It’s tough to be a speculator these days. Not only do they have targets painted on their backs, but they are being blamed by the likes of the oil companies, airline executives, Wall Street and Congress for being the reason why crude oil hit record highs in July. In a survey by a TV station recently, the general public blamed “speculators” and Congress over the president, oil companies or even themselves (consumer demand), for the current price tag at the gas pump. Now there may be some legitimate reasons “speculators” have affected prices, but one factor definitely works against them: they don’t have a lobby, or at least not one the size of the oil companies.
Futures magazine has always catered to the speculator set, whether it’s the individual trader, commodity trading advisor or proprietary trading group. So we get annoyed these days when the term “speculator” is used with the same derision as “felon.” When someone e-mailed me the Open Letter to All Airline Customers, in which all airline bosses blamed speculators for the current price of fuel and encouraged people to write their congressmen, I forwarded it on to some sources to get reaction. One said “These airline CEOs, like members of Congress, should first be required to demonstrate a basic understanding of the futures markets.” Another noted that “someone should point out [to them] that being unhedged is speculating.”
And now that the discussion is raging beyond trading rooms, dinner conversation for me has gotten a bit odd: I’ve had debates with friends on topics ranging from ethanol production to defining speculation. Even my sister asked me the other day about Sam Israel III and hedge funds. My world, which once was more complicated than friends and family cared to know about, suddenly has become the fodder of everyday conversation. A-Rod and Madonna, who cares? But who are these speculators and why are they messing up our world?
Although we have covered the U.S. Senate hearings looking at the “speculative” question (pick a committee, there are many), the posturing of the politicians is similar in all, and mostly clueless. The Commodity Futures Trading Commission has been a strong advocate against the “speculator as devil” theory, but seems it’s getting worn down by constantly defending the usual suspects.
In this issue, we hope to explain the speculator quandary by starting out with the definition of what exactly “speculating” entails, and work through the issues involved in today’s price spiral. Although we’ve written about these issues many a time — most recently pertaining to the grain prices — we are focusing on the commodity index funds who are the “speculators” that are being blamed. In “Inside commodity index funds,” by Associate Editor Christine Birkner and Managing Editor Daniel P. Collins, we show the make up of these funds and how they use the markets. We also look at the current debate and unmask some of the tale telling. In Editor-at-large Steve Zwick’s piece, “Are market distortions driving high prices?”, he unveils some of the falsehoods on both sides in describing the debate. Also, our trader profile this month is Henry Jarecki, former Mocatta Metals chairman, who probably had the first commodity long-only fund, and has a keen eye for today’s melodrama and shares his experienced wisdom.
I do believe a little regulation can go a long way. Speculative limits already exist, and if they are good for one group, they should be good for another. No exemptions should exist even on a case-by-case basis for non-commercials. And beyond that, the markets should take care of themselves. I certainly don’t like paying $4 plus for a gallon of gas, but then that’s why I usually take the “L” to work. Government action can sometimes be a good thing; but in this case, our leaders should use caution. Frankly, fuel is too costly to be using it to stir up more fires.