Governments Must Pull In Hedge Funds

Oil moving back to $100? Oh no. Why? Markets in the real world are struggling. Growth is anaemic, unemployment rising, profits and tax revenues falling. Yet prices of commodities, ludicrously find a way to boom one more.

Markets were said to be the most efficient way to allocate resources, that supply and demand find a balance, while prices are set at the most advantageous rate for the greatest number of people. Money and price are said to be the most efficient method of signalling, and passing information ever invented.

They works most of the time, I would agree, but there is one market where this most obviously does not work, and that market is debt. Debt has the ability to so totally distort the information that markets run on, that no one can read anything from prices any more. Debt is the only signalling device we have left. Real markets are in abeyance, waiting for the monster to die.

If hedge funds and others can borrow and take bets in futures markets without laying down any deposit, this is little different to the deposit free mortgages that have sunk the US property market. If there is no stake demanded, the bet taken in the marketplace is free of loss from the beginning. There is no downside, only upside potential. Everyone piled in and bought houses hoping for some of the gravy. Now they are walking away from their obligations leaving banks and governments to carry the losses.

The same is now happening in futures markets. Governments allow banks and hedge funds to trade in futures with no deposit required. Many of these institutions are as close to bust as can be, with massive toxic debts from the property collapse hidden in their accounts, off balance sheet, archived and ignored, waiting for the ‘recovery’ that is unlikely to come for a generation or two.

What have such organisations got to lose by joining the next deposit-free jamboree? This time they might land on the black not the red.

Just as deposit-free betting sent real estate on a boom without end, ending in an inevitable bump, the market being sent to glory this time is commodities. There is no limit to the size of the futures positions taken up, and there is no charge made for placing a bet. The profit or the loss earned is all that is at stake.

The world is allowing organisations which are already effectively trashed by their exposure to one-boom-turned-to-bust, to rush ahead and create the next one, after being bailed out by the public’s money. They can all bid up prices like oil, not exactly something ordinary people don’t need for their daily lives, any more than somewhere to live. They can flash juicy balance sheets at their bankers, borrow more and bid up more prices. It will all look lovely until …..

….the next crash.

Meanwhile ordinary people all over the world are being squeezed to breaking point by high prices of the daily essentials. Rice, oil, even gold is needed, for jewelers to work and earn a living, which is being made nigh impossible. Turkey’s jewelry industry is down 90%, Italy’s not far behind. Yet each day we only see the gold price, and the oil price. No one thinks about the jeweler who’s being thrown out of work, or the transport company which can no longer compete. This is a boom which is killing jobs, not creating them.

With debt, and its uses, such as futures markets where people are allowed to gamble free of deposit, markets become highly inefficient. The monster which financial deregulation created must be tamed. It is only making sure that the coming crash will obliterate almost every institution in the land. No government will be able to bail them out this time. The problem will simply be too vast.

The only choice we have now is how big a bust do we want. It is down to the US Congress to call time. The signs are that they will, and soon.

Nadler on Kitco today writes –

Crude oil –a generally closely related trade to gold- was last seen trading just shy of the $86.00 per barrel mark and has now posted a better than 70% (!) gain over the past year. This spectacular rise has utterly puzzled many a seasoned energy trader who sees inventories well above the top end of normal seasonal limits.

If this massive gain is all about the optimism related to the economic recovery, well, we’ve seen something like this being used as the excuse back in 2008 when black gold climbed to $147 per barrel. The ebullience that is fueling fossil fuel is not at all shared by economists, the reality on the ground (or under it, in storage tanks), or by statisticians. We call it funds at play. See yellow gold for striking similarities.

The Tap Blog is a collective of like-minded researchers and writers who’ve joined forces to distribute information and voice opinions avoided by the world’s media.

5 Responses to “Governments Must Pull In Hedge Funds”

  1. Twig says:

    That’s the whole point. These financial whizz kids don’t create wealth they just move it around and each time some of it sloshes into their own pockets.
    If the FSA actually employed ex traders, they would be in a position to understand the way the markets work and weed out the parasitic elements that you refer to.

    I’ve seen the problem brewing since the early nineties, and I was astonished that the FSA never spotted it. I thought that was their raison d’être.

  2. tapestry says:

    The FSA only enforces the rules. The rules of the game are set by Congress…and that means for the world. The system acts as a taxation system on ordinary people who are forced to pay high prices.

    The profits end up as bonuses in the pockets of the winners while bail-outs are needed for the losers.

    The ‘funds at play’ game has to be stopped.

  3. defender says:

    I have been reading your blog with much interest, I read this earlier and thought you might find it useful

    As nations of the world are thrown into a debt crisis, the likes of which have never been seen before, harsh fiscal ‘austerity’ measures will be undertaken in a flawed attempt to service the debts. The result will be the elimination of the middle class. When the middle class is absorbed into the labour class – the lower class – and lose their social, political, and economic foundations, they will riot, rebel, and revolt.

    Ratings Agency Predicts Civil Unrest

    Moody’s is a major ratings agency, which performs financial research and analysis on governments and commercial entities and ranks the credit-worthiness of borrowers. On March 15, Moody’s warned that the US, the UK, Germany, France, and Spain “are all at risk of soaring debt costs and will have to implement austerity plans that threaten ‘social cohesion’.” Further, Moody’s warned that such ‘austerity’ measures increase the potential for ‘social unrest’:

    “Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion,” said Pierre Cailleteau, the chief author.

    “We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society,” he said.[1]

  4. tapestry says:

    Thank you, defender. The financial world doesn’t want the stops to be put on. A big rise in interest rates would do for most middle class folk.

    Cuts are the only way to avoid that.

    The FT discusses the issues here.

  5. tapestry says:

    FRIDAY – Looks as if the Goldman Sachs prosecution is impacting on price rallies in gold and oil, as if to order. Maybe the US government reads my blog. I always they did.

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