According to some, the evil Wall Street speculators are behind the recent run-up in world commodity prices. However, as this chart shows, commodity prices and industrial production are nearly perfectly correlated. In addition, the middle class is growing, which means we're seeing an increase in demand for nearly everything such as
1.) Oil -- more people are driving cars
2.) Cattle -- more people want different food, such as beef
3.) Cotton -- more people want different clothes to wear
4.) Corn -- is increasing because of biofuels, the increased demand for beef (corn is fed to beef) and the increases in other grains, which typically trade in high correlation.
5.) Wheat is increasing because of constrained supply, which led to output quotas and then mass purchases to ensure adequate domestic supply.
6.) Copper is rising with industrial production
Hat Tip Mark Thoma
4 comments:
I would be willing to look at your view on this, but this data does not quite tell that story. For one thing production does NOT necessarily equal demand. Inventories?? Hoarding??. Also co-relation does not necessarily imply causation, so it would be great if you can show more data to that effect.
Here is an alternate point of view from Naked Capitalism.
While it is NOT clear to me right now whether the price inflation is due to speculation or fundamental factors, or how big a role each has, in early 2008, looking back at the oil markets, it was far more clear that it was speculation. Also there were no shortages in 2008, in fact oil inventories were rising, even given refineries were operating below normal operating capacity from an earlier period.
81% of oil trading back in 2008 was due to speculation
Here is some additional questions
1) Are you saying speculation couldn't cause price inflation? How about if it is 81% of the market?
2) I realize some speculation is need in the commodities market. What social purpose does 80/20 ratio serve? How does it benefit you or me or anyone? Why not enforce position limits, so we can make it 20/80 instead? There used to position limits for speculators back until 91. Then with the passing of CFMA in 2000 and unmonitored ICE trades starting in 2006 the spec situation got worse.
3) While there is NO requirement to take physical delivery in the futures market, that doesn't mean they can't.
One more thing to note about by previous comment in case there is any confusion. Of course prices fall(or stay flat) and production falls, when there is recession. They generally go in the same direction. What I was saying is this data doesn't support the claim that there isn't any price inflation due to speculation with supporting links. There also tends be less speculation in a recession.
1) Are you saying speculation couldn't cause price inflation? How about if it is 81% of the market?
Sheer volume alone is really meaningless. Day trading churn means nothing. What you have to quantify is how much productive capital was actually taxed out by having to compete with "fake" bids that just dump out quickly.
1) Are you saying speculation couldn't cause price inflation? How about if it is 81% of the market?
Sheer volume alone is really meaningless. Day trading churn means nothing. What you have to quantify is how much productive capital was actually taxed out by having to compete with "fake" bids that just dump out quickly.
Post a Comment