Wednesday, 2 February 2011

Egypt, China and Famine Futures

It's February already! When I was just 19 someone told me that when I turned 21 the speed at which time elapses would double, and then when I turned 45, it would double again. With January gone in a blink, the subjective acceleration of elapsed time is confirmed again. It makes me aware of how little time any of us have in our brief spans of life, and so how important it is to think forward to the future we help to create.

There are so many things I wanted to write about in depth, but perhaps what I need to do is just write something - especially since the comments may be the best part of this blog if the old Roubini posse hangs out here.

Along with the rest of the world, I am watching events unfold in Egypt and I am awed by the civilised and moderate nature of the Egyptian crowds. Students have formed protective rings around the most important heritage sites to prevent damage. Neighbourhood Watches have sprung up to provide civil security. Supplies of food and water are couriered to the protestors and shared with the police and soldiers. There is no obvious political leadership among the protesters, but their self-organisation is still impressive.

The looting that has occurred appears to have been a tactic of the security forces to prepare the way for an aggressive crackdown.

I wish it was only undemocratic regimes that used the technique of the agent provacateur, but there is too much evidence otherwise. Every post-9/11 group of "terrorists" arrested in the USA for bomb plots has had an FBI informant as the main agitator, planner and source of weapons or equipment. Here in the UK, we have police undercover agents infiltrating green and peace groups - sleeping with and even marrying activists - and they too foment unlawful violence. (It's worth clicking the link for the picture of the protestors in front of Scotland Yard.) At the G20 protests a couple years back, the peaceful crowd started to video an agitator and reported him to organisers and police, only to see him run for police lines and disappear among his colleagues. The agent provocateur has become a mainstream strategy of a political class which views organised, democratic resistance as a threat to entrenched privilege. The unscrupulous politician might even instigate violence to foment fear and justify further statist oppression.

A nation of 50 million Arabs is peacefully demanding democratic reforms and accountability. This is so starkly at odds with the narrative we have been fed by our leaders in the West that we should probably rethink what else they might have got wrong.

Now imagine if such activism spreads to China. I guarantee you that the Chinese elites are imagining it too. In a country where food and fuel take about half the money in the average consumer wallet, the risks of political instability from rising inflation are very real.

The monetary excressences of the central banks to maintain the dividends and bonuses of their corporate cronies are going to spur a political backlash as inflation takes hold. The Chinese elites, just like our own, have gained the disproportionate benefit of monetary laxity through their speculations in real estate and commodities. But now comes the inflationary backlash . . .

The current spike in food prices has exceeded the spike in 2008. Rice is limit up two days in a row. Storms and crop failures are threatening worse to come.

The role of public policy in worsening market failures in energy and food is worthy of deep and searching examination. As Barry Ritholtz points out, oil companies and agribusiness are among the top corporate welfare queens, sucking on the Treasury for subsidies while reporting huge profits largely secured from taxation by sweetheart tax breaks and global avoidance strategies. When real people go hungry, and many are unemployed, the offensiveness of this political and economic injustice becomes too great to stomach.

Egypt used to have a food surplus. Thanks to the miracles of modern agribusiness, population growth, and mismanagement by corrupt politicians, it is now a net importer of food. Food security is going to be a priority for any new leadership in Egypt. A recent UK study of food security makes clear that it is an issue we will all have a stake in resolving.

As the Year of the Rabbit dawns, China's elites will be weighing life without easy credit against life with political chaos and hungry protesters. I used to be quite confident that they would crack down on banks and the shadow banks that have grown like fungus in the warm, moist environment of monetary excess. Now I am not so sure. Like their peers in the banks, oil companies and agribusinesses of the West, many Chinese elites cannot imagine a world of financial constraint and fiscal austerity. Despite the risk that they could lose it all to political instability if they delay and inflation takes hold, they appear to be wavering.

Interesting times . . .

What is clear is that our systems for energy and food production and distribution have become so highly concentrated and so easily manipulated by the corporate few that a popular uprising might be the best hope of reform for the hungry many.

Professor Roubini has a piece in the FT today discussing the stagflationary risks of instability.

Writing this, I went back and read "Famine Futures" which I wrote in 2008. That post goes into more detail about how progressively more concentrated ownership of critical energy and food production, alongside free market reforms and financialisation of commodity markets, have led us to where we are.

