Wednesday, July 29, 2009

Talking One's Book

On the Street, it's called talking one's book; a typical example is coming on CNBC and explaining why a stock one owns is undervalued. Now, it's Goldman Sachs saying to the authorities that all this speculation, such as in oil is good for society. As reported in's Goldman Sachs Says Curbing Speculators Could Disrupt Markets:

Goldman Sachs Group Inc., the fifth- biggest U.S. bank by assets, said attempts to curb speculation may be “disruptive” to markets.

“The role that is played by non-traditional participants such as index investors and other financial participants often has been mischaracterized,” Don Casturo, a Goldman Sachs managing director, said in prepared remarks today for hearings at the Commodity Futures Trading Commission in Washington.

The testimony to CFTC Chairman Gary Gensler, a former Goldman Sachs employee, is part of the second day of hearings at the agency on ways to address excessive market speculation. Gensler, who said yesterday that speculators contributed to a commodity “asset bubble,” is considering new position limits in energy markets after crude oil futures rose to a record $147.27 a barrel in 2008 on the New York Mercantile Exchange.

Gensler said at yesterday’s hearing that the agency should “seriously consider” setting strict federal position limits to curb speculation. . .

Gensler worked at Goldman Sachs for 18 years, leaving the New York-based company after becoming co-head of finance. In 1997, He joined the U.S. Treasury Department under Robert Rubin, another former Goldman Sachs employee. . .

Casturo said increased participation in commodity markets by financial investors has helped liquidity and improved price discovery.

He probably means the discovery that a barrel of the world's most major internationally traded commodity, crude oil, could go in price from about $145 to about $35 in about 6 months. All that volatility, one should realize, ended up enriching traders from commissions, bid-ask spreads, etc.

This blog questioned months ago why oil should be traded on exchanges much at all, much less manically. Once a field is discovered, lifting costs are fixed. Demand can be predicted, especially if prices are stable. Oil is perfect for long-term contracts. This differs from the original reason the futures markets were established, which was that crop yields were highly variable from year to year, and most of the crop would go bad if it was not consumed promptly. Oil meets none of those characteristics.

What is happening at the CFTC is likely part of an orchestrated show. Whether the President and Congress have agreed on final matters is not known to us. What is certain is that as of now, the traders and financiers remain in control. Because they have done such a great job for the average person the past decade.

Past performance is no guarantee of future performance, but it's the best one has to go by.

Expect more volatility; don't think you know more than the markets. The markets know nothing. They primarily exist in today's worlds to enrich the insiders.

Copyright (C) Long Lake LLC 2009

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