Monday, April 28, 2008

Bloomberg: Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin

I've touched on the themes in this story a few times [Feb 28: The Hedge Funds are Coming! The Hedge Funds are Coming!]

I wrote a few weeks ago about the coming crush of hedge funds that are coming into commodity markets (I have zero proof but I know any hot market will draw in their computers like blood in shark infested waters) [Feb 12: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] I wrote:

... strength begets strength and strength means hedge fund computers scanning the globe for any pattern will start chasing each other into the commodity futures markets. While I do expect the trend to remain up, the volatility will increase (thanks hedgies!), and another interesting thing happened - the daily limits were increased so the intraday volatility will sharpen - cool! This allows wider ranges for daytrading for these futures, more fun for the hedge funds.

Again I am not a CBOT trader, never traded a future directly in my life but I know human psychology and the pure and utter greed and avarice on the Street - so I knew this would bring in the hedgies.... and the comments below by experts seem to confirm my guess from a few weeks ago.
Yesterday was apparently the most crazy day ever in wheat futures, a swing of 25% in 1 day! If it is "good" or "bad" I will leave that decision up to you, but you can see how these quant computers truly ruin any market (unless you are a daytrading dynamo). Wherever they go, it is like locusts - they will chew it up, spit it out, spin it, kick it, push it, punt it... and make sure volatility increases by a huge magnitude. And as Ben continues to cut and flood more liquidity into the world, as I stated many times, more and more is going to go into relatively small commodity markets because this is where "hot money" is going; so we will have a bubble - and I fear it will be epic.

Also last week in [Articles of Interest Around the Net] was a story NYTimes: A New Threat to Farmers: The Market Hedge

I wrote
I continue to believe as hedge funds control more and more of the world's capital there comes a time when their sheer scale and size must fall under some sort of higher level of regulation as they literally, en masse, can move markets. Perhaps only when a disaster strikes caused by hedge funds, will anyone care to broach this subject - give it 5 to 10 years. As more wealth is concentrated in fewer and fewer hands (sovereign wealth funds and hedge funds), we will have the same things we always have - out sized risk leading to terrible effect. And then the politicians will say "how did everyone miss this and why was there no regulation?" Blah blah.

I continue to be of the belief that these pools of capital are going to ruin the golden goose at some point - it is simply human history to take everything to excess. Now that it is impacting real world situations (housing crisis, credit crisis, and next food crisis) we'll see what, if anything, regulators decide to do about it....
  • As farmers confront mounting costs and riots erupt from Haiti to Egypt over food, Garry Niemeyer is paying the price for Wall Street's speculation in grain markets. Niemeyer, who farms 2,200 acres in Auburn, Illinois, won't use futures to protect the value of the crop he will harvest in October. With corn at $5.9075 a bushel, up from $3.88 last year, he says the contracts are too costly and risky.
  • Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk.
  • Commodity investors control more U.S. crops than ever before, competing with governments and consumers for dwindling food supplies. Demand is rising with population and income gains in Asia, while record energy costs boost biofuels consumption, sending grain inventories to the lowest levels in two decades.
And don't think the Federal Reserves (along with W Europe's) flooding of the world with fiat currency is not exaggerating these issues. Over the past decade the policy response to every crisis if creation of more money. More money leads to inflation. The bubbles have increasingly become worse and less localized. Tech bubble - local to US investor class mostly. Housing bubble/credit bubble - most of the world's investing class. Commodities bubble we are now creating - affects every human on the planet.

Every action has unintended consequences. So after the politicians, one day, stop pointing fingers at "greedy oil executives" or "suspicious sovereign wealth funds" - they probably should take a moment to look in the mirror for their legislative actions, and look across to the street to their buddies at the Federal Reserve and ask "is there any coincidence that every major commodity exploded higher beginning in August, when the Federal Reserve (and ECB) began their liquidity injections?" ... no... I am sure it is just coincidence. Western governments have as of March put nearly $1 TRILLION into the system [Mar 11: Some Interesting Facts on the Fed Injections] As I keep saying, all FINITE assets (including equities) must go up, all other things being equal. And we get inflation in everything. Here is a 2 year chart of oil equivalent... strange how it turned on a dime the minute the spigot was opened by Helicopter Ben. Yet no one in leadership aside from Ron Paul seems to understand why inflation is exploding...

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