Tuesday, May 20, 2008

Three Big Bubbles Will Burst: Part IV

Speculators and Politicians, a Tutorial: Who are the bad guys?

Many of you might guess the speculators. They are just working people like you, really. Ok, they’re gamblers, but instead of going to Atlantic City or Vegas, they trade stocks, commodities, and other things.

They serve a very useful purpose. Here I will just refer to commodities traders because they work with the bubbles I’ve been talking about. Whether they are on the trading floor, working for a bank or other company, or in a home office, they supply liquidity to the markets.

If only the producers and processing companies were the market there would not always be someone there to buy or sell, and someone would get hosed, usually the producer, farmer, etc.

Commodities’ trading unlike the stock market is a zero sum game. That means that for every buyer there has to be a seller. The combined contract is part of open interest. If open interest is high, there are a lot of buyers and sellers. If you want to buy a contract, say 5000 bushels of oats, someone has to think that the price is right to sell. Of course, you think it is too low. Someone’s going to win: someone is going to lose. If enough traders are in the show gambling, when any time a producer needs to sell, or a processor needs to buy, there is a liquid market to do so. This keeps prices from fluctuating wildly.

Contracts can be traded far into the future, hence the name, “Futures Market”. Southwest Airlines has remained profitable because they bought fuel far into the future and is just now hitting the high priced spot market.

Traders have been known to reap vast fortunes if their timing was right, and many have lost everything. The suicide rate is a little above average is this wild arena. It is not for the faint of heart.

You have heard me refer to the “Last fool Theory”. When the Last fool has purchased the highest priced item, the market will collapse. This happens, especially in manipulated markets. However, it usually happens when the general public or trading funds, such as retirement plans, are sold a bill of goods, or just get the “bug” and go nuts. Classically the Pork Belly Market is so thin it is manipulated all of the time. In 1981 the silver market had its turn. Sometime I’ll talk about that because even if you think you know what happened, you are probably wrong.

Right now, there is Euro, oil and gas “fever”. The fundamentals just do not justify the prices for these commodities. A day of reckoning will arrive, probably sooner than later. The last fools in will get killed.

Politicians: they are the ones to watch. Their only interest is getting elected, staying in power, and controlling our lives. If they can sell you a plan of “controlling” the markets to do that, they will. Any attempt to do it, will end in disaster, guaranteed, or… worse, an end to freedom.

The best example is communism, sounds good, and doesn’t work. It’s that simple. Yet, liberals, be they Democrats or Republicans, are the culprits in this activity. Richard Nixon was a liberal economically, putting price controls on that ended in total failure and market dislocation was the prime example. Every Democrat running for and getting elected to national office in the past 30 years did their share or at least attempted it.

I live in the Socialist State of Maryland, where they never cease to try to regulate business and our lives in general. They have driven major corporations out of the state regularly for the past 30 years.

Free markets work. It isn’t always nice, and it isn’t always pain free, but that is life. In the end, we survive and we keep our freedom. What more can you ask? Hundreds of thousands of our people have died preserving that and I hope we don’t piss it away.

Who are the bad guys? You tell me. My money is always on the politicians. The general public usually votes their wallets and perceptions, not their brains. As I have always said, the general public is almost always wrong. If you doubt that, look at our choices for president this year.

Be prepared,

The Hammer

Copyright Crickard Publishing 2008. All rights Reserved


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