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    what are you gonna do, a resurrection?..., 2008-06-23 05:07:05 | Main | totally dhimmitudinal..., 2008-06-25 06:38:21

    speculation:

    I thought I'd try to figure out just what the fuck a futures market is, so I can the more enjoy long stupid arguments about whether the rise in commodities prices is the nefarious work of speculators, or a more mundane price response to rising demand and inelastic supply. Far as I can figure, the story goes like this:

    George the Oilman sells a contract for the future delivery of a barrel of oil to Clyde the Commodities Trader, of Eats Young Lambs & Partners. George likes this because the price of oil is volatile, and if you're in the drilling business it's best to have some idea of whether you'll be in the black at the end of the year. George wants to finance a deep water drilling rig his conservatives friends insist are just floating around in marinas, waiting to be bought up on a low introductory rate APR. He's just seeking price stability so he can stick to the business plan. Good for George.

    Clyde on the other hand is just seeking a quick buck. He's not like Rick, who is a refinery operator. Rick runs Magic Consumer Goo Inc., and is shopping to buy futures contracts so that he, too, knows down the road how much he's going to pay for the barrel of oil he pours into his Magic Consumer Goo Producer. Normally, the volatility of commodities is enough to keep most people like Clyde away from the slips of paper George is selling and Rick is buying. Up today, down tomorrow. A 30 year long bear market. Times had been hard on guys like Clyde.

    But something has changed and now Clyde is selling his slips of paper to Joyce, of Bigass Wallstreet Institutional Fund. And Joyce of BWIF is selling to Dick of Raping American Butt Fund. And Dick of RAB is surrounded by other Dicks of every kind and sort, who sell their slips of paper back and forth, and pretty soon it's like they're at the water park, all riding the same fat wave of Fun for Everybody at the Waterpark. Clyde is having more fun than anybody. Good for Clyde.

    Joyce and Dick and all the little Dicks were all afraid of the falling dollar, real estate backed mortgages, the recession, and the imminent collapse of tulips. While it's always speculative to speculate about the motives of speculators, let's say that Joyce and Dick got the idea it'd be better to save their piles of money in the form of George and Clyde's little slips of paper instead of other financial instruments, because at least they'd own the exchange traded derivative equivalent of Something That Really Exists and People Really Need. Now speculate that Joyce and Dick and all the other little Dicks had a really Big Pile of Money, and that their Big Pile of Money was some multiplier of the combined worth of George and Clyde and Ricks' little slips of paper, which they buy and sell amongst themselves before passing the realized futures contract on to the refinery, after which the slips of paper George sold to Clyde for $32 are costing Slick $140 a mere 8 years later.

    That seems to be the gist of the story here, and if only Jimmy Jackboots comes in and waves his mean stick around at Joyce and Dick and all the little Dicks, they'll take their Big Pile of Money and go home, and gas will be $2 again, because the rising costs of discovering, drilling (or mining and producing) then shipping the fulfillment of these futures contracts are figments of our collective imagination, as must be the not-insignificant possibility - people at one or the other end of the water park like to make great hay dickering about whose numbers you can believe - of demand oustripping supply.

    I can see how a Big Pile of Money demanding ever more commodity contract derivatives as a hedge against Everything Else might pile onto something like oil and double prices in the space of one year. I don't know how they'd do it without ending up with some inventory somewhere bound for nowhere, but if such a Big Pile of Money really exists, it might be more economically fruitful to just bury it under a windmill than leave it out in the markets, drifting from one asset bubble to the next.


:: posted by buermann @ 2008-06-23 18:43:13 CST | link





    go ahead, express that vague notion
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