*promote

Promoting this video and sending it back into the queue for one more try; last queued Thursday, September 8th, 2011 11:14am PDT - promote requested by kulpims.

That shit is evil.

The invisible hand of the free market: visibly strangling the poor to death.

Can someone tell me why we need speculators? In all seriousness I just want to understand. Please correct me if I am wrong but speculators just seem to me to be people who tell investors how to invest their money so the investors doesn't have to do research themselves?

But laws and regulations take away our freedom! Ron Paul told me so!

I'm not familiar with Lester Brown's proposed solutions, but his diagnoses pretty clearly lay things out concerning food and water and globalization.

>> ^Darkhand:

Can someone tell me why we need speculators? In all seriousness I just want to understand. Please correct me if I am wrong but speculators just seem to me to be people who tell investors how to invest their money so the investors doesn't have to do research themselves?


so rich people can get richer?
leverage is all fine and dandy... but that's why you NEED government, to limit/inhibit actions like these... ie to protect the INTERESTS OF THE MAJORITY OF THE PEOPLE... not the few

the concept of FREE MARKET ECONOMICS completely collapses once entities arise that have enough money to fundamentally change/inhibit free market action, whether through purchasing of politics, monopolization, or simply buying out the competition... supply/demand becomes secondary in the equation, and fantastic, there's no one there with the power to stop it... and don't expect those benefiting from it to control themselves... the actions of Wall Street over the last 30yrs can't be plainer proof of this

its ironic that most people that tout FREE MARKETS use NATIONALIZATION as the alternative... in the extreme... both are facism...

don't believe the propaganda and brainwashing, the most humane and sustainable economics lay somewhere in the middle...

its just sad that until the tragedy that the 3rd world is facing because of this type of economics is visited upon 1st world countries... nothing substantial will be done... because the politicians don't work for the people... they work for business... and business has no morals... only limitations, which are slowly (and moronically) being eaten away by the call for small government and the hijacking of libertarianism

"its nothing personal... just business"

>> ^Darkhand:

Can someone tell me why we need speculators? In all seriousness I just want to understand. Please correct me if I am wrong but speculators just seem to me to be people who tell investors how to invest their money so the investors doesn't have to do research themselves?


It's partly in the video. Speculators help farmers and people who use farmers' goods by pre-purchasing and pre-selling harvests at fixed prices. That way, a farmer knows exactly how much his crop will be worth when he harvests it, and a bread company or whatever knows exactly what they will be paying for the next batch of incoming wheat/flour/etc. The speculator studies the market and establishes a price both parties are willing to pay, even though neither party has produced or consumed the good yet. These are called futures.

This stabilizes food sources, which is a good thing. The problem is when people speculate on the speculators and sign all sorts of promises to pay each other depending on what happens...these are referred to in common terms as "bets". Yes...they bet each other on the outcomes of food production. It gets made to look complicated with lots of legalese, but it really isn't very complex.

Basically it describes how people make money by producing nothing, providing nothing, and servicing no one.

If there were a lot of land available for farming and industrious small company could setup to compete, avoid futures and undercut everyone who plays in it. But the land, the seeds, and the lines of production are owned by one or two big companies.

Whole situation is crazy. Producing raw materials and goods, especially food, should be the number one thought...now how they can make money off the guys who produce by jacking the prices up and providing no benefit in doing so. Shipping things, good. Leaving things sit in the field or in a warehouse while the price goes up for the consumer but not the farmer because people are dicking with the market.....shouldn't fly.

Goes for oil futures as well. It's bullshit that some guy makes a buck off of oil that never changed it's location, state, quality, or anything else to make it worth more for legitimate reasons. And it's not like they hold on to this stuff like a collector would to preserve it, they might hold it for a day or a few months, but it's unlikely they hold it for a year.

And some how the scenario described in this video is so important and influential in the US it can kill the rest of the economy. Allowing it to continue is just stupid beyond belief, make all those guys take their money and invest in production or services if they are so knowledgeable.

This system is so fucking sick, that if it was a human body, even the most conservative doctor would have put it to rest already...

That video made me feel really dumb.

Nope, you're thinking of alpha managers in investment banks. Speculators are the risk takers in derivative contracts and act as the counter-party to those hedging (transferring risk away).

In the example they give of the farmer and the miller both are effectively looking to minimize risk with the farmer worried about a price drop at harvest date and them miller worried about a price hike on purchase at harvest. They exchange their risk and in effect both of their potential gains and losses are cancelled out as in doing so they have established a fixed price.

In practice it doesn't work as neatly, you may have a lack of willing counter-parties to the farmer if prices are expected to go up and the miller does not wish to lock in a price. This is where speculators step in to take the counter-party position. The point is though, without speculators or someone to take on this risk, there would be no way to hedge or transfer risk away (or the margins would be considerably higher) so speculators fill a vital role without which there would be greater risk and uncertainty.

The video is quite confusing in that it then goes on to refer to the intermediary as a speculator without properly explaining that this only applies while the bank has not found a willing counter-party speculator to sell the contract to. If they choose to retain the counter-party position themselves though they are of course speculators.>> ^Darkhand:

Can someone tell me why we need speculators? In all seriousness I just want to understand. Please correct me if I am wrong but speculators just seem to me to be people who tell investors how to invest their money so the investors doesn't have to do research themselves?

On topic, there needs to be a better ability to measure and monitor OTC derivative contracts, but I think generally people who sorely blame speculators don't understand how markets work.

