It’s that time of year again. The weather is warming up, people are back on the roads, and gas prices are going up. This is when we’ve learned to expect a fair amount of “blame the speculators” rhetoric going around. The recent New York Times op-ed by Joe Kennedy is a perfect example of this type of bad argument, but goes far outside the bounds of the typical calls for position limits or curbing influence. No, Mr. Kennedy wants an outright ban on speculation- specifically, in the oil markets.

Now, this, in contrast to what we normally see, seems a little extreme, and, in the past, we may have just chuckled at the notion while shaking our heads at the flow of logic that a high school debate student would annihilate in 30 seconds. Unfortunately, crazy seems to be catching. Senators Sanders, Blumenthal, Cardin, Franken, Klobuchar, and Bill Nelson have proposed legislation that would force the CFTC to take “emergency” action to stop “excessive speculation” in commodity markets with pressure to eliminate it altogether… within 14 days. Representative John Larsen took it a step further, publicly calling on the President to take action personally should the bill or CFTC fail. Then you have House Democrats holding a panel on the subject, where former CFTC official and law professor at the University of Maryland, Michael Greenberger, joined ranks with Gene Guilford, head of the Independent Connecticut Petroleum Marketers Association, to continue the crusade.

Suddenly, crazy has legs.

Sanders, in a public statement regarding his proposed legislation, likened the bill to a similar one that received support during the height of the oil spike in 2008, and that, unfortunately is exactly what has us on edge. As poorly supported as the arguments presented by speculation critics may be, and as much as the data may be on our side, the fervor that surrounded the oil spikes in 2008 eventually manifested as the ill-fated Dodd-Frank position limits we saw imposed late last year. We know that these emotionally driven policy crusades, however silly they may seem to those who know better, can and dobecome law… and this is one instance where we can’t let that go without comment.

To be clear- do we think the ban will pass? No- too many what-ifs, maybes, and election year dramas to play out. But on the off chance that it does become a consideration, this had to go out, and through conversations with financial professionals from across the board, what began as a 500 word retort became a behemoth of a smack down.

We, alongside many other economists, analysts, traders and financial experts, have addressed the speculator argument time and time again, but, apparently, numbers aren’t getting through. So here it is- our open letter to policy makers regarding futures speculation and the bottom line.

Dear Current and Former Policy Makers,

In the wake of 2008, it has become a popular choice to blame rising gas prices on evil oil speculators. The argument, essentially, has been that if it were not for individuals buying and selling oil in an attempt to generate profits, the price of oil would be far more reasonable.

We understand why the argument is used. In some ways, it’s intuitive. After all, what business does a trader have in setting the price of such a globally important commodity? It’s also rather convenient, as it deflects attention from the impact of other policies in place that may cause or exacerbate tensions on the global stage. Unfortunately, your argument is also completely false.

This red herring may be a go-to tactic for you, but the fact of the matter is that the story you weave with such gusto has no foundation in reality. It completely ignores the inherent structure of trading, history, and logic. It covers a portion of the plot, but not its entirety. And with these new proposals you seem so hell-bent on pushing through… well, we believe an epilogue may be in order…

Click through to keep reading

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The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

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This entry was posted on Friday, April 13th, 2012 at 4:23 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.