It appears that a lot of the near-term trends in the commodities markets are changing. Grains look a bit toppy ahead of the agriculture report, and meats have retreated in a big way. Commodity currencies seem to be falling; gold, silver, copper and platinum seem to be giving in to slowing demand fears. But oil mostly seems to be bucking the trend, or trend-change, anyway. After contemplating the lower growth target for China and the continuing uncertainty still coming out of Europe, many commodity bulls are starting to throw in the towel. With crude oil though, the threat of war still overhangs the market place, and it should hold up better than the rest of the complex.
How can you pretend to be able to fix an economy when it is obvious that you really don’t understand how it works? House and Senate Democrats are looking to rush legislation that, if implemented in its current form, could cost business in the United States millions of dollars and potentially lead to gas lines and shortages. The Democratic Party, which in the past has blamed everyone from the big oil companies to speculators for rising energy prices, failed again to point the finger where it really belongs, and that is the underlying fundamentals of the market that they sadly fail to understand.
In a letter to the Commodity Futures Trading Commission as reported by Dow Jones on Monday, nearly 70 House and Senate lawmakers pressed the CFTC to enforce caps or position limits on speculative trading adopted in October under the Dodd-Frank financial reform. Yet it is possible, and perhaps even likely, that this legislation could actually harm the economy and have the exact opposite effect on oil prices than these senators expect.
Dodd-Frank, when applied to the commodities markets, is a disaster and will set off a wave of unintended consequences that could harm each and every American family.
First of all, Dodd Frank was created from the false assumption that speculation and "Wall Street” drove oil prices higher. In the emotional rush to fix everything that was wrong in regulating and butt-covering in the aftermath of the economic meltdown, it seems Dodd-Frank decided to regulate something that was not the cause of the financial crisis, but was actually the safety valve that probably kept the U.S. economy from totally slipping over the edge.
Oil speculators did not cause the crisis in 2008, but, in fact, saved the economy. If it were not for oil speculators, we would have seen the economy freeze up more than it already did. In 2008, oil prices surged as the market was reacting to what many believed was a small sub-prime crisis that would bring down the U.S. banking system, but would leave Europe and the ever-growing China untouched. In the United States, Ben Bernanke started to realize the magnitude of the crisis so began lowering interest rates. Yet in Europe, the belief was that they had decoupled from the United States and they started to raise rates in response to sharply rising commodity prices. This caused a run out of the dollar, and we saw a surge as the world panicked that dollars would become almost worthless.
At that point oil and other commodities became the escape valve. Of course, the spike in commodities should have been a signal that things were out of whack. The rest of the world soon came crashing down, and we got a taste of how the world might look without speculators to assume the risk. The global economy froze, as we crashed towards a deflationary depression. People were on their knees begging for the specs to take the other side.
Without the speculators things would have been worse.
Now with the threat of war and major disruption across the globe, we are seeing the reason why speculators are vital to the health of the global economy. They are assuming the risk that others will not. In the world where the threat of the shutdown of the Straits of Hormuz and war in the Middle East and oil embargos and the like, there is a hoarding mentality when it comes to global supply. Countries are fearful that they may not have adequate energy supply, and if speculators decide not to assume the risk of insuring supply, then it is very possible we are seeing a situation where supply actually could dry up.
In fact instead of demonizing oil speculators they should be on their knees thanking oil speculators for assuming the risk that Wall Street and the rest of the world fear to take. In other words, they should be thanking oil speculators for saving the global economy. The lawmakers said in their letter that it was irresponsible to delay enforcement in light of rising energy costs. I think it is irresponsible to push through legislation that you do not understand.