Everything ultimately has a fundamental value, if speculators are taking excessive amounts of positions expecting the price to go up, ultimately it will rise far beyond levels determined by supply and demand for the physical good and these speculators will stand to lose in their derivative position.

What is their incentive to inflate prices if they know that this will happen? Why not simply attempt to predict the market price accurately, whether it is trending up or down? Now obviously bubbles happen and what the video says about property investors heading into food commodities may well be true, but that is precisely why shorters have a role in the market to push the price down if it gets over-inflated.

You know when the video talks about hedge funds betting in price falls? What they conveniently omit to mention is taking these contracts puts downward pressure on prices.

Furthermore, whether high or low food prices hurt people in developing economies depends on who you're talking about. People living in country areas who rely on farming for their livelihood tend to gain from higher prices, urban dwellers tend to lose from it.

Demand and supply is also quite obviously driving increases in prices regardless of what you believe about speculation.

1) As developing countries have become wealthier they've shifted from a grain/rice diet to a more meat reliant diet, which is far more agriculturally intensive.

2) It's pretty self evident that weather instability has increased worldwide which destabilises prices.

3) Increased use in bio-fuels both in the US and Europe has taken up supply and pushed up prices.

4) All of these factors have in several cases resulted in countries establishing temporary trade barriers which in itself push up prices.

Point is, it's easy (and not entirely rational) to blame speculators but analysing all the factors at play (which this video brushes off) paints a far more complex picture.

@RedSky Both "sides" are just gambling. They use all kinds of statistical models and data to convince themselves that they're not, but they are. They know it's unstable, but they're trying to avoid the hot potato.

You're correct in your logical assertions that each of these parties have a "role" in the market. Yes, hedge funds can have a downward influence. Yes, speculators can drive up prices. In theory, these cancel out. In reality, it causes the system to become fragile because these upward and downward influences don't happen simultaneously in a neat math equation. The problem is that all of this up/down activity causes drastic fluctuations in the price of goods which have nothing to do with supply or demand. The more layered the contracts and transactions get, the less stable the price. Even if the up/down forces actually succeed in "stabilizing" (or even lowering) the average price over time, that doesn't prevent people from starving because rice is too expensive this month.

Yes, all of those supply/demand issues are factors in price, but they do not mitigate the central point. The video started off by explaining that the 4 "complex" factors you listed at the end don't account for price instability. Consumers, producers, supply chains, etc can acclimate to gradual changes, but they have a hard time responding to spikes. That's one of the central points of the video.

The biggest problem is that the application of these economic theories work well to increase stability when complexity is low, yet they actually decrease stability when complexity increases. It's easy to logically explain why speculators are necessary. It's a persuasive argument, but it ignores the bigger issue at hand. It's much harder to explain why "speculators speculating on speculators" is a problem when people can easily understand "speculators are good in this logical everyday situation".

@mgittle

I agree that particularly the sheer volume of speculative versus physical transactions is an issue.

You say though that speculative activity has nothing to do with supply and demand though, which I disagree with as ultimately that's what it's looking to predict. After all speculation based on rumor and not fundamentals is essentially a ponzi scheme, ultimately the price will fall back down to true levels when enough further buyers cannot be found, or for that matter when counter parties can't be found. Food may to some extent be an exception here in that people can't choose not to buy it though, so there is less pressure on it to fall if it rises too far.

Ultimately I agree that whether it causes more instability is debatable, but you could just as easily argue that more transactions means a deeper, more liquid market and that the price instability is more as a result of the market pricing in food price changes more readily. My issue with the video was more than it only listed the other factors, saying nothing of their significance relative to the argument it was making, which seems disingenuous.\

@RedSky

It's not that speculative activity has "nothing" to do with supply and demand. Of course it does. I'm saying that once you get past that initial set of contracts between the initial speculator and the farmer/mill/bread company/whatever, you get further and further away from supply and demand as a factor. You get people who are betting on price swings for profit rather than someone actually providing a service. The video did a pretty good job of illustrating the see-saw effect this has on markets, which makes prices unstable.

This see-saw effect causes severe and sudden price spikes and dips as people pile on short sales or speculative buying. The point is, if the price for a good increases 71% in a short period of time without extreme supply issues, it's likely a speculative effect. Yes, the video could have done a better job of explaining why biofuels, certain supply shortages, etc, don't account for nearly all of the price increase, but I've heard that broken down elsewhere. I'll try to find a source.

Furthermore, large US investment banks have convinced sovereign wealth funds (think Saudi royal money type funds) to invest in US commodities markets in recent years.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/11/AR2008081102462.html
http://www.reuters.com/article/2009/02/24/us-commodities-sovereignwealth-idUSTRE51N28Z20090224

This is what these huge piles of money do to protect themselves. More recently, investors bought huge piles of Swiss Francs because it was the world's most stable currency. However, since such huge investment in the currency suddenly increased the value of the Franc, it caused Swiss exports to become more expensive. This started to destabilize their economy, as producers were having trouble keeping contracts with their buyers. So, the Swiss central bank started manipulating their currency value by offering to buy unlimited amounts of any foreign currency. They succeeded in dropping the Franc's value by around 10%. None of this activity had anything to do with supply or demand of Swiss goods...or goods anywhere for that matter. It was simply massive amounts of investment from a crowd mentality.

Same thing goes for the price of gold. It's just a giant hedge against inflation and/or price spikes in other markets...so you get these accumulations of money in "safe" areas, and that's how you get massive overvaluation of various goods and commodities (bubbles).

It's all due to the level of complexity. "Speculative activity" is a stabilizer when the number of speculators is low, but it has a destabilizing effect as the number of speculators increases.