Dubious wording in FT article

In a Financial Times piece defending speculation, the author writes:

‘Unfortunately, high commodity prices are a necessity. They provide the message that we need to consume less and to boost supplies. Speculators help not only to shape that message but also to accelerate its reception.’

I support speculation but I don’t like how the author use of words, specifically the idea that we ‘need’ to respond to the message contained in higher prices to reduce consumption/increase supplies. I find that an ugly twist on the idea that people ‘will’ respond to higher prices by curbing consumption. It’s the difference between a calling to action and saying what will be will be.

Yours,

A.Fusspot

Article Link: Speculators and commodity prices

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5 responses to “Dubious wording in FT article

  1. Haven’t read that article yet, but the reasoning seems a bit on the specious side. It’s interesting the author didn’t raise the old “liquidity” argument, which I think holds more credibility. If anything, speculation injects more distortion into the price discovery process more often than not – or so I have believed. Is there a trade-off between liquidity provided by specs, which also may increase volatility, and value provided by true supply and demand inherent in a given market? (I digress….)

  2. The liquidity trade-off is an interesting one. There is also the idea that commercial operators quite often have to buy/sell/hedge out of necessity, regardless of where they believe true value lies, so we could even argue the case that speculators sometimes play a role in keeping prices fair. I have no problem with speculation, per se, but manipulation is another matter!

  3. Right right. Commercial operators (and other institutionals) being the demand part of the equation — which in part provides the inherent market value with a given amount of supply (and how quickly it can be brought to market). But it seems the role of the speculator is more to keep things liquid than to keep things fair…methinks. So your “sometimes” gets a nod from me — although I’m no expert on this, not by a long shot.

    The manipulation part, I think, might come in to play when commercials or larger players — private speculators/institutions/hedge funds who nonetheless are invested in the process — start to speculate. From their perspective, it might look like they are merely “seeking counterparties to what would be a fair price”. (Or, from ours, what they can get away with.) My thinking on this is they exert pressure on price, and ultimately (and almost always) find counterparties. Most of those are other speculators, who get burned because their information is of a lesser quality and so produces poorer decisions. But then demand dries up and price swings the other way, provided their is more supply to be had.

    But this kind of market wrecking whipsaw almost never happens in the more liquid currency markets. They are simply too big. Or are they? We have seen speculative attacks, most notably, on the Sterling and the Baht. Looked at from another angle, could not the JPY have also been attacked by the BoJ in 2004? And will we see a run on the USD or the CNY if the stars line up correctly? Or even the Euro? I’m not too familiar with the commodities, although I’m vaguely familiar with cases of silver and nat gas manipulation. I wonder about oil, and whether this current run is due to manipulation or something else. And of course when manipulation occurs in the ag futures, the food security of nearly the entire third world is at risk — that’s enough to start wars in weaker/failing states. (Of course, an oil war would be much worse, because of the stakeholders involved.)

    Gaming this out, however, makes me think that it would take a lot to blatantly manipulate a market before another actor/agent came in and put the hammer on the rogue speculators (or the rogue central bank or whatever).

    I’m just wondering…

  4. Or, to look at it another way, what about profiteering multinationals starting wars in Iraq and (soon) Iran, via the good old boy network and their political henchmen…and because of the resulting speculation/price pressures in crude futures and consequent contagion across key markets, other players (including nation states) start to hord foodstocks and other strategic stuff, setting up a downward wratchet effect on the quality of life of the poorest 1/3 of the world’s population (without concerted leadership and intervention by international financial and development institutions). And then there is the middle class in the developed economies. How will the historical backbone of wealthy capitalists in the modern era fare through all this? Will the capitalists fall as well? (Evidence points to the contrary, which isn’t all bad — since they will eventually emerge to employ the farting masses as soon as things cool off.) Just as a thought experiment, could all this have been touched off by manipulation? Or was the manipulation touched off by artificially low interest rates in the US and corporate profiteering in the Middle East?

    Methinks we have bigger problems than speculators who are trying to manipulate prices — but then this is all related, and somewhere someone is paid a lot (in gold and glory) to do something about inappropriate activity in the commodities markets. So I suppose all this jawboning from me is pointless. (And not very coherent or educated, I admit.)

  5. An equally pointless response, not well thought out, but what the hey:

    I hear you LT. On this topic of dodgy practice by the really big guys, I have no strong opinions on what is happening, will happen, or has happened, due to absence of information. Still not convinced that evil practices are at to blame, but that’s a personal bias that the world is fundamentally good and things will get better. However, if one day, a whistle blower comes out and reveals a grand conspiracy, or wholesale manipulation of key markets, I’m ready to change my mind.

    Re what we could call medium size manipulation, this is there for all to see – I guess because companies are mandated to profit maximise, the problem is that manager’s have the responsibility to push the law to the borders of what is illegal if it generates more profits. However, the limited career spans and bonus structures for these agents means that they have personal incentives to cross the line. I think this is the ugly side of capitalism, but view it as a price to pay…also believe that this agency problem will improve in coming years, although I don’t know how.

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