Wednesday, April 13, 2011

Michael Masters: Commodities Complex in the Throes of a Bubble

Michael Masters was interviewed by Maria Bartiromo on CNBC yesterday. Below are some excerpts of his thoughts on oil prices and commodities in general.

Maria started by pointing out that a number of executives and others in the oil sector have been on recently saying that there is plenty of supply. She asked Masters if he agreed:

"...while people can talk about supply and demand the overriding role is the force of money from financial participants."

What should be done? What new rules? Masters said provide limits to speculation at a specific aggregate level (something like 1/3 speculators, 2/3 bonafide hedgers) and limit commodity index funds. He went on to say...

"...we need speculators to provide liquidity in commodities markets, we don't want them to overwhelm these markets and effect price discovery."

How do you prevent them from overwhelming the markets? According to him it's position limits:

"...the nice thing about position limits is, they worked for 50 years. From the 1930s until the mid-90s. They worked great to limit speculation and to allow enough liquidity in the markets to benefit the hedgers, the primary constituency."

His thoughts on other commodities...

"...the whole commodities complex is really in the throes of a bubble or an echo bubble if you will."

Enormous speculative capital is involved. Masters recently founded Better Markets Inc., a nonprofit focused on the public interest when it comes to commodities prices.

Last week another veteran oil trader, David Greenberg, had the following to say about the oil market on CNBC. Some excerpts:

"The speculators have just taken control of this market, and it's just out of control."

"With the amount of money that is in this market, the market is too small to handle it, so it's very easy for any fund that needs a position to go one way or another to slam it with the algorithms and that's what's moving the market right now."

"The bottom line is there is no disruption of oil right now."

"As far as what can be done to help the oil prices...and that's position limits that nobody seems to ever talk about."

"...in the old days, intraday, there was really barely any intraday margin. Now, on a $ 50,000, you know, crude position, could you probably trade hundreds of thousands of dollars worth. Maybe $1 million worth depending on the day and the position."

Greenberg does point out that the sheer size of the oil market makes it such that position limits alone will probably not fix the problem.

So add the above comments from Masters and Greenberg to these recent comments by another veteran trader, Daniel Dicker, and that's three different sources saying essentially the same thing. If even partially true seems foolish to not address this yesterday.

A sustained distortion in prices will drive investments that later turn out to be a widespread misallocation of resources.

We've seen this movie.

Adam

Related posts:
Oil's Endless Bid
Ray Dalio on Stocks & Commodities
Financialization of Copper

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