About that commodities bubble…

Two weeks ago I regretted, with some relief actually, that my earlier predictions about a bubble in commodities derivatives seemed to have been inaccurate. More to the point, the oil price collapse triggered by the Saudis had not led to a broader avalanche in other commodity prices or the failure of any big hedge funds.

I may have jumped the gun.

Collapsing oil prices may be starting to kick off just the kind of broader financial crisis that I had worried about. The first evidence is beginning to show up in prices of food, aluminum, copper and other goods. This could get ugly, but it might yet fizzle out.

The problem has been evident for a long time. Commodities prices have been on a steady upward swing since we expanded speculators’ access to the market fifteen years ago. This inflation has happened in spite of steadily rising surpluses and modest demand in almost all of these commodity categories. As I wrote three and half years ago:

We aren’t talking about our supply problem because our economic reasoning says that it must not exist.  But we have an oil glut, just like we did the last time prices spiked in 2008.  So if the world has more oil than it can burn, why are prices so high?  You could have asked that same question in 2008, and you could ask it about any number of commodities that were bubbling then from iron to houses.  The answer then is the answer now.

The gist of the original argument was that efforts to open up commodities markets to broader participation by speculators had created some perverse effects. Basically, it had tamped down the notorious beta of those markets (the vast, rapid value swings), but in the process had created extraordinary risk.

Sloppy efforts at deregulation in 2000, and again across the Bush years, had made the markets more accessible to institutional traders and derivatives speculation. This had, as predicted, flattened out some of the previously troublesome unpredictability of those markets.

The problem was that the new structure of those markets created an inflationary bias. Big institutional traders don’t have the freedom to take heavy short-bets. They had a bias toward long trades that prop up asset prices long past the point when the market fundamentals have shifted away from them.

My argument, basically, was that 20th century regulators were right. Commodities markets are too inherently volatile to be opened up to speculation by day traders, pensions, banks, and sovereign wealth funds. If they are going to participate, they should not be publically insured and they should have no access to derivatives.

When combined with the rise of derivatives, CDO’s, CDS’s and other largely unregulated forms of investment insurance, commodities deregulation created three conditions:

1) A market that can’t react quickly to changes in supply and demand, which means prices tend to balloon long after real value has disappeared.

2) Forms of leverage that create no economic value while exponentially magnifying the cost of a bad trade.

3) Publicly insured institutions participating both in inflated commodities markets and hyper-dangerous derivatives trades based on those markets.

Once again, just like the last decade, we’re left with financial institutions critical to the survival of global capitalism risking their solvency on trades they don’t understand based on commodities they don’t intend to use. At least this time the exposure is slightly smaller. Nearly every American family was affected by home prices and the mortgage market. This crisis is modestly more limited in scope.

If my predictions were right then the collapse of one broadly owned commodity should create losses that force investors to sell off others as well, without any connection to a broader economic change. That’s pretty clearly happening as every commodity, even food, has started a decline.

The next step should be a collection of moderate to large hedge funds collapsing under their investment losses. That hasn’t happened yet. If we don’t see some headline-grabbing fund failures by about the end of February then this whole mess may prove to be relatively localized and I may be wrong.

Even if broader institutional failures materialize, a few firewalls might hold. For the theory to hold, then the failure of a few hedge funds should be followed by the failure of one or two major financial institutions. Their collapse should be due to the size of their CDO obligations against failed commodities bets. Again, if these institutions have figured out how to manage and regulate their derivatives trading better than they did in the last decade then I was wrong and this might not materialize. Maybe they will just experience a couple of bad quarters before stabilizing.

If commodities derivatives create yet another economic crisis, then we deserve it. We had every opportunity to shut down the perfectly pointless though lucrative speculation that created the last crash. Blame Wall Street all you want, but they don’t make the laws. Merrill Lynch doesn’t cast a single vote.

By the way, the budget bill passed by Congress last week contained a minor provision, pointed out by Senator Warren, which strips the Dodd-Frank financial regulations of just about the only meaningful provision it contained. Once the law takes effect then publicly insured banks can resume derivatives trading on their own books. America, you’re welcome.

Chris Ladd is a Texan living in the Chicago area. He has been involved in grassroots Republican politics for most of his life. He was a Republican precinct committeeman in suburban Chicago until he resigned from the party and his position after the 2016 Republican Convention. He can be reached at gopliferchicago at gmail dot com.

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96 comments on “About that commodities bubble…
  1. johngalt says:

    I’m curious what people think about normalizing relations with Cuba. My own view is that it is long overdue. The standard argument is that the embargo keeps economic pressure on the Castros to open up, and while that seems to have had an impact in Iran, it has abjectly failed in Cuba to do anything other than impoverish the Cuban people. We have normal economic and diplomatic relationships with plenty of totalitarian countries – China comes to mind – so I’m not sure why a country as close to the U.S. as Cuba should be singled out for such drastic measures.

    • kabuzz61 says:

      It’s a mixed bag for me. I remember the Castro take over vaguely but really the Cuban Missile Crisis. Both long forgotten. I haven’t a problem really with the deal.

      I however do have a problem with how it was done. At this point I don’t know if he sought the views of leadership in the congress but I doubt it.

      Politically for the dem’s they lost Florida in 2016. Little Havana isn’t going to get over this one easily.

      • flypusher says:

        The Dems can win in ’16 without FL.

      • johngalt says:

        You might be right about Florida, but this is not a complete opening, which would require Congressional action, but just a diplomatic thaw and relieves some restrictions on travel and spending money there. The anger from some in Little Havana is irrational but the fact that it makes no sense won’t change what they do in the voting booth.

      • kabuzz61 says:

        Cuban’s are a very passionate and political people. Fly, generationally it may be forgotten but not for a couple decades at least. They felt personally or knows someone who felt the sting of Castro.

      • Turtles Run says:

        Older Cubans are not happy but the younger the Cuban demographic gets the more popular the President’s move is. Obama may have lost Florida but n the long run he has sealed the Cuban vote especially if the Congress chooses to fight him.

