Bollitics - Ireland, the Euro and the future of the EU

[leviramsey]

Besides which the folks who bid up food prices in the commodity markets are not shorting them at the top (the sale is a liquidation of a position, not taking a new position).

If anything, the ones who are actually shorting food are the angels in this: their bet is basically that the current price level is untenable and likely to go down. The act of shorting ceteris paribus drives the price down.

Peter's position seems to boil down to:

1) high food prices are bad

2) people driving down food prices are bad

Have I misread anything?

[snowychap]

Peter's position seems to boil down to:

1) high food prices are bad

2) people driving down food prices are bad

Have I misread anything?

It isn't exactly how I've read it.

Isn't Peter suggesting that the cart is not just being put before the horse but is almost driving it?

[CVByrne]

Very simplistic view there peter. Someone needs to loan you the stock that you sell. That's how you short.

Yes they do. But I don't see the relevance of that to my post?

Well nobody is going to loan stock they fear is vulnerable, it's their stock. Plus you can only short a stock if it's last trade was up, this is to stop shorting of stocks on their way down.

Further it's considered by many and myself included to be a good way to test prices. When stocks are getting too high the price can be tested by shorting the stock, if the stock was over valued it'll lead to the stock being reassessed by the market. It serves a purpose and simply banning it would result in new stock bubbles as traders have no way to test prices.

[peterms]

Besides which the folks who bid up food prices in the commodity markets are not shorting them at the top (the sale is a liquidation of a position, not taking a new position).

If anything, the ones who are actually shorting food are the angels in this: their bet is basically that the current price level is untenable and likely to go down. The act of shorting ceteris paribus drives the price down.

Peter's position seems to boil down to:

1) high food prices are bad

2) people driving down food prices are bad

Have I misread anything?

You seem to see shorting as a minor correction of a market price which has drifted out of line with actual value. The point about shorting is that it's part of a process of introducing greater volatility to markets - the people who make these bets profit from the continuing volatility in prices. The ideal world for the speculator is one where the price goes up and down, up and down, creating endless opportunities for gambling.

What we need in food markets is more stability, not less. Rising prices obviously hit consumers, for example there was a woman from a country I didn't catch the name of on R4 this morning talking about how rice was 90 shillings a kilo 2 months ago and is now 120 shillings; price increases like this for staple foods for impoverished people lead to death.

But if prices fall sharply, that can also be harmful, because it hits producers and undercuts their ability to maintain production, especially where the outcome of a price collapse is that people stop tending the crops.

The effects are multiplied because the brand owners and distributors, the big multinationals, will keep most of the profit from price rises but push most of the loss from price falls onto producers, much as supermarkets do to farmers here.

The outcome is that markets become volatile and unpredictable, small producers are from time to time driven into hardship or even stop producing altogether, consumers are no better off in the long term, but profits are extracted by speculators who have added no value whatever to the process and have simply sucked value out of the whole thing.

Food markets are chaotic enough already, what with climate change, droughts, using crops for biofuel and so on, and Oxfam are publishing something tomorrow about this. The very last thing we need is speculators artificially introducing more chaos so they can make large profits from doing nothing of value.

[peterms]

All investment is speculation though

I wouldn't say so. I see investment as a long term thing, aimed at helping growth of the company invested in, and speculation as short-term buying and selling to make a quick profit with no regard to the longer term prospects of the company.

Investment is a necessary part of adding value and providing the conditions for growth. Speculation is just gambling on short-term price movements, adding no value whatever and often destroying it.

[leviramsey]

You seem to see shorting as a minor correction of a market price which has drifted out of line with actual value. The point about shorting is that it's part of a process of introducing greater volatility to markets - the people who make these bets profit from the continuing volatility in prices. The ideal world for the speculator is one where the price goes up and down, up and down, creating endless opportunities for gambling.

What we need in food markets is more stability, not less. Rising prices obviously hit consumers, for example there was a woman from a country I didn't catch the name of on R4 this morning talking about how rice was 90 shillings a kilo 2 months ago and is now 120 shillings; price increases like this for staple foods for impoverished people lead to death.

