Page 2 of 2 Oil floats high on easy money
By Julian Delasantellis
had become common during the asset boom of the first years of the 21st century
- the move of institutional investors such as pension funds and university
endowments, along with the brokerages such as Goldman Sachs that advised them,
to begin to see physical commodities not as just inputs of industrial
production but as investment vehicles that could be traded like equities or
real estate on their own.
This was a strategy where, instead of buying individual commodities one at a
time, they were purchased in a basket, called by Masters a "commodity index
summary" that eliminated the need to pick actual individual commodity winners.
According
to Masters:
Assets allocated to commodity index trading strategies have
risen from $13 billion at the end of 2003 to $260 billion as of March 2008, and
the prices of the 25 commodities that compose these indices have risen by an
average of 183% in those five years!
But it was the crash in
the oil price that really exposed the key command louver of the entire
commodity (as well as equities, and most especially, real estate) price
appreciation machine - the easy way money was created to be devoted to fueling
and advancing it. As I wrote last December:
All during the great bull
move in oil, as in most of the rest of the commodity sector, hedge funds and
other speculative interests were buying commodity futures contracts like there
was no tomorrow. To finance these purchases, the speculators were taking out
huge loans from the banks. Why shouldn't the banks have been lending to the
speculators; it seemed like they were riding the tail of a very profitable
tiger. If that wasn't enough, the fact that the banks were lending to lots of
these speculative interests, who were all in the market taking very similar
long positions, made the profitability of these loans virtually a
self-fulfilling prophecy. The loans spurred buying, which spurred price gains,
which spurred profits for the speculators, and the whole thing went on.
Until this summer. The deleveraging plague finally reached the lending to the
commodity funds, and the banks, seeking to contract and strengthen their
balance sheets, pulled back on the commodity speculation loans. The speculators
couldn't roll over their long positions from month to month, so they had to
sell; in effect, this was the great world margin call. Most other commodity
prices were also driven down through this mechanism; for many of them, the fact
that the banks were also pulling in their crucial letter of credit financing,
by which the transit and shipment of commodities from producer to consumer was
financed, also exacerbated the big bad commodities bear. (See
Illusory dollars for a real crisis, Asia Times Online, December 25,
2008.)
Thus, it was only when the crack cocaine like addiction
of the financial sector to leveraging up everything they could get their hands
on except the tissue paper in the washroom couldn't be accommodated that we saw
how critical it was in the general price rise. When the US real estate sector -
both subprime and prime - could no longer be leveraged up anymore, that was
when the whole edifice collapsed.
But the private leverage boom has suffered a catastrophic fall, and not even
all of Treasury Secretary Timothy Geithner or Federal Reserve chairman Ben
Bernanke's men can put it back together again. Then why, even if world oil
reserves are at their highest in a decade, is oil rising again?
I guess for a journalist on deadline, like this recent reportage from Cnnmoney,
it's good to have the China angle as the "in case of emergency - break glass"
to add on.
"Oil got an early bump after data showed HSBC's China Purchasing Managers'
Index (PMI) had risen in October for the seventh straight month, to an 18-month
high of 55.4, pointing to sustained strength in the giant oil consuming
nation's manufacturing sector."
But if this is another money supply induced rally, where's the money coming
from?
"Hey, Federal Reserve chair Bernanke and Bank of England governor Mervyn King.
You've recently expanded your balance sheets to the tune of around $2.5
trillion. Any idea where all that money is going? Troubled Asset Relieve
Program overseer Elizabeth Warren says she doesn't know where it is, and it
sure doesn't seem to be funding new investments in technology and capital goods
purchases that would put people back to work now, is it?"
On the New York Mercantile Exchange where oil futures are traded, the oil
markets are currently in what is called a state of contango, the term from when
a commodity to be delivered at some time in the near to intermediate future is
higher priced than one to be delivered closer to the present. These conditions
make the "buy and store off Singapore" strategy profitable in and of itself -
especially in the current situation, where lease rates on oil tankers are very
low, which they probably wouldn't be if high current Chinese demand was sucking
crude oil straight out the sand of the Persian Gulf.
The tankers riding at anchor are not the main course of the conspiracy; it's
probably better to think of them as the stew covering the meat at the bottom of
the pot. Still, by removing however much oil they have from the daily market,
the tankers, and the willingness of the financial community to believe any
rationale with a China-based theme, work very well to obscure the real current
story of the commodity rally - that the banking system currently in place,
rescued from the lethal debts and depths of its self generated catastrophe last
autumn, still has absolutely no intention to do any real banking.
When the British government injected money into British banks through equity
purchases, it expressly demanded voting shares so as to acquire some of the
power of ownership over the banks. This the US Treasury under then Treasury
secretary Henry Paulson did not do; it accepted non-voting shares so not to
frighten the markets over the prospect of nationalization. The Barack Obama
administration followed suit when, in the first days of its term, it explicitly
took all talk of bank nationalization off the table as the solution to the
bank's toxic mortgage-backed securities. As all Americans are indoctrinated to
believe from their first ride in a pram, the private sector is always more
effective and efficient than government.
Yes, the banking sector is more efficient in blowing up bubbles than in running
to the government for rescue when they burst. The banks are more efficient in
creating socially useless debt than socially productive jobs. Most important,
they're dazzlingly effective in buying off enough of the financial media to
make what is essentially a long-running social and economic dysfunction seem
like a key part of a proud national heritage.
Thirteen years after his assassination, the generation of Julius Caesar's
contemporaries finally came to a conclusion with the defeat of Mark Antony at
the battle of Actium. A stirring story, but I still doubt if it would bring in
the ratings from an American audience absolutely inured to changing the channel
rather than watching anything historical.
Maybe the battle could be restaged with Antony riding a fleet of Singapore
tankers; the subsequent fiery conflagrations would draw in the ever-reliable
teenage boy and stockcar-racing audience willing to watch anything with enough
frequent explosions in it.
My choice for a modern American staging of Antony and Cleopatra would be to
make them a bickering married couple on a special episode of the late 1970s to
early 1980s US ABC network show The Love Boat. Antony, played by Ernest
Borgnine, will be recast as a Brooklyn mechanic called Tony, and Cleopatra,
played by Ruth Buzzi, as his long suffering, cantankerous, meter-maid wife
Connie. Mickey Rooney plays the asp.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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