Results 11 to 17 of 17
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10-06-2008, 09:56 PM#11
Senior Member
Dear Wall Street
futures markets can protect consumers from spikes in the price of oil, but they can also cause spikes in the price of oil...the futures market needs more regulation to limit speculators from screwing us (again)
Testimony of
Michael W. Masters
Managing Member / Portfolio Manager
Masters Capital Management, LLC
before the
Committee on Homeland Security and Governmental Affairs
United States Senate
May 20, 2008
Good morning and thank you, Mr. Chairman and Members of the Committee, for the
invitation to speak to you today. This is a topic that I care deeply about, and I
appreciate the chance to share what I have discovered.
I have been successfully managing a long-short equity hedge fund for over 12 years
and I have extensive contacts on Wall Street and within the hedge fund community. Itʼs
important that you know that I am not currently involved in trading the commodities
futures markets. I am not representing any corporate, financial, or lobby organizations. I
am speaking with you today as a concerned citizen whose professional background has
given me insight into a situation that I believe is negatively affecting the U.S. economy.
While some in my profession might be disappointed that I am presenting this testimony
to Congress, I feel that it is the right thing to do.
You have asked the question ??Are Institutional Investors contributing to food and energy price inflation??
And my unequivocal answer is ??YES.? In this testimony I will explain that Institutional Investors are one of,
if not the primary, factors affecting commodities prices today. Clearly, there are many factors that contribute
to price determination in the commodities markets; I am here to expose a fast-growing yet virtually unnoticed
factor, and one that presents a problem that can be expediently corrected through legislative policy action.
Commodities prices have increased more in the aggregate over the last five years than
at any other time in U.S. history.
We have seen commodity price spikes occur in the
past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today,
unlike previous episodes, supply is ample: there are no lines at the gas pump and there
is plenty of food on the shelves.
If supply is adequate - as has been shown by others who have testified before this
committee - and prices are still rising, then demand must be increasing. But how do
you explain a continuing increase in demand when commodity prices have doubled or
tripled in the last 5 years?
What we are experiencing is a demand shock coming from a new category of
participant in the commodities futures markets: Institutional Investors. Specifically,
these are Corporate and Government Pension Funds, Sovereign Wealth Funds,
University Endowments and other Institutional Investors. Collectively, these investors
now account on average for a larger share of outstanding commodities futures contracts
than any other market participant.
These parties, who I call Index Speculators, allocate a portion of their portfolios to
??investments? in the commodities futures market, and behave very differently from the
traditional speculators that have always existed in this marketplace. I refer to them as
??Index? Speculators because of their investing strategy: they distribute their
allocation of dollars across the 25 key commodities futures according to the popular indices ?? the
Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG
Commodity Index.
*snip*
some familiar names there...where have i heard of them before????
read more here:
hsgac.senate.gov/public/_files/052008Masters.pdf
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10-07-2008, 01:39 PM#12
Senior Member
Dear Wall Street
Originally Posted by GoldenBoy812
The stock market sure isn't doing good...And if a collapse were to happen, and the government tried to take more liberty than they already have from us, there would most certainly be a revolution...As each day passes by I believe it's getting closer and closer..The government is supposed to be servant rather than our master, but that's certainly not the case here..and people are beginning to realize what's going on..
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants." -Thomas Jefferson
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10-07-2008, 03:28 PM#13
Senior Member
Dear Wall Street
What if people are desperate? Desperation paved the way for FDR to push big government throughout the republic. Originally Posted by Markass
You have two scenarios really:
1.) The bailout works; new leadership is ushered by way of baby boomer power demise. New leadership will in fact encompass our generation, paving the way for liberty and justice for all.
2.) The bailout does not work, and the world suddenly stops doing shit. If Americans do not have money to buy things, China collapses. Paper debasement via Asian states redeeming their US treasury certificates surfaces, which could force the treasury to offer better interest rates. Liquidity would drain from free market investment into that of government insured paper, sending retirement accounts into a frenzy. Those that were to retire work longer, offering less jobs to new graduates. Massive deflation follows...