      • dowripple says:

        Does “older Cubans” mean “rich Cubans”? Or do they just long for the golden Batista/Mafia years?

      • flypusher says:

        Dow, I never felt much sympathy for the Cuban exiles who were Batista’s people. Their master was just as much of a scumbag as Castro.

      • Turtles Run says:

        Dow – Remember. When the Bay of Pigs occurred the Cuban people had a choice to fight for Batista or Castro. They chose Castro. That should tell you how bad Batista was.

      • BigWilly says:

        Cuba was not singled out, Fidel Castro was. I have to hand to him, while most of his peers were whacked by CIA operatives, he’s managed to live to a great age.

        Bubbles? Hurricanes! I’ve just finished patching up my boat, and returned to my trade as a fisherman, and bam another hurricane. They’re getting worse at the same time. More frequent and more severe.

        How can I plan for the future, or live well in the present if, I am continually subjected to financial hurricanes.

        Sen. Warren is the HoDean of the moment. I can’t say I care too much for her style of politics. Please, no more consciousness splitting campaigns.

      • dowripple says:

        Oh, I get it. Batista was also backed by the US government (up until the end), who’s aid-of-choice was weapons/military equipment. That was a not-so-subtle attempt to show the irony of the “we can’t deal with Cuba because of human rights” argument. (Which, nobody on here seems to espouse, but it is a common one over on the Chron).

      • Turtles Run says:

        Dow – I would simply argue that the embargo has done nothing to change the regime in Cuba. It is a waste of time and a dead issue. Younger Cubans do not care about Batista or Castro. They simply want to open up trade and travel. Older Cubans are living in the past, they are not getting their wealth back so they need to move on.

      • dowripple says:

        Yes, I agree it’s a good thing. I won’t be visiting or smoking Cohibas, but I certainly don’t want to restrict the freedom of others.

      • flypusher says:

        I remember the heated debate over giving China the “most favored nation” trading status. One of the big arguments in favor was the notion that trade was one way for the US to “influence” China for the better. So if we can so influence such a huge nation so far away with some big cultural differences, influencing a much smaller nation only 90 miles away with some common history/culture should be a piece o’ cake.

      • kabuzz61 says:

        Actually I mentioned the human rights angle.

        Turtles, your argument isn’t valid. By your thought process, blacks in this country shoudn’t even give voting rights a thought since they are now two or three generations removed.

        Families hand down their stories and it certainly doesn’t help that a Castro is still in power.

      • dowripple says:

        If the ultimate goal was championing human rights, then we should have just made Cuba a state after the Spanish-American war. 🙂

      • Turtles Run says:

        Buzzy – Last week you were defending torture, now this week it is bad. As a nation we lost the moral high ground on human rights. You and the rest of the right wing pi$$ed away that argument.

        Why is it OK when we support right wing dictatorships in Central America with human rights violation many times worse than Castro. How about all the other dictatorships we support around the world. Why is Cuba so special?

      • kabuzz61 says:

        Turtles, only in your self loathing, american hating mind could that be true. We are so great a nation, million, literally want to come here every year. You pool this ‘holier then thou’ bullshit out of your ass and call it fact.

        I hope others see your anti american bias.

      • flypusher says:

        What we actually see buzzy, is your jingoistic myopia. The fact that other places are so bad that people flee here does NOT rebut the fact that the US has supported some very unsavory characters because they agreed to kill the Commies/ keep the oil flowing/ give Dole Inc a good deal on bananas, etc. it does does rebut the fact that we did torture people, some of them innocent of being terrorists. Justified criticism is the exact opposite of hating America – it’s wanting America to do better and actually operate by what are supposed to be its values.

      • Turtles Run says:

        Buzzy – You are right. What the heck is wrong with me believing that our nation is better than torturing people, supporting dictatorships, and should try to create an environment where all have a realistic chance to better themselves. Obviously, I hate America for believing in these things.

        Better yet maybe I am just foolish enough to believe that we should strive to live by the ideals we supposedly stand for. I pray I never love this country like you do.

      • CaptSternn says:

        We have supported dictators in the past and even in the present if it is our best interests. There was no torture, but I see the left still believes in guilty until proven innocent beyond a shadow of a doubt. Sometimes not even that is enough.

    • flypusher says:

      100% agree. Once the Cold War was over and the US lifted trade restrictions on China, there was no rationale left other than appeasing certain political blocs in FL and saying FU to Castro. But the irony about the latter is that the embargo probably helped Castro, as he made a lot of political hay over it’s-us-against-the-big-bad-USA.

    • Crogged says:

      About time and the impact in Presidential election years will be a wash- older Cubans maintain a hard line and the younger ones don’t (a familiar divide….).

      Embargo’s only work if all (major) economic parties involved participate-our Canadian friend below can hop a flight to Cuba when he wants. Russia (and Iran) are feeling economic pains because Western Europe has joined us in sanctions.

    • johngalt says:

      According to this article, opinions about the embargo are changing amongst Cuban-Americans in Miami, with a marked decrease in support for it (though there remain a lot who do support it, but it’s closer to 50-50 now).


    • Bobo Amerigo says:

      I feel that policy toward Cuba has been held hostage by a very few Cuban-Americans for decades, playing right into this country’s HUGE fear of communism.

      I heard President Obama just say that when policy has no impact for 50 years, it’s time to try something else. Yes.

      The US automotive industry is reported to be looking at Cuba with lust in his cashier register. I hope Cubans don’t abandon their old cars. I’d visit there just to see them.

      I also heard today that our relationships with south American countries may become more productive because they never really understood our harsh, vengeful approach to Cuba.

      It’s all good.

      • flypusher says:

        When Cuba was effectively a Soviet base, the embargo made sense. If it’s purpose was to get rid of Castro, it couldn’t have failed worse.

      • bubbabobcat says:

        And for your information Cappy, I was stationed in West Germany in the late 80’s near the Fulda Gap guarding in wait against “the invading Commie hordes” at the perceived likeliest assault entry point.

      • bubbabobcat says:

        Sorry this was meant to be posted in the chain below.

