Friday, May 30, 2008

CFTC: "There Will Be Blood"

The US Commodities Futures Trading Commission ("CFTC") has announced that it has been, and will continue to be, monitoring oil futures markets, both at home and abroad, more closely to ensure that the process reflects "fundamental economic forces of supply and demand, free of manipulation and fraud." Apparently the investigation began in December of 2007, just after oil prices hit $90 per barrel. The CFTC stated that they normally conduct these types of investigations in secret, but because of the extraordinary leap in the price of oil over the past few months, were announcing their investigation to the public.

We all know what pervasive fraud on the market can do to a micro-economy (see WorldCom, Enron). What is interesting in this case is, first, that the CFTC is actually investigating oil futures market practices before any bad actors get caught with their hand in the cookie jar, and, second, that the CFTC has announced its investigation.

We are used to seeing the feds investigate bad actors in the financial markets. Anyone who has taken a look at the SEC rules can attest to the fact that the Feds have set up an elaborate scheme of regulations and pitfalls for would be fraudulent traders. What we are not used to seeing is a large-scale investigation of an entire market, especially one that occurs before the investors dump their shares and send the market plunging into oblivion (some might argue that's not such a bad thing for oil prices; I am not one of those people). Several possible explanations come to mind for why the CFTC might have launched its investigation in December instead of, say the day after oil prices plunge to mid-1990's levels and the futures market crashes. I don't want to speculate about the CFTC's motives, but it seems that either there was some evidence of fraudulent practices on the futures market that surfaced around Dec. 2007 or the CFTC is taking a more proactive approach than market regulators have in the past, oh let's say 7 years.

The fact that the CFTC actually announced its investigation is, at least according to the CFTC, a fairly extraordinary measure. Apparently they normally keep their investigations quiet and it is only after the recent massive jumps in the price of oil (30% or so in 5 months) that the regulators have disclosed their interest in the oil futures market. The CFTC's motivations for this one seem a bit more obvious- this is probably a shot across the bow for some institutional investors to go ahead and start cleaning up their practices and abandoning any market positions that might appear, well, fraudulent or manipulative. I'm interested to see where this goes, but, given the fact that the Feds have warned any investors who might be engaged in illicit practices, I'd say that we'll either see a gradual withdrawal from the market by those who might be tempted to engage in fraud or manipulative practices (most likely), or we'll see one or more big-time investors dump their shares suddenly, and send the price of a barrel of oil plummeting.

For my part, I'll keep watching the prices of oil, natural gas and other commodities with bated breath, and I am hopeful that we will see a gradual decline in prices that keeps a relative stasis between supply and demand because a sudden drop in prices, or a period of extreme volatility can be just as damaging as the unprecedented increases of late.

Sunday, May 25, 2008

Interesting Story Related to My Last Post:

James Howard Kunstler, author of "World Made by Hand", a book about America's post-oil future, predicts a much bleaker future for our way of life. Read the story.

Thursday, May 22, 2008

Economists Don't Understand High Oil Prices

A story in today's Washington Post centers around what seems to be a growing consensus that economists and industry "experts" don't understand exactly why oil prices are rising as rapidly as they are.

The Saudis refused Bush's entreaty to boost production because they didn't want to get caught holding the bag when the prices inevitably drop. They stated that supply and demand are currently balanced and that they didn't want to disrupt the equilibrium.

Some people are blaming speculators, citing some $90 billion of investment money being pumped through the markets in the last two years.

Everybody points the finger (at least partially) at China, which has become the flagship for the rapidly developing world. Certainly China, India, Brazil, and other rapidly developing countries are putting stress on demand, but then, at least according to the Saudis, supply is in balance with demand. Many of those same developing countries are heavily subsidizing oil and China particularly has been cited for hoarding oil in preparation for the Olympics.

Congress seems to think that OPEC is the problem in that they are keeping prices artificially high. The problem with that thesis is that it seems more likely that the weak dollar is to blame for OPEC's high prices. After all, can we really expect the OPEC countries to continue accepting $20 per barrel that is worth about half as much internationally as it was just a couple of years ago?

Further circumstantial evidence that it is actually our own fault that oil prices are rising so rapidly in this country is that, if you'll notice, every time that crude prices hit a new high the Dow drops about 200 points or so (270 yesterday). My theory in the correlation between oil price spikes and stock market tumbles is that all that money being leeched from the stock market is being pumped into the commodities markets which have seen exponential price growth, not just for oil, but also for corn, rice, and natural gas. As the demand for commodities futures rises, so does the price.

