Well now the United Nations has wandered into the analysis of what is going on in commodity markets, releasing a report this week, and appears to have fallen into the blame speculators camp. While I did not read the 80-page report cover to cover, some of the recommendations in the UNCTAD (United Nations Conference on Trade and Development) report are downright scary.
Like other individuals or entities commenting on the “problem” with commodity prices, whether it be a regulator or member of Congress, the UNCTAD report acknowledges that there are fundamental factors for price spikes but their recommendations focus on regulations and restrictions on traders and speculators.
The executive summary of UNCTAD’s “Price Formation in Financialized Commodity Markets: The Role of Information” acknowledges various legitimate fundamental factors for rising commodity market prices and then dismisses them to focus on their thesis of blaming the “financialization of commodity markets” for rising prices.
Unlike other analysis, the UNCTAD report appears to place a greater focus on the affect of systematic trend followers than passive long-only investments in commodities as creating what it describes as “the new normal of commodity price determination.” It says both contribute to an increase in “herding activity.”
The report suggests greater transparency is needed in regards to reporting on fundamentals as well as how listed and over-the-counter markets operate.
It also recommends tighter regulation including the always popular position limits and tighter international rules to avoid regulatory arbitrage. One recommendation is to prohibit financial institutions involved in hedging transactions for clients from proprietary trading. The report refers to these measures as “soft regulation.”
But here is the policy recommendation that caught my attention: “… a number of direct commodity price stabilization measures should be considered. As governments and international institutions have access to the same kind of information as the market participants, the establishment of a government-administered virtual reserve mechanism and the possibility of allowing governments’ direct intervention in the physical and the financial markets need to be considered. In financialized commodity markets, as in currency markets, intervention may even help market participants to better recognize the fundamentals.”
Help market participants to better recognize the fundamentals? i.e. ‘the fundamentals are what we say they are.’
For example, over the last few years the Federal Reserve instead of simply claiming there was no inflation in the face of rising prices, could have attempted to prove it by shorting the markets in an attempt to make the markets match their point-of-view.
This is a remarkably arrogant and dangerous statement. It assumes the central banks of the world know where prices should be and the rest of us don’t; ignore the thousands of market participants buying and selling in the age old price discovery process, the economists at the Fed and EU know best.
This is even more incredulous considering just how often and consistently wrong these groups have been. Just months before the credit crisis blew up in September of 2008, the Fed and Treasury Department assured us that it would not happen.
The recommendation that central banks have authority over commodity markets similar to how it exercises authority over the Federal Funds rate is mind boggling in its lack of respect for the role of markets.
What is remarkable and frustrating about the report is that it acknowledges the real fundamental factors that are affecting markets but chooses to ignore them or make any attempt to address them in their policy recommendations.
More on this tomorrow.