Professor Mark J. Perry's Blog for Economics and Finance
What happened in 2001? Oil prices plunged by 33% and went from almost $30 to below $20, at the same time that "excessive speculation" was increasing, at least measured by open interest of oil futures contracts? Isn't speculation and futures trading supposed to drive prices up, not down? 
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.
16 Comments:
Speculators weren't as greedy back then, obviously.
Though, of course, it's worth noting that the greedy speculators could have been just as greedy but making their money driving prices down by taking short positions.
Some arguments just make me dizzy.
Just as the stock market has certain triggers that suspend trading to prevent crashes,why should we allow unregulated speculation by ICE to traded WTI contracts and not take physical possession as the contracts call for.I'm not against traditional speculation driving prices up or down and someone taking physical possession of a finite commodity.They play a vital market role. I'm against index speculators[pensions/investment banks]investing,driving prices up or down just to make money and not having any physical need for the essential commodity.Would recommend this article on ICE an unregulated exchange-it helps explain how we got in this position http://www.star-telegram.com/ed_wallace/story/659081.html
I don't know if the following stands up to analysis of what is going on in oil markets, but I think it is the theory people believe:
Speculation causes volitility.
When people buy and sell not on fundamentals but due to short term guesses about what other speculators will do, that creates a herd mentality and speculators amplify price swings. If the price goes up a little, everyone buys. If it goes down a little, everyone sells. If there is a rumor everyone makes the same trade.
Liquidity is supplied by the non speculators, investors who trade based on fundamentals and business people who trade in commodities (eg heating oil dealers).
This is what causes bubbles. People buy because everyone else is buying not because of market fundamentals. Market bubbles are inflated by inexperienced traders who try to get in on the action when they hear news stories about "easy money" and a "sure thing". This happened in the stock market when students were putting their student loans into mutual funds and in real estate with ordinary folks getting into condo-flipping, and in the mortgage industry with people squandering the appreciation on their homes by taking out home equity loans. I don't know if these excesses happen to the same extent in comodities but it probably does to some extent.
Are speculators really so numerous that they really create market liquidity or are they only a minority acting as a parasite on the other types of traders?
Is it better to have a less liquidity and more stablity in the market?
Ask someone who easily sold their home at the top of the housing bubble for a high price, traded up and now owes more than the value of their new home because the bubble burst.
"Isn't speculation and futures trading supposed to drive prices up, now down?"
I suppose you meant to ask "..up, not down?" My proposed solution can be found below.
Keep in mind that Open Interest is not by itself an indicator of price direction, either lagging or leading. That would be too obvious for the markets to exist at all.
As Michael Harris, a veteran futures trader, puts it in his new book "Profitability and Systematic Trading", what matters ro price movement is price concession: "When buyers concede to higher sell offers, prices rise. On the other hand, when sellers concede to lower buy offers, prices drop"
So, because I was asked, here is a specific model of how you can get a speculative bubble in crude oil prices:
Some speculators play buyers and some others sellers. Buyers concede to higher sell offers from those speculators who constantly sell short crude oil contracts. When buyers do not concede to higher sell offers any longer, they cover their shorts causing a rally up. All they need to do is repeat this pattern a few times to cause a bubble run.
For this model of manipulation to work you need concerted speculation, which I think it is highly possible is happening for at least the past year or so.
So for those that asked, this is a very specific model which shows how speculators can drive prices sky high.
Note that this may not always be successful and in the past speculators have lost money doing it. This time around, they have succeeded because it seems that many other factors are in their side plus the external benefits are many, like shorting stocks and the dollar.
Not all speculators are bad, but this kind of speculation is very bad to your pocket.
The Sophist, me, proposes the following compromise:
All oil and oil product futures players should be allowed to keep open positions without delivering or taking delivery for a maximum a 5 days. Open positions after 5 days should be required to deliver or take delivery. This solution does not deprive futures markets from needed intraday and short-term volatility but forces speculators to cover their positions, increases their transaction costs and makes their presence evident.
Other proposals are welcome. I agree we should not kill good speculation and thus kill liquidity.