But if prices fall sharply, that can also be harmful, because it hits producers and undercuts their ability to maintain production, especially where the outcome of a price collapse is that people stop tending the crops.

The futures market fundamentally exists (and succeeds at) to reduce price volatility. Consumers (or more properly those who sell to consumers) routinely trade in the futures markets in order to lock in prices in the event that the price rises. The other party on such a transaction, most of the time, is short. In the absence of short-selling, the locked-in price will be higher and more of the price increases will be felt. The same is true, in reverse, when it comes to producers: shorting the crop they produce is the same thing as locking in a price for future delivery so that even if there is a fall in prices they still produce.

Food prices in the US have risen much more gently than in most other countries (the CPI for food is up 3.2% YoY, in line with the CPI as a whole). The US also has the most developed, highest-participation-by-producers-and-consumers futures markets. Those two facts may well be connected.

The argument could be made that futures markets for those who are producing/consuming a given commodity are a good thing, but that those who don't should be banned from participating. This ignores that the participation of arbitrageurs in the market increases liquidity and thus the ability for producers & consumers to lock in prices.

Food markets are chaotic enough already, what with climate change, droughts, using crops for biofuel and so on, and Oxfam are publishing something tomorrow about this. The very last thing we need is speculators artificially introducing more chaos so they can make large profits from doing nothing of value.

You seem to mistake speculators recognizing that there is volatility inherent in the food market and trading to reduce that volatility (for which they, it must be said, are generally well compensated) for speculators causing volatility.

[peterms]

The argument could be made that futures markets for those who are producing/consuming a given commodity are a good thing, but that those who don't should be banned from participating. This ignores that the participation of arbitrageurs in the market increases liquidity and thus the ability for producers & consumers to lock in prices.

Isn't there another possibility, along the lines of allowing some trading by those other than those producing and consuming, but limiting the scale of their activity? This allows some degree of the increased liquidity advantage you mention, but at least curbs the scope for rampant speculation.

You seem to mistake speculators recognizing that there is volatility inherent in the food market and trading to reduce that volatility (for which they, it must be said, are generally well compensated) for speculators causing volatility.

Yes, it's a fair point that you can distinguish the type of trading aimed at stabilising prices from the manipulation that leads to bubbles and panics. Obviously it's the latter that concerns me.

[snowychap]

The futures market fundamentally exists (and succeeds at) to reduce price volatility.

Does it succeed?

[TheDon]

All investment is speculation though

I wouldn't say so. I see investment as a long term thing, aimed at helping growth of the company invested in, and speculation as short-term buying and selling to make a quick profit with no regard to the longer term prospects of the company.

Investment is a necessary part of adding value and providing the conditions for growth. Speculation is just gambling on short-term price movements, adding no value whatever and often destroying it.

Why is gambling on short term price movements any different from gambling on long term price movements?

Short term investors, especially those who short stock, might not care about the long term prospects of the company, but why should they? That they can make money from stock falling isn't a problem, the fact the stock is falling in price is the problem, and the fact the stock is falling isn't their problem. Maybe if the company didn't have deeper failings then the stock wouldn't be dropping and they wouldn't be shorting it.

Like has been said before, shorting stock can actually help to abate falls in stock prices, without people WANTING to buy the stock at a lower price it'd ultimately drop even lower. Shorting drives demand where there otherwise would be none.

[LondonLax]

The futures market fundamentally exists (and succeeds at) to reduce price volatility.

Does it succeed?

You'd have to say so. Having an agreed future price set that both the buyer and seller are happy with would tend to smooth out some of the uncertainty that is inherent in something as volatile as food production.

[snowychap]

You'd have to say so. Having an agreed future price set that both the buyer and seller are happy with would tend to smooth out some of the uncertainty that is inherent in something as volatile as food production.

Why would you have to say so?

Aren't you just detailing how it ought to be the case?

I was asking whether it was.

On p71, UNCTAD"]Taken together, the evidence suggests that the participation of financial investors in commodity markets has increased price volatility.

