In the 1960s and 1970s, the price of stocks were determined by the percieved long term value of the company. Many working folk invested in companies like Ford, GM and General Mills and never gave their investments another thought.. and in general, they were profitable. In the commodities markets, the price of commodities was determined by the push and shove between farmers trying to sell their grains at the best price and companies like General Mills trying to get it at the lowest price. In short, these were the days when markets were used as vehicles to fairly determine the value of companies and commodities.
In the early 2000's, I traded commodities.. grains primarily, some currencies.. and generally not very well as I'm not very good at the mathematics part of trading, known as "tecnhicals". These math programs, developed by the likes of William Gann and others.. the most famous of which is the Fibonacci system.. have been honed to perfection by mathemeticians into computer programs known in the trade as algorithms, or simply "algo's". These sophisticated programs put the firms that use them.. combined with the amount of money these firms have to manipulate markets.. in firm command of trading stocks, currencies and bonds. Smaller investors were at a severe disadvantage, and became known on Wall Street as "dumb money". The actual value of a company became less and less important. When I was trading, commodities were as yet left untouched by firms like Goldman Sachs and JP Morgan, who were content with manipulating real estate, bond and stock markets. But firms like General Mills did use these algo's for their own purposes. Yet it was still a relatively fair way to determine a fair price of a commodity.. fundamentals (basic supply and demand numbers) still ruled the trading floors, though technicals were increasing in their importance.. at the end of the day, fundamentals always prevailed over technicals.
In the mid 2000's, a new investment vehicle.. the ETF (electronically traded fund) came into being. You could invest money into commodities via these ETF's. The early days of commodity ETF's centered around precious metals, specifically gold and silver, and these funds invested in physical gold on commodities markets as well as firms that produce gold. Peter Schiff was one of the first to invest heavily in the gold ETF and bring it to the attention of the mainstream media. Today, there are ETF's which are for nearly all commodities.. wheat, corn, lumber. These ETF's are traded on the NYSE.. and thus have come to the attention of firms like JP Morgan and Goldman Sachs and their sophisticated algo's. Thus it has come to be that firms like JPM and GS are increasingly in control of the planet's most basic resources. This is a very bad idea. Worse, they have begun writing derivitaves on commodities.
Paul Farrell's recent article on this sends a warning: "Commodity ETFs are rapidly becoming a malicious virus breeding chaos in the global markets pricing all commodities: food, farm lands, metals, oil, natural gas, livestock, water and other natural resources are the assets under commodity derivatives and their ETFs, pricing that's now controlled more by Wall Street speculators than the weather, adding wild swings in volatility and trillions in global derivative risks. And once again the usual suspects, the Goldman Conspiracy of Wall Street Banksters, are in the lead. Today, Wall Street is making a killing on commodity ETFs. And yet at the same time they are rapidly accelerating global market conditions that'll eventually kill the goose that laid their golden egg, those high-profit-generating commodity ETFs. But unfortunately this new ideology, Chaos Capitalism, is rapidly moving past economic pricing wars into military conflicts, a trend the Pentagon predicted years ago, an ever-increasing cycle of global wars over increasingly scarce nonrenewable commodities" http://www.marketwatch.com/story/story/print?guid=887EA1DA-E0AB-4D6B-988E-77A040E56B8E
Rolling Stone's McKenzie Funk focuses on Phil Heilberg, a former AIG commodity trader who is one of the new "Capitalists of Chaos." Heilberg is a self-proclaimed pure Ayn Rand capitalist hustling Africa, making "land grab" deals to control millions of acres and commodity rights in unstable nations. Heilberg "makes no apologies for dealing with warlords: 'This is Africa ... The whole place is like one big Mafia, and I'm like a Mafia head. The essential lesson in capitalism is that no one is actually in control." In this new Chaos Capitalism, there is no rule-of-law, democracy is dead, chaos and anarchy rule.
