Futures 101
Walter Williams explains why the futures market, which takes into account both the present and the future availability of goods, is a vital part of a smoothly functioning economy.
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Thursday, May 29, 2008
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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7 Comments:
When organized publich futures amrkets were put in place nobody could predict the emergence of speculative hedge funds.
The author appears ignorant of price discovery fundamentals. Speculative bubbles in futures markets can and do affect underline price adding a significant premium over equilibrium price. In the case of crude oil, this is estimated between $20 and $30 by many analysts.
Although speculators assume the risk of hedgers in normal futures markets, it is evident that increased speculation above and beyond what is normally needed to transfer risk from hedgers to speculators can add premiums that are passed to end consumer.
One possible solution is to abolish the publicly traded oil amd grains futures markets and replace them with Forward Agreements between producers and commercial users, in a similar way it is done with freight rates. In this way, the purely speculative premium will be taken away.
Just a thought.
e. harokopos,
You do realize that hedge funds can go long and short. In fact, may do the latter much more than the former.
Look at the price of wheat over the last 3 months, it has dropped 45%. Why are you not complaining about speculation there??
http://tfc-charts.w2d.com/chart/KW/78
In fact, outside of oil most of the commodities have hit a wall. Wheat is off 45% from its high, gold is off 15%, copper is down 15% from its high, coffee is down 25% from its high.
Or what about commodities like orange juice, which have been trending down for almost a year are down 40% in the last 52 weeks.
http://tfc-charts.w2d.com/chart/OJ/W
I bet you the orange juice manufacturers are blaming the speculators for the low prices just as fervently as you are blaming the speculators for the high oil prices.
The fact of the matter is that supply and demand is probably accountable for oil going from $20 to $80. The low dollar is responsible for it going from $80 to $120 and speculation might have pushed it up above 135. Remember, that even speculators have to sell the oil to some end user before the contract expires. So someone is obviously buying the oil at that price.
> The author appears ignorant of price discovery fundamentals.
Since the author is a former economics dept. chairman, one assumes you must be the ignorant one, to assume he somehow doesn't know of anything you know. He may see it in a different light from you (thus triggering disagreement on causes/results), but I doubt if he's ignorant of anything you're aware of, no matter your background.
But that's just my US$.02
Appeal to authority is an informal fallacy.
The article tried to take the blame out of the future markets while ignoring significant studies and research that show otherwise.
Since there is no supply problem in the oil market as OPEC insists, something else is driving prices up. That is speculation through futures markets.
I just watched documentary about Americans driving to Peru to buy gasoline. DO you see supply issues?
It's all well orchestrated speculation through futures markets, the same way the Hunts brothers drove silver up in the late 70's.
But now it's done in a much more sophisticated way.
"Since there is no supply problem in the oil market as OPEC insists, something else is driving prices up. That is speculation through futures markets."
The low dollar perhaps?
Machiavelli, it is obvious that harokopos posses an analytical tool that tells him when, "it is evident that increased speculation above and beyond what is normally needed.." I'm sure he could more than likely tell you at which point profits become "windfall" and tell us exactly at what amount one becomes "rich" and therefore should be taxed accordingly. I just wish he would share his insight with us as to exactly when speculation exceeds its "normal need."
"The low dollar perhaps?"
The dollar has fallen in the past without a comparable rise in oil prices. The correlation is not evident.
"I just wish he would share his insight with us as to exactly when speculation exceeds its "normal need.""
Speculators are needed as a means of transfering risk from hedgers. When speculators start defining the price hedgers pay, then you get bubble markets.
This is what is happening now a days, it started with the tech stock market in the late 90s. There is just too much money looking for speculative investments.
Whilst bubbles burst at one point or another, the consumer gets hit hard in the middle.
What you see now is commodities markets with a 50% or more speculative premium. This premium is added though futures markets because speculators do not exchange for physical, simply said.
If you need a rigorous, axiomatic theory in a formal language for what is happening you will not get it. You have to excersize common sense.
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