[CVByrne]

The documents conclusion is that volatility has increased due to increased of financial instrument use in commodities markets. Which I'd not dispute, but it's important to point out that futures are exchange traded and have been around for a long time, the document points to the volatility levels in 97-01 being lower than the volatility since. What has happened is trading has moved away from the exchanges and into bespoke financial derivatives that got increasilngly more complex and more importantly (and worringley) leveraged.

To make the jump that futures has any basis on the increase in price volatility since 2001 cannot be obtained from that document.

[snowychap]

To make the jump that futures has any basis on the increase in price volatility since 2001 cannot be obtained from that document.

Why have you called it a 'jump'? Using such a loaded term would suggest that you were just dismissing what they had suggested because you didn't agree with it.

[snowychap]

The documents conclusion is that volatility has increased due to increased of financial instrument use in commodities markets. Which I'd not dispute, but it's important to point out that futures are exchange traded and have been around for a long time, the document points to the volatility levels in 97-01 being lower than the volatility since. What has happened is trading has moved away from the exchanges and into bespoke financial derivatives that got increasilngly more complex and more importantly (and worringley) leveraged.

What trading has moved away from exchanges?

[CVByrne]

I didn't mean anything specific by the word jump. Just mean that since futures have been around for decades and they are exchange traded like stocks the document is not about them and more about the emergence of new financial derviatives particularly leveraged ones. ie. futures have been constant during the entire study timeframe, they did not emerge in the past decade.

Would you disagree with that?

[CVByrne]

The documents conclusion is that volatility has increased due to increased of financial instrument use in commodities markets. Which I'd not dispute, but it's important to point out that futures are exchange traded and have been around for a long time, the document points to the volatility levels in 97-01 being lower than the volatility since. What has happened is trading has moved away from the exchanges and into bespoke financial derivatives that got increasilngly more complex and more importantly (and worringley) leveraged.

What trading has moved away from exchanges?

A huge amount, CDO's the instrument of doom, and the even worse version, synthetic CDO's. Along with CDS', none of these are exchange traded instruments.

Take the credit default swap as I have a vast knowledge of that instrument. Here's how you price it, a company called Markit went to the investment banks and offered them a % share in the company in exchange for all of them giving their CDS spread quotes for which market averaged the quotes and sold that info to other banks and funds to price their derivatives.

That is a world away from actual prices being set by a liquid financial market where an instrument is traded almost every second. The point is financial markets are fine but it's the emergence of OTC derivatives that has lead to this mess, they are leveraged.

[snowychap]

A huge amount...

Any financial instruments that are used in commodities markets?

[snowychap]

I didn't mean anything specific by the word jump. Just mean that since futures have been around for decades and they are exchange traded like stocks the document is not about them and more about the emergence of new financial derviatives particularly leveraged ones. ie. futures have been constant during the entire study timeframe, they did not emerge in the past decade.

Would you disagree with that?

I don't know. I'm reading the document in full so I'll get back to you when I've seen the data.

Initially, though, the graphs in Chart 2.1 (and the comments on the page below it) would suggest an enormous increase in activity in the last decade, wouldn't it?

[CVByrne]

Yes, there are loads of exotic commodity derivatives. You can have all kinds of exotic options on a commodity. Hell you can even make money off the volatility of the commodity price with a variance deriative. Or the correlation between rice prices and oil prices with a correlation derivative.

Most of the exotic structures can be used on any traded security, be it a stock, or commodity.

[CVByrne]

I didn't mean anything specific by the word jump. Just mean that since futures have been around for decades and they are exchange traded like stocks the document is not about them and more about the emergence of new financial derviatives particularly leveraged ones. ie. futures have been constant during the entire study timeframe, they did not emerge in the past decade.

Would you disagree with that?

I don't know. I'm reading the document in full so I'll get back to you when I've seen the data.

Initially, though, the graphs in Chart 2.1 (and the comments on the page below it) would suggest an enormous increase in activity in the last decade, wouldn't it?

Oh no doubt, but it's the type of derivatives that have emerged and become popular in the past decade, they are leveraged and OTC, which stands for over the counter meaning traded between 2 parties, bypassing an exchange and using an investment bank instead.

It's a fundamental shift from simple products traded on exchanges, to complex exotic ones, which are done as deals with investment houses.

You can see now why they pushed for so much deregulation