Back in the 1960's, food went from the hands of farmers to the food producers (General Mills, etc) and then to your supermarket. Simply put, today, JPM, GS and folks like Heilberg have injected themselves in the middle of this simple market system.. and in doing so, will undoubtedly grab for themselves a handsome profit. To me, they are, quite simply, parasites.
"Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan. They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits" http://www.spiegel.de/international/business/0,1518,708765,00.html
Allowing the world's food supply to be so cruelly manipulated will lead to hunger, instability and riots. This cannot continue. There were riots in several parts of the world when food prices rose in the early 2000's, producing political instability in some nations. Today's drought and fires in Russia and Ukraine have led Russia to halt all grain exports this year, and as a result wheat skyrocketed up by 25% this week alone. Somewhere down the food chain this could have serious repurcussions. But not for Goldman.. whether grains go up or down, they're five steps ahead of you and have already made their parasitic pro
fit.
fit. 
Wow Mr. K that was a great post. All I can say is amen. I think I will print Lord Blankfein and put it on a dart board and toss darts at him daily. Of course beside the Vampire Squid (Goldman Sachs) is JPM the king of the financial world. Dimon is just as insidious. He would kill his grandmother for a profit.
ReplyDeleteThanks, Mr K for posting ...
ReplyDeleteIncisive analysis. I would not place the blame only on GS or JPM though. How come politicians have not noticed this?
ReplyDeleteTill a few years ago, those who had better physical weapons ruled others. Hereafter, those (I mean societies) who have fairer systems will rule. The traders are ruling the world by keeping the politicians happy. That situation will not last long. Just like US forced BP to cough out money (Exxon escaped the last time the spill happened), politicians will force traders to part with money. That won't be difficult. Doing it in a fair manner will be difficult. That job should be left to mathematicians
--P
Interesting post.
ReplyDeleteI'm not sure I can agree with your conclusions however. Rampant speculation has perverted the economy into a giant casino with little to no connection to 'real' economic activity, this much is true. Speculators (GS, JPM, etc.) are cetainly front and centre in that action but to suggest that they are the cause of it is a bridge too far. Today's speculators were in the right place at the right time when the conditions of certain economic segments(equities, bonds, commodities, etc.) developed such that speculation became an economically viable activity. They simply saw an oppotunity and seized it; no different than you or I would do when presented with an economic opportunity. The question is not whether a given person should have or should have not seized an economic opportunity, people have, are and will seize economic opportunities. The question is how did a situation arise where this kind of speculation even became possible. The speculators didn't create the conditions that allowed them to prosper they just took advantage of them.
Who created the conditions?
I would argue that those conditions were created by gov'ts around the world who decided to allow money to be created out of thin air and for a chosen few banks/institutions to be able to create credit out of thin air. In the absence of billions and billions of dollars it's pretty hard to speculate to the degree that we see today. The billions and billions and billions that these speculators use are not the savings of their customers as they would have us believe. The money they use is leverage created out of thin air to such an extent that it dwarfs 'real' economic activities and allows them to play the games they play.
The problem is central banks, silly paper money and fractional reserve schemes. GS didn't create that, the US congress did. Many would advocate that the congress must then control GS. On this point I would also disagree. The only thing the congress should do is shut up, sit down, and get out of the way. In the absence of a bunch of favours from the guys with guns (the gov't) GS would be in the same pond as the rest of us and my guess is that things would assume a much saner tempo/tone.
If some one sets up a game where you can make $10 doing something there is always going to be a line up of willing participants. It's the guy who set up the game that deserves to be throttled though, not the guys in the line.
I enjoy your blog, thanks.
Chris
Chris: I would argue that those conditions were created by gov'ts around the world who decided to allow money to be created out of thin air and for a chosen few banks/institutions to be able to create credit out of thin air"
ReplyDeleteIndeed you are correct; the fiat currency system is a ponzi which will end very badly.
An alternative you ask ?? Why I have a post for just this: http://themeanoldinvestor.blogspot.com/2010/07/kowalskis-perfect-world.html