Ultimately, I think that high oil prices are a function of a confluence of factors: irresponsible financial policies on our part, both at the macro- and micro-levels (e.g. the credit markets and hyper-consumption); rising demand around the world as former 3rd world countries begin to industrialize and compete; different rules for different players (e.g. China buys its oil through state-negotiated contracts and does not pay market price); and over investing in commodities market as the boom and bust cycle that has plagued Wall Street over the past 20 years creeps into new territory.

The US solution is probably not going to lie in a business as usual approach, but rather we will need to innovate. We will need to move past the oil economy and into a new age. The problem is that no one really knows what resource will fuel the next era. Interestingly, this seems to be the first time (at least that I can think of) that humans have needed to transition from the fundamental mover of the economy (e.g. stone, bronze, copper, iron, etc.) due to pressures on the resource pool instead of simply using the technological gains of one age to bring about another.

The clock is ticking on the oil age. Global warming threatens the relative environmental stasis we have enjoyed throughout most of human history. Oil supplies are dwindling as new sources become more and more scarce. The question is whether or not we can transition from the oil age before it happens on its own.

Sunday, May 18, 2008

I Know Its Almost Summer And All...

But let's take a look at futures for natural gas and heating oil.


Crude oil prices are also hitting record highs almost every day. Bush just got back from Saudi Arabia where he asked the sheiks to boost production of crude oil. Know what they told him?
Demand does not justify increasing production at this time.

And, if you look at the above graphs, it seems the prices of heating oil and natural gas are also going up without the conventional pressures on demand (e.g. cold weather). My prediction: demand for blankets will spike around January 2009 when people begin to find that heating their homes is becoming prohibitively expensive.

Special thanks to my friend for bringing these graphs to my attention.

Thursday, May 15, 2008

Let the Red Herrings Abound

First off, I do not think its a vast right-wing conspiracy that state supreme courts keep ruling in favor of gay marriage during election years. They're not nearly organized or principled enough to pull that off. However, I'm anticipating a blitz of media coverage on the recent California Supreme Court decision that not allowing gays equal rights to marry is unconstitutional (at least under California's Constitution). Here's the story I read. Of course its a sign of things to come when you google "massachusetts gay marriage decision" and the first 10 pages of hits are different articles about the California decision.

Don't get me wrong. I'm all for gay marriage. I applaud the California Supreme Court decision and, although I haven't actually read the text of the decision yet, their reasoning, as portrayed in the Washington Post was sound.

What bothers me about this decision is simply the timing. Here's what's going to happen: for the next couple of days the networks will be milking this story for all its worth in their traditional manner. Then something will happen. They will realize that there's a presidential election going on and that the candidates haven't spoken out on their positions on the issue in a while. John McCain will be asked and he'll say he's against it. Barack Obama will be asked and he'll say something to the effect that he supports it while trying not to irritate those of his supporters who might abandon ship if he comes out strongly for gay marriage rights. Hillary Clinton will say something similar to Obama and nobody will pay her any attention as the election train passes her by. But then the media will begin to harp on it. And they'll drive it into the ground, parsing every single word out of the candidates mouths, figuring out what blue collar white voters think about it, what black voters think about it, what moderates think about it, what Chris Matthews thinks those people think about it. We are going to be hearing about this through November, mark my words.

So, to do my part, absent some actual newsworthy story apart from today's headline, you won't hear anything else about it here. My take: good decision on the part of the California Supreme Court, I think they nailed the equal protection argument that's convinced me for quite sometime. Not sure how they got around the fact that, to my knowledge, homosexuals aren't a suspect class, at least according to the US Supremes, but I think the argument is there to make them one.

So there you have it. I'm not talking about this anymore.

Everybody's Got a Crazy In Their Corner

McCain supporter John Hagee has officially apologized to Catholics for "any comments that Catholics have found hurtful." Source.

Couple of Things:

(1) What a lame apology. If Hagee were apologizing to his wife for "any comments she might have found hurtful," he would still be sleeping on the couch. A true apology takes responsibility for one's words or actions, Hagee's shifts the blame to oversensitive Catholics.

(2) Catholics? Really? When did bigots start hating Catholics again? I really thought that was behind us.

(3) Here's the money quote from Hagee, exposing him for the true idiot that he is:
In my zeal to oppose anti-Semitism and bigotry in all its ugly forms, I have often emphasized the darkest chapters in the history of Catholics and Protestant relations with the Jews," Hagee wrote. "In the process, I may have contributed to the mistaken impression that the anti-Jewish violence of the Crusades and the Inquisition defines the Catholic Church. It most certainly does not.


(4) Hillary Clinton, if she is going to maintain any slim chance at garnering the nomination, is apparently going to have to gain the support of at least one crazy religious zealot. Given her disadvantage in virtually every category of electoral results, I suggest she go deep for her pick. I suggest Warren Jeffs. Now I know what you're thinking: Jeffs doesn't really say too many crazy things in public. But if Hillary really wants to make a splash, the leader of a polygamist cult who is currently serving time for aiding and abetting statutory rape is the guy for her. Nothing says "I've got a crazy minister in my corner too" like the potential first female president accepting the endorsement (maybe even marriage? I'm just saying...) of a guy who performs wedding ceremonies for 14-year olds.

