many billions are transferred to the "commodity rent seeking community", e.g., 1 penny at a time at the pump.

Should we not at least attempt to understand whether or not this is occuring? Or maybe we have efficient and fair commodity markets after all ... just like we've seen with other markets recently Sure

[Ghent12]

Re: diversification no longer a panacea.

Can you quantify the impact of speculation on price swings then or explain further the reason for the magnitude of the price swings absent real and equivalent supply/demand swings? Appreciate your cigarrete analogy which is qualitatively effective, but am still not clear as to the quantitative relationship with real suppliers/customers, and their legitimate hedging, and the speculative/finance portion of the market. I get the liquidity angle, but cannot liquidity be part of the problem, and this is where the FEd comes in.

It seems to me your saying that speculation is overall good for everyone b/c markets would not function as well w/o it and further that whatever minor effect the speculators have on price, such is an accetpable price we all pay for the markets as they operate. If this could be quanitified, that would be helpful. What % extra do we pay for a gallon of gas so that the markets can function well?

Do you not agree that broker dealers and other players who are nearest to the Fed's liquidity spigot ( and can borrow money at 10 bps or 100 bps) are not "speculating" in the commodities markets thereby causing prices to rise (speculative carry trade if you will)?

Thanks.

Well quantifying things in a given market in economics is especially difficult because there can be no such thing as a controlled experiment. All we know for certain is that speculators have the ability to influence supply (and demand) to an extent, and that has some impact on prices. To even begin to quantify the effects of speculation, we must know the relative amount of oil that was speculated upon compared to the amount in the market at large. I am not the type to engage in original research to find such quantitative relationships, however. It is possible that the relatively minor impact that speculation has on the supply and demand dynamic is responsible for such large percentage swings, but I have reservations about that. Such a hypothesis necessarily ignores the other side of the equation--dollars--and that seems irresponsible.

Since you will never have an oil market in a vacuum to perform experiments on it, you will never know the exact quantitative relationship between the price of oil and the various influences on its price. The magnitudes of the influences can only be speculation, at best (pun intended).

[Andreuccio]

Re: diversification no longer a panacea.

It is easy to put the blame on speculators, but can speculators really distort fundamentals over the long run?

Not sure if you're answering me. You don't seem to be, since you don't address my point at all, but let me reiterate it with some explanation.

I think it's likely the increased correlation among asset classes is not due to speculators, the Bilderberg Group, the Illuminati, the 1%, Voodoo, or Elvis. It can be placed at the feet of the FED, but only indirectly.

Finster has explained repeatedly that if many asset classes that were previously uncorrelated suddenly become correlated, it's most likely due to a change in the currency they're priced in rather than some new or previously unseen relationship.

All prices are really a ratio between the item and the unit of currency. Typically, one of the item in question would be in the denominator, and the number of dollars it takes to purchase that item would be in the numerator. We speak, for example, of x dollars per share of stock. A change in that ratio can be caused by a change in either the value of the item in question, the denominator, or a change in the value of the dollars they're priced in, the numerator.

In this case, we have a new correlation in the price movements of a variety of asset classes that were previously uncorrelated. Simultaneously, we have extreme gyrations up and down of the dollar, as evidenced in Finster's Dollar Index here:

http://users.zoominternet.net/~fwuth...alForecast.htm

Why would we assume the new correlation is due to some tin foil hat conspiracy among speculators, rather than just being an artifact of the large size of the movements of the dollar compared to the smaller size movements of the relative values of the asset classes?

[touchring]

Re: diversification no longer a panacea.

No, I was referrng to the bit on speculators being responsible for high oil prices. As for correlations, I believe that Fed is only part of the equation. The WTO might also have a part to play.

Not sure if you're answering me. You don't seem to be, since you don't address my point at all, but let me reiterate it with some explanation.

I think it's likely the increased correlation among asset classes is not due to speculators, the Bilderberg Group, the Illuminati, the 1%, Voodoo, or Elvis. It can be placed at the feet of the FED, but only indirectly.

Finster has explained repeatedly that if many asset classes that were previously uncorrelated suddenly become correlated, it's most likely due to a change in the currency they're priced in rather than some new or previously unseen relationship.

All prices are really a ratio between the item and the unit of currency. Typically, one of the item in question would be in the denominator, and the number of dollars it takes to purchase that item would be in the numerator. We speak, for example, of x dollars per share of stock. A change in that ratio can be caused by a change in either the value of the item in question, the denominator, or a change in the value of the dollars they're priced in, the numerator.

In this case, we have a new correlation in the price movements of a variety of asset classes that were previously uncorrelated. Simultaneously, we have extreme gyrations up and down of the dollar, as evidenced in Finster's Dollar Index here:

http://users.zoominternet.net/~fwuthering/FFF/FinsterFinancialForecast.htm

Why would we assume the new correlation is due to some tin foil hat conspiracy among speculators, rather than just being an artifact of the large size of the movements of the dollar compared to the smaller size movements of the relative values of the asset classes?