      • CaptSternn says:

        Interesting, Bubba. I was there in the middle 1980’s. I watched the shuttle blow up in our break room, we all watched the winds when Chernobyl went off, we had bombs planted in our snack bars (on the base), and we had armed Germans breaching our walls after the bombing of Libya. My roommate got a medal for stopping one of them with an unloaded M-16. They didn’t give us ammunition, but you should already know all that.

        So, having lived through all that, how could you have forgotten it?

        FYI, Ray Barracks in Friedberg, where Elvis was stationed. And then Turley Barracks Mannheim. I liked Friedberg better. They took us to the border and we got to stand on the line where freedom ended. I had an easy MOS, 64C. Where were you stationed and what was you MOS?

      • Bobo Amerigo says:

        The shuttle did not blow up. It fell apart. There’s a significant difference.

      • CaptSternn says:

        “The external tank then collapsed, releasing the hydrogen and oxygen which spontaneously ignited, creating a massive fireball and cloud of water vapor that enveloped the entire stack.”

        That describes an explosion. Granted, the shuttle itself did not explode, if you want to be really technical.

        Thing is, I remember being in the break room and watching it. I remember seeing it happen and telling my fellow troops that “it just blew up”. They were going on and on about how beautiful it all was while I went to the back of the room and sat down on the floor. Then the TV announced the “major malfunction”.

        Yeah, major malfunction. They all shut up at that point.

        I also remember the 1993 Columbia disaster and where I was, and watching the second plane hit the WTC tower on TV before I left for work.

        I don’t remember the JFK assassination as I was not even born at that time. So there is that.

      • bubbabobcat says:

        Cappy, I was in communications 36L stationed on a remote hilltop providing 24X7 communications (ha, if the Russians only knew) for the infantry units arrayed around the area. The closest American base was Harvey Barracks, a small outpost in Kitzingen about 30 miles away where we resupplied from. The major base another 30 miles away (I think) is Leighton Barracks in Wuerzburg where the 3rd Infantry Division was HQ’ed.

        My parent unit ( which was part of the 93rd Signal Brigade) was headquartered in Heilbronn about 150 miles to the south. When I first arrived in country, I stayed in HQ for a month until I got my assignment. I had to do a 2 week tour of ERF (Emergency Reaction Force) duty and live in the attic of one of the barracks building isolated from everyone else except to eat in the mess hall and to “patrol the base” for show as you noted without real ammo. I mention it because it was right after we raided Libya and we were on high alert for any retaliatory strikes. But we had no formal police or counterterrorism training. Just what every soldier learned in Basic Training. We were told to assist the MP’s with searching vehicles and the real base guardians had to tell us to cut our walkie talkies (after we had already used them) in case they might trigger a remotely detonated car bomb. As I noted, we were a clueless dog and pony show and were more of a hindrance than help to the real security teams (MP’s).

        I was not aware of any terrorist attacks on any American base in Germany. Just the Labelle disco bombing which killed a serviceman and a Turkish woman and was the justification for the bombing raid on Libya. The biggest pain back then were left wing German radicals (Red Army, Baader Meinhof Gang) who pretty much left the Americans alone and protesters who were opposed to US nuclear Pershing II missiles on their soil but they were pretty harmless and mostly got water cannoned by the local Poleizei to disperse them.

      • CaptSternn says:

        That’s pretty cool, Bubba. My dad was in the Air Force during the Vietnam War, stationed in Italy. His job was to intercept Morse code coming from the enemy. If they only knew.

        64C was transportation, truck drivers. Started out in 2nd Trans with the M-911 tank haulers, later transferred to 41st Trans with 5 ton cargo trucks. I liked to drive. Got away from it for a while, but now with my lady we take lots of road trips seeing Texas through the back roads.

        Yes, there were some bombs planted in snack bars on the bases. One went off just down the road from my barracks. A week later one was discovered in the microwave in our own snack bar, and that was just minutes after I walked out. Thankfully it didn’t go off. Turns out it was an inside job, a soldier working with some organization. Never got all the details, we weren’t ever well informed about anything.

        And for me, that was the strangest part, being cut off from The World. I didn’t even know it until I got back to The World. I was flooded with music, songs, movies and news that were all new to me and everybody else shrugged off as being old news, popular a long time ago and now just collecting dust. Even as much as ten years after I got back it would happen, I would stumble across something I had missed.

        I hope you weren’t so isolated you never got to see Germany. Cool place to visit.

      • bubbabobcat says:

        Yup nothing like driving an Army 5 ton or deuce and a half (2.5 ton) truck through the German woods in the middle of a typical German winter during field exercises. Or living in the woods in a tent for 30 straight days in January even though your comfy home and nice warm bed was less than a half mile away. But that’s what I signed up for (and I voluntarily requested a transfer to Germany) so I can whine about it fondly almost 30 years later. I put in for a second consecutive overseas post because I knew I wasn’t going to be an Army lifer and I wanted to see as much of the world in 4 years. I traveled a lot because you can drive almost anywhere in (western) Europe and fast so short unplanned trips were easy. We would just drive aimlessly to check out a new small town and try their beer. Every town no matter how small made their own and they were all pretty universally good. Germany got me hooked on the wonders of trying microbreweries which I still enjoy today. Just found Twisted X brewery in Dripping Springs last week (between San Antonio and Austin, http://www.texmexbeer.com) on a trip in the area for a funeral. I was hooked on their Jalapeno Pilsner and my wife likes hoppy brews and was hooked on the Chupahopra. Catchy name too.

    • bubbabobcat says:

      Nothing but positives that will achieve our ultimate goal that 50 years of Cold War cloak and dagger has not. Unless of course you’re an inveterate Obama hater. Yes I’m talking about you buzzy. At least even Cappy is looking at this objectively.

      “Without the U.S. to blame, the shortcomings of the Cuban government will be much more transparent. The Cuban government will no longer be able to blame the United States for the obstacles that entrepreneurs face. The government will have to be able to explain why it’s so hard to get a loan from a bank, get a cellphone, get access to broadband.