Nobody in their right or blazed mind wants scenario 2.:jointsmile:
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10-07-2008, 03:47 PM#14
Senior Member
Dear Wall Street
Markets are flawless in their ability to stabilize prices on the long run. Does US consumption based on speculation have the ability to bring the fuel increase on its own? NO! Originally Posted by maladroit
There are too many factors at work to label 1. US dollar debasement, turmoil in the region of the world where the majority of oil production occurs, and of course oil speculation that feeds of the two other factors.
When the US dollar is down, you are going to have volatility in many commodities, more so oil because it is only sold in dollars ( > 95%). Since food throughout the US is shipped using oil energy (the majority) prices are going to go up.
The rest is needed to further evaluate what the man is saying; i keep getting an error. Of course, when you add more overall dollars to an economy, the cost of goods will go up until correction takes place.Testimony of
Michael W. Masters
Managing Member / Portfolio Manager
Masters Capital Management, LLC
before the
Committee on Homeland Security and Governmental Affairs
United States Senate
May 20, 2008
Good morning and thank you, Mr. Chairman and Members of the Committee, for the
invitation to speak to you today. This is a topic that I care deeply about, and I
appreciate the chance to share what I have discovered.
I have been successfully managing a long-short equity hedge fund for over 12 years
and I have extensive contacts on Wall Street and within the hedge fund community. Itʼs
important that you know that I am not currently involved in trading the commodities
futures markets. I am not representing any corporate, financial, or lobby organizations. I
am speaking with you today as a concerned citizen whose professional background has
given me insight into a situation that I believe is negatively affecting the U.S. economy.
While some in my profession might be disappointed that I am presenting this testimony
to Congress, I feel that it is the right thing to do.
You have asked the question ??Are Institutional Investors contributing to food and energy price inflation??
And my unequivocal answer is ??YES.? In this testimony I will explain that Institutional Investors are one of,
if not the primary, factors affecting commodities prices today. Clearly, there are many factors that contribute
to price determination in the commodities markets; I am here to expose a fast-growing yet virtually unnoticed
factor, and one that presents a problem that can be expediently corrected through legislative policy action.
Commodities prices have increased more in the aggregate over the last five years than
at any other time in U.S. history.
We have seen commodity price spikes occur in the
past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today,
unlike previous episodes, supply is ample: there are no lines at the gas pump and there
is plenty of food on the shelves.
If supply is adequate - as has been shown by others who have testified before this
committee - and prices are still rising, then demand must be increasing. But how do
you explain a continuing increase in demand when commodity prices have doubled or
tripled in the last 5 years?
What we are experiencing is a demand shock coming from a new category of
participant in the commodities futures markets: Institutional Investors. Specifically,
these are Corporate and Government Pension Funds, Sovereign Wealth Funds,
University Endowments and other Institutional Investors. Collectively, these investors
now account on average for a larger share of outstanding commodities futures contracts
than any other market participant.
These parties, who I call Index Speculators, allocate a portion of their portfolios to
??investments? in the commodities futures market, and behave very differently from the
traditional speculators that have always existed in this marketplace. I refer to them as
??Index? Speculators because of their investing strategy: they distribute their
allocation of dollars across the 25 key commodities futures according to the popular indices ?? the
Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG
Commodity Index.
*snip*
What is inflation?some familiar names there...where have i heard of them before????
read more here:
hsgac.senate.gov/public/_files/052008Masters.pdf
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10-07-2008, 05:09 PM#15
Senior Member
Dear Wall Street
sorry about the bad link GB...i'll post the rest of his written testimony below...here is a link to his spoken testimony:
YouTube - Hearing on Energy Speculation, Gas Prices: Masters Testimony
continuation of written testimony (charts available at link):
http://hsgac.senate.gov/public/_files/052008Masters.pdf
Index Speculator Demand Is Driving Prices Higher
Today, Index Speculators are pouring billions of dollars into the commodities futures
markets, speculating that commodity prices will increase. Chart One shows Assets
allocated to commodity index trading strategies have risen from $13 billion at the end of
2003 to $260 billion as of March 2008,
and the prices of the 25 commodities that
compose these indices have risen by an average of 183% in those five years!
According to the CFTC and spot market participants, commodities futures prices are the
benchmark for the prices of actual physical commodities, so when Index Speculators
drive futures prices higher, the effects are felt immediately in spot prices and the real
economy.
So there is a direct link between commodities futures prices and the prices
your constituents are paying for essential goods.