Let us turn this blog into an effort to propose solutions to important problems, rather than arguing about silly things.
The final solution will probably be a combination of different ideas and inputs from other posters, but I am glad to get this thing going.
Remember, talk is cheap, we need effective solutions.
Krugman, Kling, Hamilton and Cowen weigh in.
Sometime in that time frame (though it may have been the late 90s) the oil companies were losing their shirts with the price of gas actually dropping below $1 in many places, including high-gas-tax Florida (tax the tourists, you know). I seem to recall hearing that, in fixed dollars, gas was at the lowest price ever in history (I could be wrong, but it was close, either way).
I suspect that most people have utterly forgotten THAT recent time.
> I don't know if the following stands up to analysis of what is going on in oil markets, but I think it is the theory people believe: Speculation causes volitility.
OK, do you actually read anything but the headlines? Do you actually read any of the articles here?
This topic has been dealt with twice in the last couple DAYS:
Here.
Here.
I won't argue with the tiny part of your assertion that "I think it is the theory people believe", but on what basis do you make the statement "I don't know if the following stands up to analysis", if you've read the blog at all? The answer is there, and it's "Hell No".
Try reading the blog.
Just a little bit.
---- > Like, *Duh* < ----
> For this model of manipulation to work you need concerted speculation, which I think it is highly possible is happening for at least the past year or so.
Given your previously shown lack of effective intellect, by what evidentiary justification do you make this claim?
I saw a graphic while ago that the number of "long" positions in oil has fallen 90% in the last several (I didn't notice how many) months. That means that while the price of oil was rising 30% the "Speculators" were selling.
The price is being set between "producers" and "consumers." The "Specs" are "taking the price," Not "making the price."
o bloody hell,
given your spectacular record of ad hominen attacks, nobody will take you seriously and respond to your postings.
why do abrasive individuals like you believe that a blog can take the place of a judicial investigation and present conclusive evidence about anything?
I presented you with a specific model of how pump & dump works and made a proposal about limiting the negative effects of potential price manipulation of oil prices.
What have you done other than ad hominen attacks? How do you justify your existence in this blog? Do you gain self esteem by just attacking others?
When was the last time you looked at a mirror and asked yourself whether you contribute something to this society or you are just a plain energy wasting biochemical machinery?
Just some thoughts for you, assuming you can think at all.
rufus,
in futures markets, the number of long positions always equals to number of short positions. You probably read something about the COT report (obllodyhell look it up in Google) and the net long positions of commercials dropping. That can change any time.
How do you know that some producers and/or consumers aren't speculating anyway?
Sophist, I guess I'm over my head in this one. I'll just back off and try to learn something. :)
> given your spectacular record of ad hominen attacks, nobody will take you seriously and respond to your postings.
When you show you actually read things written by others (not me, even, just Dr. Perry) and actually make claims which follow suit in some way with verifiable information (instead of unsubstantiated claims and blatantly ignorant expressions of opinion), I'll be concerned with your opinion.
I don't respect the opinions of anyone who can't be bothered to actually READ the stuff being presented here and then claim ignorance of the very things they are expressing an opinion on.
If you can't take the time to actually learn anything about a subject, you have no business expressing an opinion on it. We get enough of that from politicians.
You can learn it faulty, and express a wrong opinion, you can not grasp things completely, and express a wrong opinion. If someone does that, I'll see if I can make it clearer, and won't make "ad hominem" attacks in the process (and if you doubt that, I suggest you go LOOK at the places where I've done so. And feel free to cite a case where I've made such comments in the ABSENCE of such deliberate ignorance. I'll lay pretty good odds I expressed WHY the personal comment was made, which, by the way, is NOT an "ad hominem" attack -- You're given specific reasons why the expressed opinion is unworthy of consideration).
I can be wrong, too. I more than realize that economics is a major field with a lot of information, and a counter-intuitive subject which can lead one to think they understand what they don't. Most definitely including me. But I've TRIED. I've read regularly on it. And I continue to read on it. And I have no patience with time-wasting morons who think they have a worthwhile opinion (i.e., one worth expressing) WITHOUT making such an effort. You get a lot of this sort of attention from me because you very definitely show a lack of willingness to read JACK on the topic even when it's laid out for you in detail -- making a claim of supposed fact in direct opposition to data presented a couple days earlier in the blog says you aren't bothering to read stuff even when it's handed to you.