Wednesday, May 14, 2008

This Just In...Clinton W.Va. Landslide Bolstered by the Banjo Vote


W.Va. union United Banjo Pickers of Americky have put their support behind Hillary Clinton. According to the group's spokesman, their support was garnered due to suspicions about Barack Obama's ties to uppity banjo-picker Bela Fleck and his refusal to wear a West Virginia flag pin on his lapel.

Clinton was happy to accept the endorsement of the union, saying "We're going to fight on now that we have the majority of banjo-pickin' unions on our side, because everybody knows you can't win in November without the support of the Nascar dads and the Banjo moms/cousins." Clinton added: "Now that my campaign has the support of the majority of banjo unions we have clear evidence to bring to the superdelegates and an easy path down the river to deliverance (of the democratic nomination)."

Barack Obama refused to comment, but an inside source said he's already gearing up for Oregon's primary, courting the coveted granola-vote through his own special trail mix recipe.

John McCain couldn't be woken from his nap for comment (even though the phone rang like 30 times).

Tuesday, May 13, 2008

Quote of the Day

This, from a story about Hilton Head dealing with the problem of over development of its shoreline:
The solution, like so many other things in Hilton Head, came on the back of a golf cart.

Sunday, May 11, 2008

Exercises in Futility


One priceless picture and a few Sunday headlines that may make you shake your head:

In W. Va., Clinton's Disciples Persevere

That's right, the Clinton faithful(est) are still pushing the rock up the hill.

U.S. Legal Work Booms in India

This one truly amazed me: we are now outsourcing our legal work to India. They do everything but sign the papers and appear in court (because they are not licensed to practice in America). The upshot of this is that, if we continue sending high value business to India, eventually their wages will rise and it will no longer make sense to outsource (you know, a rising tide lifts all ships, etc.).

Growing Deficits Threaten Pensions: Accounting Tactics Conceal a Crises for Public Workers

Oops, looks like Arthur Andersen-style accounting has found its way into the public sector. Wait, you mean that government-run businesses are subject to the forces of ecnomics too?

Losing a Home, Then Losing All Out of Storage

People are losing their homes to foreclosure, putting all their stuff into storage facilities, and then losing their stuff when they don't pay their storage bills. Who's gonna stop those predatory sub-prime storage facilities?

Wednesday, May 07, 2008

Am I Missing Something Or...

Isn't the Clinton/McCain Gas Tax Holiday supposed to occur during this summer, while George Bush is still president? Do they really think they can pass that legislation in a month without clear support from the Whitehouse or either chamber of Congress?

Of course not, because Clinton and McCain, along with every other economist, pundit, and average American citizen, recognizes that the idea is foolish and nothing more than a very transparent election year pander. I try very hard to believe what politicians say during election years, but the gas tax holiday proposal is such a pie-in-the-sky idea that even my most optimistic brain cell refuses to accept it as a well-reasoned policy stand taken by not less than 2/3 of the people claiming to be qualified to lead our country through the next four years.

I may be able to accept that the gas tax holiday is the offspring of McCain's overall economic policy. After all, he freely admits that he doesn't understand economics at all and, supposing in his economic ignorance he just tows the party line, well we've seen enough irresponsible tax cuts and deficit spending over the past eight years to get used to it.

But Hillary Clinton has no business supporting the gas tax holiday at all. By all accounts, she is probably one of the most well versed policy wonks on the Hill right now. Surely her "elitist" ivy league education provided her with a rudimentary understanding of basic macro economics. But nobody ever won over a vote by telling the American people that high gas prices are a function of increased global competition for a limited natural resource and refining capacity that, somewhat inexplicably, has not been increased since Hurricane Katrina exposed its weakness. Nobody won over a vote by explaining the hard truth that the days of dollar-a-gallon gas are long since gone in this country.

Here's an idea. Instead of proposing band-aids that don't even cover the wound, why not propose what we Americans have shown we do best in times like these: innovation. Hmm, I wonder what candidate has spurned the gas tax holiday and repeated his or her calls for expanded energy research programs? Oh that's right, the one who is winning.

Desperation is a Stinky Cologne...

Hillary Clinton before last night's pyrrhic victory:
"There are going to be the rest of these contests, which are very significant, and then in June, if we haven't done it already, we're going to have to resolve Florida and Michigan," she told reporters during a daytime event at the Indianapolis Motor Speedway. "They were legitimate elections."


Source