      That’s going to be revealed for what it is. This thing is going to cause rising expectations both outside and inside of Cuba.”


      Reagan (incorrectly) gets credited for the fall of Communism in Germany because he has a good speechwriter. Yet Obama implements the same global political game changer so close to home, and nothing but nattering negativity form nabobs like kabuzz. With apologies to ole Spiro.

      Yes buzzy, you are now even at odds with the Pope who was instrumental in this deal and policy change.

      • CaptSternn says:

        It wasn’t the fall of communism in East Germany, it was the fall of the USSR. It didn’t happen because of a speech, it happened because of our spending on defense, NASA and backing the fighters in Afghanistan. I am starting to wonder about your age, Bubba. It seems you are too young to have lived through those times because you don’t seem to have any memory of them.

      • bubbabobcat says:

        As always Cappy you can believe what you want with your myopic little narrative in your head.

        I have gone into extensive detail several times and won’t rehash it again. We have the visionary Mikhail Gorbachev for the fall of Communism in the USSR and Eastern Europe and indirectly the groundwork for the bastardized hybrid capitalistic Communism in China and Vietnam and soon to be Cuba.

        Reagan would have started a nuclear WWIII with his idiotic and wasteful arms race that would have bankrupted us if he hadn’t acted like a typical hypocrite and put us in the biggest budget deficit the US had up to that point. Luckily Gorbachev was the adult in the room and lacked the hubris and insecure arrogance to go tit for tat with Reagan or just push the big button like any previous Soviet leader would have done when backed into a corner. With the exception of Khruschev apparently.

      • CaptSternn says:

        That’s the point, Reagan’s policies, along with cooperation from congress, drove up our debt and pretty much bankrupted the USSR because they were trying to keep up (and their mess in Afghanistan, maybe you should do some research about why Afghanistan is a very bad place for invaders). The USSR was pushed to the very brink, just needed one little tipping point, one tiny little push to go over.

        That tipping point came from Guenter Schabowski and a simple mistake he made about travel restrictions and regulations. It was like punching a tiny hole in a dam that was on the verge of catastrophic failure.

        That’s one thing about these neo-conservatives, they are very good about foreign policy and actions outside the U.S., but they are on the left when it comes to domestic policy. Well, most of the time on foreign policy. Bush43 threatened to veto a bill from congress on Cuba, and that killed it before it ever went to a vote.

      • bubbabobcat says:

        Thank you for willfully missing my point again Cappy. And Reagan was the accidental Forrest Gumpesque participant in the history. There was no concerted and orchestrated gameplan to bankrupt the Soviets and even if there were, that is quite the statesman to risk nuclear war and annihilation just to “win the game”. Reagan was no visionary but a clueless frontman stuck in the tired old failed Cold War machinations, oops I meant “tactics” from the 50’s.

      • bubbabobcat says:

        And Cappy thanks for demonstrating your fluctuating standards and ethics. Re: hypocrisy by any other name. It’s ok for the old White guy with an R by his name to spend like a drunken sailor with our taxpayer money but don’t EVER let the Black guy do that. It’s unamerican!

      • CaptSternn says:

        Well, Obama did say that debt and deficits are unpatriotic. Or was he saying Bish43 wasn’t having big enough deficits or creating enough debt?

        And I didn’t really like Reagan very much. Gets back to my comment about the neo-conservatives, pretty good foreign policy but leftist domestic views and policies.

    • CaptSternn says:

      This is crazy, but here I am agreeing almost completely with John and Fly. The embargo was all about the Cold War with the USSR, not so much about communism in Cuba, human rights in Cuba. Pretty much none of the rest of the world shuts Cuba out, if any other nations do, I am not sure, so the embargo isn’t causing the human rights problems. That is all about communism.

      The embargo should have ended with the fall of the USSR People from both sides of the aisle in congress have been suggesting it for a long time, and presidents shut it down by threatening a veto. Not saying congress will act on the embargo now, but I hope they do. Obama is still going about things the wrong way, as if he believes he is king. But hey, even a broken clock is right twice a day, or maybe just once if we go by military time.

      Now, if trade does get opened up, just think about all those old classic cars in Cuba. Collectors would be grabbing them up as fast as they could get boat loads of money there.

  2. Dan Cortes says:

    “Merrill Lynch doesn’t cast a single vote.”

    You’re right, but not in the way you meant. I would venture to say Merrill Lynch et al. cast quite a few votes through the influence and access their money buys them.

    • Cpl. Cam says:

      ” Blame WallStreet allyou want, but theydon’t make the laws. MerrillLynch doesn’t cast a single vote.”

      Merrill Lynch may not get a vote but I’ve heard Citibank wrote the budget rider repealing part of Dodd-Frank that you deride in the next paragraph…

  3. RobA says:

    That’s a great summary. I’ve got a pretty good understanding of CDO’s and CDD’s as it relates to the mortgage collapse due to books like The Big Short, but not too familiar with the commodities market.

    I’m not so sure I would agree that the end game wpuld be a bad thing (“hundreds of thousands of jobs lot”). There may very well be, but that could be offset by many more jobs created as a mini manufacturing boom gets created by sustained access to cheap energy.

    Certain countries are probably having trouble sleeping lately (namely Russia, but also some of the other petrostates that rely on oil revenues such as Nigeria or Venezuela) but I think on the aggregate, lower oIL prices will help America far, far more then it will hurt.

    • johngalt says:

      Exactly. And I don’t for an instant think that lower oil prices right now are an accident. Between our spike in production and Saudi Arabia keeping the foot on the gas (so to speak), I think there is some collusion to drive oil prices down for the express purpose of keeping the pressure on Russia and Iran. Venezuela was screwed even before the prices tanked, and the prospect of normalization with Cuba will marginalize the Maduro regime even further. He won’t last to the end of 2015.

  4. lomamonster says:

    Chris, you might already know this, but it is instructive to peruse the S&P 500 2014 list of Aristocrat stocks and then ask yourself why anything else that you own is not on this list and whether it is an acceptable risk to keep those particular stocks.

