The Price of Speculation

For the last few months I have become increasingly concerned that the large, unregulated pile of money sitting in the middle of the global living room (private equity, hedge funds, sovereign funds, private banking trades) is not only dangerous to the world because of its use in CDOs, derivatives, and other goofy instruments, but for another, even more serious reason: it is being used to create a new level of speculative behavior in the markets.

That’s right: speculation is as old as the hills. Everyone does it. But what if a few very large players realized that, simply by the fact of speculating, they could create a new landscape for making profits? What if, for instance, just by creating volatility, they could increase their profits ?

Well, I think not only, can they, but they are.

It is likely that prices for stocks, bonds and commodities have always carried a veneer of this, a small premium in speculation costs just for being an open market. How much? Maybe a few percent in calm markets, maybe as much as 5-10% in very active markets.

Members know I have long been convinced that consumers are being gamed in both the gas and oil markets. We’ll now use the oil market as an example.

Senator Maria Cantwell (D, WA) opened hearings this morning on the price of oil. While I’ve yet to see an investigation properly done into this question, Maria and her staff are coming about as close as one can get. She mentioned Enron’s gaming of California for all those troglodytes who think we can’t or wouldn’t be gamed by energy companies.

Two of her witnesses made estimates of how much of today’s oil price is due purely to speculation. Last time I checked this out, the figure out of Wall St. was about 20% – a record in this market, where the same figure used to be in the 10% or less range.

Today’s witnesses put the fraction of today’s oil price caused by speculation at 25% (a retail expert) or 50% (an oil commodity expert). I’m fairly sure the second figure is closer to the truth.

What good comes from those who drive prices up and take their profits from the froth? Other than paying their bar bills and mortgages, I’d say no good at all. Clearly, consumers are harmed, as are all legitimate players in the fuel supply chain.

Are these hyenas in wheat, too? And rice? And —

I expect they are in every market naive or thin enough to be manipulated with large investment sums. Perhaps vampires are a better name for these players, since they weaken others while filling their appetites for ill-gotten gains.

Can the world afford this new vampire investor class? The news is rife with stories of companies bankrupting, people going unfed, car companies suffering, consumers no longer traveling, inflation running out of control — no, we can’t afford them.

Would someone please drive a wooden stake through their collective hearts, and soon?

My heartfelt thanks to Maria Cantwell.