The next table looks at the commodity purchases that Index Speculators have made via
the futures markets. These are huge numbers and they need to be put in perspective to
be fully grasped.
In the popular press the explanation given most often for rising oil prices is the
increased demand for oil from China. According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion
barrels, an increase of 920 million barrels.
Over the same five-year period, Index
Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.
The
increase in demand from Index Speculators is almost equal to the increase in demand
from China!
In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of
1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own
stockpile as the United States has added to the Strategic Petroleum Reserve over the
last five years.
Let??s turn our attention to food prices, which have skyrocketed in the last six months.
When asked to explain this dramatic increase, economists?? replies typically focus on the
diversion of a significant portion of the U.S. corn crop to ethanol production.
What
they overlook is the fact that Institutional Investors have purchased over 2 billion
bushels of corn futures in the last five years. Right now, Index Speculators have
stockpiled enough corn futures to potentially fuel the entire United States ethanol
industry at full capacity for a year.
That??s equivalent to producing 5.3 billion gallons of
ethanol, which would make America the world??s largest ethanol producer.
Turning to Wheat, in 2007 Americans consumed 2.22 bushels of Wheat per capita.
At
1.3 billion bushels, the current Wheat futures stockpile of Index Speculators is enough
to supply every American citizen with all the bread, pasta and baked goods they can eat
for the next two years!
Index Speculator Demand Characteristics
Demand for futures contracts can only come from two sources: Physical Commodity
Consumers and Speculators. Speculators include the Traditional Speculators who have
always existed in the market, as well as Index Speculators. Five years ago, Index
Speculators were a tiny fraction of the commodities futures markets. Today, in many
commodities futures markets, they are the single largest force.
The huge growth in
their demand has gone virtually undetected by classically-trained economists who
almost never analyze demand in futures markets.
Index Speculator demand is distinctly different from Traditional Speculator demand; it
arises purely from portfolio allocation decisions. When an Institutional Investor decides
to allocate 2% to commodities futures, for example, they come to the market with a set
amount of money. They are not concerned with the price per unit; they will buy as many
futures contracts as they need, at whatever price is necessary, until all of their money
has been ??put to work.? Their insensitivity to price multiplies their impact on commodity
markets.
Furthermore, commodities futures markets are much smaller than the capital markets,
so multi-billion-dollar allocations to commodities markets will have a far greater impact
on prices. In 2004, the total value of futures contracts outstanding for all 25 index
commodities amounted to only about $180 billion.
Compare that with worldwide
equity markets which totaled $44 trillion
, or over 240 times bigger. That year, Index
Speculators poured $25 billion into these markets, an amount equivalent to 14% of the
total market.
One particularly troubling aspect of Index Speculator demand is that it actually
increases the more prices increase. This explains the accelerating rate at which
commodity futures prices (and actual commodity prices) are increasing. Rising prices
attract more Index Speculators, whose tendency is to increase their allocation as prices
rise. So their profit-motivated demand for futures is the inverse of what you would
expect from price-sensitive consumer behavior.
You can see from Chart Two that prices have increased the most dramatically in the first
quarter of 2008. We calculate that Index Speculators flooded the markets with $55
billion in just the first 52 trading days of this year.
That??s an increase in the dollar
value of outstanding futures contracts of more than $1 billion per trading day. Doesn??t it
seem likely that an increase in demand of this magnitude in the commodities futures
markets could go a long way in explaining the extraordinary commodities price
increases in the beginning of 2008?
There is a crucial distinction between Traditional Speculators and Index Speculators:
Traditional Speculators provide liquidity by both buying and selling futures. Index
Speculators buy futures and then roll their positions by buying calendar spreads. They
never sell. Therefore, they consume liquidity and provide zero benefit to the futures
markets.
It is easy to see now that traditional policy measures will not work to correct the problem
created by Index Speculators, whose allocation decisions are made with little regard for
the supply and demand fundamentals in the physical commodity markets. If OPEC
supplies the markets with more oil, it will have little affect on Index Speculator demand
for oil futures. If Americans reduce their demand through conservation measures like
carpooling and using public transportation, it will have little affect on Institutional
Investor demand for commodities futures.
