I have written several times to correct erroneous ideas about the role of speculators in the commodity markets.
Now, I'm going to write why I feel so passionately about this subject.
Frankly, over the last two months, I have traded primarily treasury and stock index futures. Since the soybean bull ended, it simply has been more difficult to trade, and less profitable. One reason may be that fewer speculators are trading that market. It's less liquid, and more erratic. I can just as easily trade stocks, treasuries, gold, or whatever else. My trading methods will work regardless of which vehicle I trade. I don't really care which one I use.
I don't frequently trade crude oil because the market moves so quickly that I have difficulty obtaining accurate executions. I only trade markets that are very liquid, provide me with good executions, and offer minimal slippage. The S&P 500, treasuries, and Eurodollar futures are the best. Eurodollar futures don't show much movement, so I don't bother with them.
As the U.S. Congress continues to spasm uncontrollably from bail-out to bully in the financial markets, they exponentially increase the risk of causing severe or even permanent (see #4 below) damage to their functions and stability, despite the claim that stability is their goal.
If Congress attempts to force traders out of the commodity markets, it will have one or more of the following effects:
- Higher Commodity Prices -- The commodity prices themselves will gyrate out of control, as they have before when liquidity was driven from the financial markets. Erratic price movements that skyrocket one day and plunge the next were the reason why the futures markets were created in the first place. The more liquidity that exists in the futures markets, the more stable they become, because no one market participant can control the market. Traders provide this liquidity. Liquidity is both a benefit and a protection for all market participants. It benefits everyone!
One example of this is the wild price swings we see for commodities that are not traded in the futures markets. Not only do prices swing wildly and erratically back and forth, but these commodities have, over the past year, risen much more rapidly and much higher that the futures-traded commodities. Higher prices are the certain result when speculators are forced out of the futures markets.
The super rich aren't deterred when Congress slams the door on traders, either. They can simply buy the farms that produce the commodities, the mines that produce the precious metals, and the land that produces the oil. Then, they can just sit on those assets until prices rise to more competitive levels. They engage in hoarding! - Long Lines at the Gas Pump -- If Congress attempts to manipulate and bully commodity prices lower, those commodities will end up in parts of the world where they are welcomed and where people are willing to pay market prices for those same commodities. Long lines at gasoline pumps in the United States will be the result. Less oil will come to these shores, and that means shortages and long lines to obtain the scarce commodity, assuming it is available at all!
- Collapse of the Dollar -- If higher taxes and unwelcome financial markets leave investors feeling that their capital is at risk in the United States, they will move those funds elsewhere. I saw this in South America, and despite the disastrous consequences, tyrants continue to attempt to bully the markets into submission. It never works, and it always has terrible consequences. One of these consequences will be that as more and more people send their money outside the United States, the volume of selling activity will cause the US Dollar to decline even faster. As the phenomenon snowballs, it accelerates, and the Dollar could collapse in a Weimar Republic-style death spiral.
In January, when Jerome Kerviel, the rogue trader at Societe Generale, was discovered, the liquidation of about $16 billion of his trades caused the Dow futures to plummet 570 points in a single day. It has similar effects on many futures, including crude oil, gold, and grains. Fortunately for the U.S. stock market, it was closed that day for the Martin Luther King holiday, and the market recovered before the open the following day.
If just $16 billion of rapid capital movement has such an impact on the financial market over a holiday, what would the impact be if $1-$2 trillion moved out of the United States over a period of several weeks or months? The impact could be cataclysmic for the Dollar! As one government followed by another decides to liquidate their Dollar reserves, the Dollar will accelerate downward. This, in turn, causes the prices of food and fuel to skyrocket in inflationary mushroom clouds. It could initiate panic selling not only of the greenback, but of US treasuries also, setting off waves of hyperinflation. Is that an apple cart we want to risk upsetting? - We Lose the Markets to Overseas Competitors -- The United States no longer has a monopoly on the world's financial markets. The fact is that there is more money elsewhere, and competitors are chomping at the bit to attract more capital to their own markets. When investors around the world find the United States financial markets inhospitable, they will simply transfer their funds to other futures exchanges around the world. There are active and liquid futures exchanges in Europe, China, India, Singapore, Dubai, and several other countries. Once those customers are gone, so are the jobs and the competitiveness of our markets. Do we want to give up still another dominant market position, and send still more business and more jobs overseas? Why do you think that commodity expert Jim Rogers moved his family and business to Singapore, and is liquidating all his Dollar holdings? Because the markets elsewhere are more hospitable!
