Scapegoating Speculators

Greetings from Sedona…

First there was the legendary Nathan Rothschild who instructed his broker to sell securities in London during the battle of Waterloo, leading everyone to believe Wellington had lost.  This in turn created a titanic panic.  Secretly, other Rothschild agents bought into the deluge which ultimately bottomed out, reversed and regained all losses as the truth of Wellington’s great victory became known.

Then there was the iconic George Soros leading an intrepid band of swashbuckling currency speculators shorting the British pound in a colossal confrontation with the Bank of England – and earning $1 billion on the day the bank blinked.  These are two of our greatest episodes contributing to the myth of the speculator as an evil mover of markets, fleecing the innocent small timer and ruining governments in the process.

The truth is the professional speculator is not a super swami stud, but a timid trend follower hiding in the shadow until a trend emerges, hops on, and then runs at the first sign of conflict.  Professional speculators may on occasion exacerbate price movements already in progress, but they never create them.  In addition, they will not even try to maintain a price move in the face of even faint resistance.  Any seasoned financial professional understands this, though the macho men dominating the field may object to the appellation “timid.”  Only academics and pandering populist politicians believe in the super speculator.

More credible, on the surface, is the notion that big corporate and foreign governments manipulate prices of certain key commodities, like oil, in their ongoing gouging of the general public.  The last round of big oil bashing featured Bill O’ Reilly in late 2006 and into the peak during the summer of 2008.  That type of thing no longer bothers me much.  What still gets me going is the complete collapse of competence among the guests brought on to offer counterpoint to his blather.  Since oil is again on the move, we can expect more big oil and OPEC bashing combined with the same lack of any substance to the arguments arrayed to the contrary.  Therefore, we need to become inoculated before the next round of finger pointing frenzy begins.

The obvious way to start is to do something nobody bothers with during these episodes, which is to take a look at the history of the price of oil.  Here is our first chart:

We start with this longest term view in order to get a baseline for further analysis.  Until the 1970’s the world was drowning in the stuff.  The glut was so enormous that big oil made money primarily from the markup selling gasoline.  Esso would simply tell the Arabs what they would pay and that was the end of it.  OPEC was formed in 1960 in a futile attempt to fight back.

That all changed with the stagflation 70’s as the dollar collapsed and Nixon closed the gold window.  Of course, the populist politicians and pundits all conveniently blamed OPEC instead of our own monetary and fiscal irresponsibility.  Still, there could be a lingering doubt at this point, even among reasonable people.  Therefore, we now turn to the next chart which begins in 1983, shortly after the blow off peak at around $35 per barrel:

Notice that, with the exception of the Saddam spike in 1990, OPEC and big oil wandered the desert of low prices and relatively poor profits for twenty five years!  If they were so powerful and proficient at gouging the consumer, how could this have happened?  Are we to believe that OPEC was all powerful in the 70’s, lost it for two decades and then, in concert with big oil, go their mojo back in time for the new century?  That’s a stretch at best.

As an Objectivist and an Austrian school economist, my fundamental beliefs take people as they are.  It is a rare individual that will not gouge the crap out of you if given the opportunity (yours truly probably not included among the rare ones either).  Therefore, I have no love lost for the creeps running big business.  However, it is counterproductive at best to invest them, or the equally creepy OPEC leaders, with such prodigious powers of price levitation.  For another perspective and further proof we review charts of other commodities and notice similar patterns found in the oil chart:

Of course, gold is money and not just another commodity, but is it just coincidental that the charts look so much alike?

As it happens, copper tells a similar tale.

For a broader view we can look at a basket of foodstuffs and raw industrial commodities:

In both instances prices stagnated for decades, just like oil, until about 10 years ago when they took off.  Notice that the price of foodstuffs and raw industrial commodities has exceeded their 2008 peak while oil lags.

If we are to subscribe to the populist theory of price gouging, I guess that big oil and OPEC are pikers compared to big food and just about everyone else producing commodities.  OPEC and big oil must have gone to sleep, or just forgot how to gouge for twenty years after Ronald Reagan took office.  Maybe it is all W’s fault.  After all, the latest surge began after he ascended to the throne.  I don’t think so.  We cannot correctly conclude W was light in intellectual capacity and then credit him with the brains for such an operation, even though his oil patch buddies have been major beneficiaries.

Now this wasn’t all that hard.  After all, I am no genius, but was able to put this together from easily accessible sources on the web.  So why didn’t Cavuto, et al do the same on O’ Reilly’s show?  Beats me.

There is a new factor that emerged during the last decade that has changed the game to some degree.  It is the addition of another class of speculator that dwarfs the power of those evil professional we discussed above.  That new speculator is you!  OK, maybe not you personally, but that editorial you.  The vehicle is the exchange traded fund (ETF).  You can now play right along with the pros, and you are!!

USO, an ETF holding crude oil has a market cap of $2 billion.  The giant is GLD, which holds gold bullion has a market cap of $50 billion.  There are scores of ETF’s covering virtually every tradable commodity.  This is real money, even in today’s trillion dollar world.  This all developed in the last decade and certainly explains a significant portion of the magnitude of commodity price increases across the board.  So the next time Bill O, Bernie Sanders, or Chucky Schumer blasts the nasty speculators, remember you’re it too!!!

All the best to you all,

Stephen Reiss
[email protected]

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