  5. bubbabobcat says:

    Sorry to go off topic. Derivatives are way too arcane for my basic understanding of elaborate legalized Ponzi schemes.

    More proof supply side economics, Reaganomics, AynRandynomics or whatever wingnuts like to do to consolidate money amongst the 1%’ers are totally wrong. Again.

    And more empirical proof to support Chris’s minimum income capitalist economic model.

    Countries with high taxes AND an extensive safety net (“free gub’ment giveaways with MY money!”) have the highest employment rates.

    USA dragging in the back of the pack for both.


    • RobA says:

      Well, as a citizen of a country with high taxes and a wide safety net (Canada) thats also lived in America for a few years, I can tell you I far prefer it here.

      After you guys pay for your health insurance, you end up spending more then we do. But your fear of “the T word” helps you sleep easier. As long as it’s not CALLED taxes, you’re fine. But make no mistake, your paying it regardless. Unless you choose to go without health insurance, and really that’s no way to live a civilized life, being one major illness away from destroying everything you’ve worked to build in your life.

      The NYT just recently reported that Canada has just bumped off America from the wealthiest middle class.


      The thing is, when a governet providing things like health care or large safety nets, it’s not an expense, it’s an investment. It comes back more then it costs. Things that are anathema to many repubs (I.e. raising the minimum wage) are necessary to help slow down income inequality. Our lowest provincial wage is about $11/hr. You guys are so worried about giving out “handouts” you’re cutting your nose off to spite your face. A society is only as wealthy ad it’s poorest people.

      • kabuzz61 says:

        Please provide what percentage of your population is using your safety net.

      • Turtles Run says:

        Buzzy – I would say it is 100% because everyone is covered under universal health care.

      • CaptSternn says:

        We tend to value individual liberty and rights here. At least many of us do.

      • Turtles Run says:

        Like the right to not be able to afford health care. The right to die because you are poor. The right of insurance companies to deny your claims.

        Sternn’s favorites – the right to force others to subsidize your irresponsible behavior. The right to receive medical attention without realistically paying for it.

        Spoken like the tax cheat that he is.

      • kabuzz61 says:

        Some think they can just make up ‘right’ by pulling them out of their ass.

        In Canada, how much of the population is pulling the wagon and how much is in the wagon?

      • flypusher says:

        Tell me buzzy, do you even have a clue us to the %-age of the US population on welfare? How many people do you think are “riding in the wagon”?

      • CaptSternn says:

        No, Turtles, just the opposite. Those are the things you support through the PPACA, what others support and demand by calling for a “single payer” system. You are describing the way Canadians do things, “the right to force others to subsidize your irresponsible behavior. The right to receive medical attention without realistically paying for it.”

        And I have never even once cheated or even attempted to cheat on my taxes. But that’s all you ever have, just running around spouting lies about people and putting those lies in writing. Guess what you are doing …

        1. Law: a published false statement that is damaging to a person’s reputation; a written defamation.

        •the action or crime of publishing a false statement about a person.

        •a false and malicious statement about a person.

        •a thing or circumstance that brings undeserved discredit on a person by misrepresentation.

      • flypusher says:

        You are describing the way Canadians do things, “the right to force others to subsidize your irresponsible behavior. The right to receive medical attention without realistically paying for it.”

        Yes, how totally irresponsible of someone to have their appendix burst while they are unemployed in a down economy. How irresponsible to have your child diagnosed with leukemia.

      • CaptSternn says:

        Make you own choices, Fly, and allow others the same freedom. But that is what you hate and fear, freedom.

        Parents had the option of getting child coverage. The PPACA destroyed that option. Guess that also makes you happy.

      • flypusher says:

        Please enlighten us as to how “choices” would lead to a burst appendix or a child with cancer. Please explain how a parent could buy coverage for a child if all their income barely pays for the more immediate needs like food, rent, and utilities and they don’t get coverage through their employer. Or how someone with a pre-exsting condition would get coverage if they lost their job.

        That none of those bad things ever happened to YOU is not a valid answer.

      • johngalt says:

        “Parents had the option of getting child coverage. The PPACA destroyed that option.”


      • johngalt says:

        An article published four years ago before implementation of the PPACA is just slightly out of date. There exist today a variety of options for covering children only, starting with Medicaid and CHIP, the eligibility for which is based on income. For a family that makes too much to be eligible for these, I searched healthcare.gov and found 74 child-only plans available in Houston, with premiums starting at $94 for a seven year old non-smoker (they asked that question). Thus a four year old article does not appear to reflect current conditions.

    • RobA says:

      Note – when I say “you” or “youre” I’m not speaking about you directly or anything.

      Just using it as an all encompassing term for a large segment of the American public.

  6. kabuzz61 says:

    Talk about a kooky senator, Warren fits the bill. What a fake. I think her name is Big Chief Warren.

    Anyway, Dodd-Frank was a bad bill. I know we all agree on that. Start over and not over react because Dodd got his hand caught in the cookie jar.

    • johngalt says:

      “Big Chief Warren.” Wow, your witty repartee continues to impress.

    • RobA says:

      If I were American, Warren is the first politician I would have ever gone out and volunteer down at campaign HQ for.

      Even though I can’t vote, because of America’s economicn power and geographic proximity, what happens down there affects me directly. American economic policies probably affect me more then Canadian economic policies do.

      To that end, I can only hope Warren runs for Prez. She seems like the only one with the balls needed to stand up to the Wall Street moneyed interests.

    • bubbabobcat says:

      Buzzy adds nothing substantive but his usual partisan attacks (as he usually whines about them from the other side), but I have my misgivings about Warren as she is lauded as the current Progressive/Liberal poster child/standard bearer. I see some disconcerting doppelganger parallels to Cruz. Ideology and “principle purity” trumps cooperation, compromise, and action.

      We all would like to get exactly what we want or believe as the “right thing”. That’s not how our government works. That only works in a dictatorship. The more our leaders from both side realize that the more we can get done and the less paralyzing gridlock we get from our representative government.

  7. CaptSternn says:

    “Tell me I’m an idiot.”