Index Speculators?? trading strategies amount to virtual hoarding via the commodities
futures markets. Institutional Investors are buying up essential items that exist in limited
quantities for the sole purpose of reaping speculative profits.
Think about it this way: If Wall Street concocted a scheme whereby investors bought
large amounts of pharmaceutical drugs and medical devices in order to profit from the
resulting increase in prices, making these essential items unaffordable to sick and dying
people, society would be justly outraged.
Why is there not outrage over the fact that Americans must pay drastically more to feed
their families, fuel their cars, and heat their homes?
Index Speculators provide no benefit to the futures markets and they inflict a
tremendous cost upon society. Individually, these participants are not acting with
malicious intent; collectively, however, their impact reaches into the wallets of every
American consumer.
Is it necessary for the U.S. economy to suffer through yet another financial crisis
created by new investment techniques, the consequences of which have once again
been unforeseen by their Wall Street proponents?
The CFTC Has Invited Increased Speculation
When Congress passed the Commodity Exchange Act in 1936, they did so with the
understanding that speculators should not be allowed to dominate the commodities
futures markets. Unfortunately, the CFTC has taken deliberate steps to allow certain
speculators virtually unlimited access to the commodities futures markets.
The CFTC has granted Wall Street banks an exemption from speculative position limits
when these banks hedge over-the-counter swaps transactions.
This has effectively
opened a loophole for unlimited speculation. When Index Speculators enter into
commodity index swaps, which 85-90% of them do, they face no speculative position
limits.
The really shocking thing about the Swaps Loophole is that Speculators of all stripes
can use it to access the futures markets. So if a hedge fund wants a $500 million
position in Wheat, which is way beyond position limits, they can enter into swap with a
Wall Street bank and then the bank buys $500 million worth of Wheat futures.
In the CFTC??s classification scheme all Speculators accessing the futures markets
through the Swaps Loophole are categorized as ??Commercial? rather than ??Non-
Commercial.? The result is a gross distortion in data that effectively hides the full impact
of Index Speculation.
Additionally, the CFTC has recently proposed that Index Speculators be exempt from all
position limits, thereby throwing the door open for unlimited Index Speculator
??investment.?
The CFTC has even gone so far as to issue press releases on their
website touting studies they commissioned showing that commodities futures make
good additions to Institutional Investors?? portfolios.
Is this what Congress expected when it created the CFTC?
Congress Should Eliminate The Practice Of Index Speculation
I would like to conclude my testimony today by outlining three steps that can be taken to immediately reduce Index Speculation.
Number One:
Congress has closely regulated pension funds, recognizing that they serve a public
purpose. Congress should modify ERISA regulations to prohibit commodity index
replication strategies as unsuitable pension investments because of the damage that
they do to the commodities futures markets and to Americans as a whole.
Number Two:
Congress should act immediately to close the Swaps Loophole. Speculative position
limits must ??look-through? the swaps transaction to the ultimate counterparty and hold
that counterparty to the speculative position limits. This would curtail Index Speculation
and it would force ALL Speculators to face position limits.
Number Three:
Congress should further compel the CFTC to reclassify all the positions in the
Commercial category of the Commitments of Traders Reports to distinguish those
positions that are controlled by ??Bona Fide? Physical Hedgers from those controlled by
Wall Street banks. The positions of Wall Street banks should be further broken down
based on their OTC swaps counter-party into ??Bona Fide? Physical Hedgers and
Speculators.
There are hundreds of billions of investment dollars poised to enter the commodities
futures markets at this very moment.
If immediate action is not taken, food and
energy prices will rise higher still. This could have catastrophic economic effects on
millions of already stressed U.S. consumers. It literally could mean starvation for
millions of the world??s poor.
If Congress takes these steps, the structural integrity of the futures markets will be
restored. Index Speculator demand will be virtually eliminated and it is likely that food
and energy prices will come down sharply.
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10-07-2008, 05:10 PM#16
Senior Member
Dear Wall Street
"What is inflation? "
- that depends on what the definition of "is" is
ha ha?
you're joking, right?
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10-10-2008, 07:09 PM#17
OPSenior Member
Dear Wall Street
Gee I post a bit of "Humor" and some of ya'll take it SOOOOOO seriously!!! Geez can't ya'll Consertives ever laugh at yourselves??/ Gawd....No Sense of humor!!
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