And that's not respecting ANYONE on this blog, to say nothing of Dr. Perry.
You don't have to agree with him, but if you're going to ignore facts he's presented you mere days before, I'm going to call you an idiot. A time-wasting idiot, who, at best, will manage to force someone to directly refute you by citing a source you and everyone else ought to already know about.
If you disagree with that opinion, fine, but you should be noting your disagreement and why (if not in fine detail -- which preferably should be broached in the specific earlier topic), demonstrating that you read the post, at least.
It's one thing to not have read everything back in perpetuity. It's another to ignore recent posts, because they do link together. Dr. Perry often posts multiple entries in regards any given treatise. And throwing out CRAP which has already been refuted is lame. And wastes everyone's time.
Throwing out claims which suggest a total lack of understanding of basic calculus, such as how area under a curve (or between two curves) is calculated says you have an utterly inadequate ability to even discuss something as complex as economics.
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Economics understanding STARTS with calculus.
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You aren't even able to grasp the most essential basics. You need to be quiet and listen. Ask questions, by all means, but don't act like you KNOW. Because it's clear you know a lot less than I do, and I KNOW I don't know a lot about it.
And no, you can't argue "your common sense" -- because, as I've noted, ECONOMICS DEFIES COMMON SENSE. It is particularly, inherently counter-intuitive.
In economics, "Common sense don't work"
> I presented you with a specific model of how pump & dump works
No you didn't. You expressed an utterly wrong notion and showed that you didn't even understand it to the point where you got one of the key features you were arguing for BACKWARDS -- to wit, you claimed that any volatility occurred when it was DUMPED, when in fact it occurs (if it occurs at all) at the PUMP. The DUMP brings the curve back closer to the comparison curve and thus ends the volatile element.
But the actual addition of volatility (if any) occurred at the start of the PUMP and continued from that instant. The DUMP only served to define the ending magnitude of it. Any volatility occurred from the very beginning of it.
> What have you done other than ad hominen attacks?
When I actually attack someone by attacking something other than visibly expressed ignorance, followed by an arrogant expression of opinion based on that same ignorance, you can ask that question.
Until then, you show a lack of grasp of what makes an attack "ad hominem".
"You keep using this term. I do not think it means what you think it means."
Calling someone stupid because they've said or done something stupid is impolite, but it's not ad hominem, especially when followed by an expression of what made it stupid -- it's giving them a chance to learn why it was stupid.
Calling them stupid and ending it there. THAT is ad homimen.
"sophist, you're an idiot".
THAT is an ad hominem response.
"sophist, you're an idiot because Dr. Perry already covered that topic three days ago"
That is impolite. It's not ad hominem.
BTW -- not bothering to respond to legitimate questions asked of you in the course of a missive, while claiming the missive is nothing but an ad hominem attack -- That would be an ad hominem attack.
Since you clearly didn't get those questions, I'll restate them:
1) What makes you think that, if you don't understand curve smoothing effects and best fit curves, or the significance of the area between two such curves in terms of what they represent and how, that you can have an opinion on the applicability of a graph to a particular argument?
2) When you make a bald-faced claim such as "which I think it is highly possible is happening for at least the past year or so.", what data do you base this claim upon?
[note, the addition to this simple question, which was impolite, was to point out that your observable lack of understanding, whether due to deliberate ignorance, intentional obfuscation, or lack of reasoning skills, makes such unsupported claims specious at best. It was made to suggest that you might want to ADD such support as a matter of course rather than simply bloviating on it as you consistently do, forcing anyone who wishes to debate the issue to call you explicitly on it]
So yes, I'm abrasive to YOU, sophist, and to a few others, notably "anonymous" posters who can't even be bothered to type a name into the "name" field so as to provide a specific way to refer to them in discussion (suggesting that they actually have no intention of joining one) -- because each of you make bald faced claims suggesting knowledge when you make it very evident that you don't even get the basics. Querilously disputing Walter Williams, while expressing ignorance of who he is, blatantly shows that one actually knows nothing of economics at all. Even a total Keynesian should know who significant people in the economics field are, including popular writers. They should know who Friedman, Hayek, Smith, Williams, Sowell, Krugman, Mises, Bastiat all are -- if only to know "significant people in economics" and not much more. Because if you don't even know that, you really, really don't know squat... and have no business doing anything more than asking questions: "It seems like it should be 'thus'. Why is it not?"