    Ok, you’re an idiot. 🙂

    There is regulation, there is over-regulation and there is under-regulation, there is good forms of regulation and bad forms of regulation. The Dodd-Frank Act should be trashed and the Glass-Stegall Act should be reinstated. The Dodd-Frank mess was written by the same people that said nothing was wrong with the housing market or the mortgage and banking industries when Bush43 was calling for more regulation on those very things.

    But there is a big difference between the current issues and the previous housing bubble that started back in the 1990’s, as in right now the federal government is not pushing banks and mortgage companies to make bad loans to people that didn’t actually qualify the way Clinton did. Oh, wait, http://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html *sigh*

    I do agree with you in general. Bring back Glass-Stegall and no more bailouts for Wall Street. There should not have been any bailouts to begin with. That is capitalizing profit and socializing loss, not a good system and the economy is still struggling because of it, among other things.

    I am not complaining about the falling gas and diesel prices, but there are going to be a lot of layoffs soon because of the falling price of oil. That will be bad for the people losing their jobs, bad for the economy and bad for our national security. The silver lining is that we know we can produce if the demand exceeds supply in the future. A possible solution for that matter would be to allow U.S. oil companies to sell and export oil outside of our borders.

    Will be interesting to see what the incoming congress will do under republican control, hopefully under control of conservatives.

    • 1mime says:

      I totally agree with bringing back Glass-Stegall and no more bail outs for Wall Street. I still think derivatives need to be regulated and they should not be FDIC backed. Will we never learn? If we begin exporting oil outside our borders, there should be a concurrent commitment to invest in alternative energy. Besides the obvious benefit of long-term planning, our environment benefits and new jobs open up. One of the chief benefits of capitalism is empowerment of ideas. Why can’t the fossil fuel industry co-exist with investment in alternative energy? It doesn’t have to be one or the other.

      • CaptSternn says:

        Invest in all the alternative energy you want. Nobody should have any power to prevent you from doing so. Just don’t force me to do so. From my point of view it is not viable nor profitable. That is capitalism based on freedom. You will most likely lose money, but that is your business, not mine. And nobody should bail you out for making bad choices.

      • johngalt says:

        Yes, because computers, the internet, vaccines, satellite technology, cellular telephones, and a million other things just sprang to life, profitable from day one. No chance the government had anything to do with their success.

      • bubbabobcat says:

        And by your measure of “freedom” Cappy, you would be happily living in a cave.

      • CaptSternn says:

        No, John, businesses are not profitable from day one. I invested quite a bit into my web design business before it became profitable. The government didn’t help me out on that one, nor did it bail me out after the dot com crash.

        FYI, HTTP and WWW were not created by the government. But the government does have the power to grant patents.

      • Turtles Run says:

        The government also has the ability to invest in long term R&D. Because of the federal government we have those things John Galt mentioned and many more items we not enjoy.

        New technologies especially ones that take years even decades to develop most often rely on the one entity that can sustain such a long term goal and that is the federal government.

        You were not doing anything new or cutting edge.

      • CaptSternn says:

        Turtles, what I was doing in the 1990’s was new and cutting edge. Think of the internet as the interstate highway system, built for national defense but also profitable for private industry. The web as we know it was born in the early 1990’s.

      • johngalt says:

        Http was largely developed by Tim Berners-Lee in the 1980s, and later refined by working groups he assembled. During most of the 1980s, Berners-Lee worked for CERN, whose funding comes almost entirely from European governments. Berners-Lee has worked primarily in academia for most of his career.

        The first general purpose computer, ENIAC, was developed in academia (UPenn) and funded nearly entirely by the U.S. government.

        Various satellite technologies came nearly entirely from government-funded sources, with a scientific veneer on a military project. This includes the technologies that underlie cellular telephones.

        Despite the hysterical paranoia of the anti-vaxxers, you can’t make any money selling vaccines, the development of which is mostly government-funded. A&M just got an enormous grant (north of $1.5 billion) to develop better methodologies. The government even provides insurance for the makers against adverse events.

        Throughout history, public funds have sponsored the development of new technologies, new discoveries, that underlie some of the biggest advances in civilization. They have done so for myriad reasons, some noble, some paranoid, and some greedy, but the bottom line is that it has provided a source of funds for projects with long horizons that are difficult or impossible to fund through standard capital markets and we are better off for it. Providing tax incentives for alternative energy sources is well within this tradition.

      • Turtles Run says:

        The federal government also insures nuclear power plants with the Price–Anderson Nuclear Industries Indemnity Act. This act has survived SCOTUS challenges (so it is constitutional) and was renewed for an additional 20 years in 2005 by a GOP controlled Congress and signed by a GOP President.

        I have yet to hear Sternn complain about being forced to subsidize the commercial nuclear industry because there is no way private industry could possibly provide Nuclear power with out federal intervention and subsidies.

      • Houston-stay-at-Homer says:

        Look you communists, if people were meant to have vaccinations, the loving, invisible hand of the free market would make it so that people would pay a fair price for the vaccinations so that the pharmaceutical companies could make a fair profit to cover the cost of the vaccination and the 10 year development cycle for the drug.

        Plus, if the FDA wouldn’t get all up in everyone’s business, we could more quickly and less expensively get these drugs to market. We could expedite human testing (with the market determining how much to pay poor people to serve as guinea pigs for new drugs) without having to go through all the simulations and animal testing that slows down commerce.

        You damn, dirty commies just do not understand how much better the free market works when it comes to health related issues.

      • CaptSternn says:

        HT, I didn’t think you would be one to support requiring the HPV vaccine. Interesting.

      • bubbabobcat says:

        Yes Cappy, let’s not support ANYTHING that benefits us as a country, society or even each individual person. Like Ricky Perry surprisingly (or not) supporting the mandatory HPV only because his cronies were going to profit from it.

        We probably should not have mandated Cappy’s polio, mumps, measles, whooping cough, rubella, etc.

        Survival of the fittest (wingnut mantra) and Darwin’s Law and all.

      • bubbabobcat says:

        Mandated “vaccines”, that is.

