Is It Demand or is It the Speculator?
So here is the question who is at fault? Is it demand or is it the speculator? I decided to find this out once and for all what is going on. In Michael Masters testimony he said that the Index Speculator is making things worse because of the calendar spread that is being created. The question though is Michael Masters right or wrong?
One of the things that I like to do is work through strategies on how I could make money. I like doing this because it comes pretty naturally to me. I learned that when in 1995 I was working on a mortgage kernel and helped the business implement the different ways to calculate a mortgage.
I created a PowerPoint slide deck that outlines what I think is a way to make money using an Index Speculator trade. What is interesting about this trade is that it is a sort of piggy back trade and only works because there is demand. Though this piggy back is not a harmless piggy back, but a toll gate piggy back. The trade is made worse by adding the fear factor, and hence this trade must be controlled.
Hello There Mr Roboto!
(the song and era says it all... http://www.devspace.com)
2 Comments Add your ownSubscribe
1. Jason | June 9th, 2008 at 4:13 pm
Amzingly informative.
Not important, but have you considered using www.scribd.com or www.slideshare.com to share yor slides.
You could then embed the doc in the post, etc.
More on point, I think I’m torn here. I’d hate to hinder folks ability to make money… even if they are just acting as middle men. However, when so much is at stake, maybe it is better to have regulation here. I like the idea that the speculators would have to (or might want to) invest in the companies working with the comodities rather than the comodities themselves. This would have a net benefit to the economy as a whole compared to what we have now.
It’s also hard (for me) to say what the downsides would be for comodity providers/sellers if they didn’t have that increased demand/shelter from speculators. Is it worth ripping off the comodity users to ensure that the comodity providers can have consistant profits. In the case of oil, those providers are the most profitable comanies in the world, so I’d say no. But maybe we do need to preserve other comodities?
Thanks for putting this together and sharing.
2. Joe | July 2nd, 2008 at 5:56 pm
I was just thinking of something similar using a simple supply and demand curve idea. The demand for oil has an infinite slope so you get a line straight up and down (also infinitely inflexible). The supply of oil is pretty much fixed, so you get a supply with a slope of 0. The influx of capital searching for the fixed supply of oil would normally cause a shortage, but demand is infinitely inflexible causing a demand curve shift to a higher price.
Your analysis with speculation in the oil futures market really puts a name to the influx of capital, and shows how they can take advantage of inflexible supply and an inflexible demand curve.
Limiting the capital available to the speculators in the futures market by increasing their margin requirements may cause demand shifts back to a lower price, but ultimately we need to do something about that darn inflexible demand curve!
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