Perhaps you actually do read on this stuff and are deliberately feigning ignorance. Perhaps you really don't understand what you read. I dunno. But you don't seem like someone who is trying to learn more, you're just talking through your hat. And looking for confirmation of your already existing notions of things. And that is why I target you so much. You're not here to learn. You're here to bloviate.
There is a lot I don't know -- but I do listen, and if someone tells me I'm wrong and details why with a good argument in favor of it, I take that seriously. I see little evidence of this in your postings, however. You appear to think you know more than Dr. Perry, even though it's consistently visible that you clearly don't come close.
Now go look at YOUR post of 1:05, and look at this post.
YOURS is ad hominem. You throw a bunch of whiny complaints around, call my comments "ad hominem" because they aren't polite (not quite grasping that that is intentional, in response to your impoliteness [see above]). In summary, You make an exercise in name calling, allowing you to write off anything I say to you.
Which is the purpose of an ad hominem attack in the first place.
THIS, however, gives a detailed explanation of *why* I tell you off so much, and so directly. You can either refute it, or figure it out. Hence it's not ad hominem, no matter how direct or impolite it is.
obloody hell,
I don't have time to respond to your apologetic post. Don't try to patronize Dr. perry to cover your ad hominen attack tracks. Dr. Perry is smarter than you think.
I'm not afraid to go against Dr. Perry's assertions, ideas or assumptions. Smart men appreciate opposition whilst stupid men respond with ad hominen attacks.
Having said that, I you are willing to learn about economics and financial matters you must listen instead of impulsively responding and attacking.
The assumption Dr. Perry made in his example about winning speculators smoothing markets is that their actions do not affect price direction, i.e. that there is an preconceived top or bottom which they sell or buy respectively.
This is a common misconception about the markets of people who don't have trading experience. If the speculators are powerful enough, when they buy at a potential top they create another potential to, and so on. Similarly, when they sell a potential bottom, they create a new potential bottom.
Thus, what Dr. Perry assumed is a situation where speculators are not capable of "moving" the markets but merely subtract or add liquidity at already established top or bottoms.
However, according to me and many other people -- save your ad hominen attacks -- the speculators in the oil market are powerful enough to drive prices to new highs.
Furthermore, even if the lose money doing that, they may be making a lot more in other markets like currency carry trades and shorting stocks, markets directly affected by their actions in the oil market.
The situation is very complex and having read a few popular science books about economics, quantum mechanics, and calculus won't help you understand what's going on, it will only add to your abrasive and compulsive esoteric behavior of attacking other people.
Bye...
> I'm not afraid to go against Dr. Perry's assertions, ideas or assumptions.
Any IDIOT can "go against his assertions." It does not require brains, intellect, or knowledge of any kind. They just have to make bald faced, ignorant assertions of the type you so commonly make.
The post I made wasn't apologetic. I defined the difference between an ad hominem attack, such as yours, and my own. I even took the time to explain WHY I target you so much, but you still didn't get a clue.
"I don't have tiiiiiiime to respond..."
Yeah, bite me, airhead. < --- Ad hominem, *this* time.
professor, several unbiased people have testified before congress regarding excessive speculation by index speculators[pensions] which buy long only and are distorting the futures market on the unregulated intercotinental exchange. link to mike masters testimony can explain it in terms much more detailed and better than i. it was enlightening to me.would appreciate your input.some may be tired of complex issue but we really need to understand why oil keeps going up,despite increasing supply.http://www.arpllp.com/core_files/Michael%20Masters%20Testimony%20200508.pdf
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