      • CaptSternn says:

        So, Bubba, you are for mandatory vaccines or against them?

      • bubbabobcat says:

        If you can’t figure that out Cappy, that explains a lot.

      • CaptSternn says:

        Ok, so the HPV vaccine would prevent disease, including cancer, so you were for it. Got it.

      • bubbabobcat says:


      • CaptSternn says:

        Fair enough, Bubba. I agree with Obama’s position towards Cuba. He also did well in dealing with the pirates a few years ago.

  8. mary says:

    Wouldn’t you agree that even modest oversight of derivatives such as was just struck from Dodd Frank in the Cromnibus Budget is desirable? What have we learned as a Congress (and a nation of voters) if we position ourselves again for exploitation and bail outs? I’m with GOPlifer on this one, real estate is just as real as corn, oil, etc., with the big difference that it’s typically not as speculative. Real people got hurt and they may not recover in their lifetimes.

    Combine this with the bassackwards Cromnibus cut of 16% to alternative energy with a 20% boost in fosil fuel R&D allocations while stripping high speed rail funding and buying more planes than the Pentagon even asked for, why worry about derivatives? It’s the handlers, aka “Congress” I worry about. Yet, we vote for the people that vote for the laws that should be monitoring risky investments like derivatives. These are legitimate investment instruments but they should not have FDIC backing. Now they will. Again. Fool me once…..

    • Bobo Amerigo says:

      Mary, I agree with you about alternative energy.

      We’re stupid not to commit to non-polluting forms of energy. Carbon-based should be back up.

      In Houston, we’ve never met even minimal air cleanliness standards.

      Of course, the problem with diseases caused by air pollution is they take a long time to manifest in the body. Too bad they’re not more dramatic. They’d lead TV news every night.

  9. Crogged says:

    My knowledge here is anecdotal and observational-please feel free to rip me a new one when wrong.

    I think we need to distinguish between 2008 and now. The underlying assets in the bubbles of this writing are ‘real’, oil, copper and commodities remain real assets which will be responding to market forces. A derivative based on these assets and the organizations which trade in these assets is, for lack of a better term, “stronger” and done by firms which, in theory, should have better risk management. The natural ‘longs’ (commodity producers) and ‘shorts’ (commodity users), have been in the market much longer, as have the speculators.

    In 2008 the underlying asset was, bad mortgages. These bad mortgages were wrapped up in pretty syndicated packages by the institutions and given an implied credit rating based on the parent organization and bad homework by the credit rating organizations. So these ‘assets’ will never recover value, there was no real market in trading, but real risk in collateralizing the debt rating. An insurance company decided to speculate on credit derivatives-stupid-and took on that risk.

    But should yours and mine savings account (or insurers) be part of this package of what really takes pages and years to understand–hell no. The ‘speculators’-the ‘shadow bankers’ shouldn’t be socialized risk takers. It takes a minimum of five million in assets for an individual to even be part of a hedge fund-let those entities and other completely private organizations solely be the speculators and subject to rules of regulated exchanges. The exchange regulators need to be involved and always looking at the rules to avoid market manipulation via rules regarding how many contracts are held and by whom. Derivatives can and should be subject to reporting standards at least.

    I linked to this before. Also look up the Senate report on oil market speculation from 2009(?) ish.

    Click to access fcic_final_report_hennessey_holtz-eakin_thomas_dissent.pdf

    • Crogged says:

      Ooops, it was the CFTC report-been years since I’ve been in this……..

    • Crogged says:

      And a great discussion of commodity market issues here.


    • goplifer says:

      “The underlying assets in the bubbles of this writing are ‘real’, oil, copper and commodities remain real assets which will be responding to market forces”

      That’s a good observation and it should be true. Unfortunately, it should be just as true for mortgages as for corn. It isn’t and it wasn’t.

      That logic doesn’t hold because, thanks to deregulation, very few of the market participants are actually buying corn, or oil, or copper and so on. In other words, almost all of the market activity is based on derivatives, instruments derived from a specific contract for oil or copper, that does not involve the delivery to either the buyer or the seller of any oil or copper.

      In other words, it is exactly like the market for mortgages in the 2003-2008 period.

      It’s complicated, but the most lucrative of these derivative deals are only a few degrees separated from the original contract. That means that even though the buyers and sellers aren’t trading wheat, they need a steady supply of new wheat contracts to make the highest-margin deals. Again, very much like the mad rush to find new mortgage borrowers in the last decade.

      Since the prices are artificially inflated and there aren’t enough consumers demanding these commodities, that has led to a massive new industry stockpiling excess commodities, especially oil. Producers are getting a false signal and responding as you would expect.

      The spectacular oil terminals in Cushing, OK are a prime example. For more than a decade the price of oil has been set by a market based primarily on derivative transactions, not the actual purchase and consumption of oil. Meanwhile the supply of these commodities has been ballooning. Go back year by year for more than a decade and you one report after another about the glut in corn production, for example, while the skyrocketing price of corn was destabilizing Mexico in 2006-7.

      I need someone to show me what I’m missing here. Seriously, I have some financial exposures that worry me (not oil, just general market stuff). Give me some good news. Tell me I’m an idiot.

      • Crogged says:

        Let’s keep going with this, it will help me understand better-this is a huge and large issue which the normal guy should have a better grasp of what is occuring.

        The derivative speculator doesn’t need ‘up’, they take ‘different’ and all because the natural person in the exchange market doesn’t want the price risk. The market for derivatives is the price set in the exchanges, so the price of oil is still determined by the exchanges, the derivative follows the exchange. Am I missing something?

        Right now there are some people with spectacular derivative profits from the decline in prices.

      • goplifer says:

        “the derivative follows the exchange. Am I missing something?”

        Yes. Maybe. Probably.

        These deals are very complex, they take numerous different forms and it is difficult to summarize them. The key problem with this market is the way that derivatives have been able to influence the prices on the exchanges.

        A derivative can be like a Casino bet. You and I agree to bet on the price of oil next February 1st, with some dollar amount attached. Thanks to deregulation, that bet is actually possible on derivatives markets, but it’s not all that lucrative. Before describing what the truly lucrative deals look like, let’s review that the market looked like before the CFMA in 2000:

        GasCo buys a contract from OilCo for a specific amount of crude oil, delivered next June, and agrees to pay $90 per barrel on the delivery date. HedgeCo, a speculator, is also buying contracts for oil delivery, but only with the intention of reselling them to potential buyers (usually consumers) of oil later on for a speculative profit. HedgeCo must maintain the capability of receiving oil in order to qualify to participate in the market (it buys this capability for a fee), but will dump contracts prior to delivery.

        Prior to the CFMA in 2000 that was the shape of the commodities derivatives market. It was an insiders’ market consisting mostly of people who were purchasing commodities, with a modest supply of speculators. Speculation was limited by regulations and the requirement that I be capable of taking delivery.

        Now it is possible to trade in derivatives using enforceable contracts, on the formal exchanges, without any capacity to receive delivery. Also, the Act prohibited agencies from regulating derivatives built on those contracts either as securities or as insurance. In other words, they were exempted from ALL existing regulatory schemes.

        After CFMA and certain further liberalizations under the Bush Admin, new parties could enter these transactions using the new financial weapons of mass destruction, CDO’s, CDS’s and other exotic instruments.

        In order to avoid insurance regulations and still buy a hedge, I could buy insurance for my oil contract in the form of a derivative contract like a swap. A speculator would agree to take on my obligation to pay for delivery of oil next June at $90 a barrel if the price ends up being higher or lower by a certain amount (maybe $85-95). I might only pay 1% of the contract price as a fee for the swap if people generally expect that prices will remain stable.

        The company taking on my obligation gets free money so long as nothing bad happens. That company can then bundle a collection of these underlying contracts, rated for risk, and resell them as a hedge against the (seemingly) small risk they took on. Someone else might insure that asset, and so on. Very simplified, but there you go.

        Unless something goes wonky, there’s free money going around in exchange for what should be a small, carefully hedged risk.

        If something does go wrong, beyond a certain threshold, things can get messy. Since this market is unregulated, there are no reserve requirements. I may or may not maintain enough assets to cover all my potential exposures. And since these contracts are very opaque, no one in my accounting department actually knows their book value and potential liability.

        Worse, these derivatives can pile up on each other until a failure that would cost the original insurer $10 could amount to hundreds of dollars of total exposure to everyone all up and down the chain.

        But we still haven’t touched the underlying asset price. Here’s where it gets interesting.

        The fattest margin in this environment comes from the first layer of derivatives removed from the subject contract. Just as in the mortgage bubble, there was far more money to be made in derivatives by generating more and more of the underlying contracts.

        Also thanks to the CFMA, lots more people can now purchase the original contracts. I do not have to be capable of taking delivery in order to buy the contracts. So they do. The same companies selling derivatives may start buying the contracts, or encouraging others to do so, in order to have a steady supply. Thus the money being made on derivatives contracts starts seeping into the underlying market, artificially pushing up prices.

        What happens when a company who started buying these contracts to build derivatives on them can’t sell their commodity at the price they want? They either eat their loss by dumping the contract, or roll it over, storing the commodity for a fee. The incidence of this practice has been climbing for years, fueling a massive new industry in asset storage, particularly for oil. As the cost of storage as declined, the penalty for failing to find oil buyers has declined with it. And the party has continued.

        Still, as long as prices gradually tick up and there’s reasonable (though perhaps declining) demand for the underlying product, it’s possible to liquidate this excess supply without too much damage. Shit hits the fan when some external event topples the Jenga, like the Saudis deciding they want to shut down competition by undercutting oil prices. When the buyers who had been helping you draw down your surpluses at the facility in Cushing can now get oil for $50 a barrel, the game ends.

        Who’s buying, selling and financing this Ponzi scheme? Most of the money comes from Ivy League kids in their twenties manning trading desks at major financial institutions with a raging hard on for fast money. What happens to them when the whole thing crashes? They take the millions they made and go somewhere else. That’s it. A no-consequences hook up. Fraud from top to bottom and no crime committed.

        What about the companies that crash from this fraud? Some may be bailed out. Others will fail. Who cares? If you are making $2m a year on these contracts, does it really matter to you that the bank might fail next year? Who cares?

        What value was created by this activity? None. It drove up the prices of critical commodities for years, then engineered a spectacular collapse, netting a few people millions of dollars, and did nothing more valuable for the economy than what Caesar’s Palace does.

        When it collapses, you have an oversupply problem that’s been building to monumental proportions, along with overleveraged derivatives contracts that multiply the exposure to a price decline exponentially. Hundreds of thousands of people will lose their jobs. Meh.

        So anyway, that’s my “summary.” It would be truly fantastic to find out that I’m full of shit. I really may be. This is very complicated stuff.

      • Crogged says:

        Just to add to the pot–the ‘derivative’ instruments are written under master swap agreements between private parties. These master agreements contain collateral obligations and thresholds. Look up “ISDA”.

        There is still a pure physical oil market, in which all exposures are fully collateralized with cash, no one gets ‘free’ money based on implied ability to pay based on the organizations credit rating set by S&P or Moody’s. The oil tankers going back in forth are in this market.

        In the derivative market an organization may have some room to play based on it’s credit rating (a master agreement between Europe Bank A and US Bank B may have collateral thresholds of 100 million dollars, all exposures under that between the parties aren’t collateralized). But all exposures over that amount have to be collateralized with cash.

        It may be be a master agreement between Europe Bank B and US Hedge Fund A. This arrangement will have Hedge Fund A having an obligation to fully collateralize all risk beginning with any exposure (with cash or LCs-maybe bonds), but Europe Bank B doesn’t until its exposures exceed 100 million. There is no ‘law’ requiring the bank to set up hedge fund A at zero threshold except for common sense.

        In my mind its the obligation to collateralize where we can maybe address some of what you say–but I’m still digesting what you say and trying to learn-I’ve always been a grunt slave just pushing the boulders up the pyramid……..

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