What I don't know as I watch political change unfold, is where we go from here. I'm still thinking a few chickens in the back yard might be a good investment.

Update: Why US farm policy caused Egypt crisis, by Thomas Kostigen


Sid said...

With regards to your initial remark, you may find this relevant:

As for your comments on Egypt: It's great that they are struggling for democracy and independence from tyranny.

Maybe, in time, they too can have tax breaks for the wealthy, ginormous unmanageable banks and a system of public finance akin to a giant ponzi scheme.

English Pensioner said...

I think that you perhaps overlook the fact that Egypt has the fastest growing population of all Arab countries, and the only productive land is the ten or so miles each side of the Nile. So possibly the food shortage is not entirely the fault of those in power,although they could perhaps have extended the irrigated area and looked at ways to improve production.

Anonymous said...

Too Freakin funny!!!
I submitted another article to Seeking Alpha. (2 days in a row) What is the semi focus??? Egypt.

Sure, these are hot topics... but there is a reason we come together again at the same time.

Basel? / Underestimating risk of civil unrest, and securities associated with Gov't that could face it???

Just a thought to bat around... Writing can be a burden. Care to share the load? How about a collaborative effort? Straight out of MAD magazine. Spy vs Spy.
The great new idea:
"London Banker vs Miss America blog"

You know we bring out the best in one another. Iron sharpening iron.


In the meantime, May I repost the link to my last article? (You roubinied me with the new piece)

(Once I get the reply on whether the next piece an article or an instablog, I will post the link here)

In the meantime, with regards to Egypt... I don't think this ends nicely. All it takes is a few rotten apples. Even if the country settles down in the comming weeks, they have set the tone for their own bi-partisan feud. ...and the losing side of today's current situation will be more motivated then before.

All the best,
Miss America - Rich Hartmann

p.s. Hey there AveJ. Hope you are well. I have the same pit in my stomach.

London Banker said...

Howdy, MA! I'm always delighted to see you in the comments, and feel free to blog-whore your own posts as often as you choose.

We are not in competition. We are all blundering towards enlightenment in dark times, and guiding each other - however imperfectly - may be the surest way forward.

I'm too unreliable just now to commit to a joint blog, but there's a project I'm looking at that you would like . . .

London Banker said...

@ Sid: Many thanks for the laugh.

@ English Pensioner: I did note population growth as a factor, but many countries have coped with growth better. The disruption to the fertile Nile delta ecosystem caused by the Aswan Dam is a major factor in poorer agricultural and fishing production.

Anonymous said...

Seeking Alpha sucks!

They nixed another article.

Thanks for the rental space.
(as far as the joint venture goes... I don't mean "vs" in the competitive sense of the word. Nor do I mean starting an additional venture.)

I guess what I'm getting at is continueing your current blog, and potentially sharing the marquee??? to attract a larger audience???

It will be less work for you or me, if we were both dropping articles around here. It would add content. (so there's no "commitment" from either of us. Blog freely in one locale.)

As far as the "vs" goes... I just see it as a catchy title. I see eye to eye with you on most economic things. ...but I also think our few differences have lead to high quality debates.

Something to consider??

I look forward to hearing from you.

London Banker said...

In the spirit of freedom of expression, e-mail me what you want to post. My standards are probably lower than Seeking Alpha (and I'm more inclined to edit out infelicities). I'll put it up as guest post here.

I didn't take the Spy vs. Spy suggestion literally. By saying we weren't in competition, I just meant that you have no need to apologise for posting links that add value, including your own.

As usual, two great nations separated by a common language.

Anonymous said...

Shall do.

I just thought the concept was cute and more marketable. (not like its actually being sold or something)

Sorta like deuling pianos. They're not against each other. They're in unison.

...and that's the show everyone comes to see.

ttyl, MA/RH

dearieme said...

Not only must the revolutionaries work out how to bring down the Tsarist/Royalist autocracy, they must also work out how to avoid the subsequent Communist/Jacobin coup d'etat. No easy thing to pull off.

PeterJB said...

@ LB et al
So many contexts, so little time:
"The unscrupulous politician might even instigate violence to foment fear and justify further statist oppression." Oxymoron, Dear Friend -
followed by "might" will is more typically to be expected - justify, er, e-'l' - 'r' ection ( choose your preferred letter).
@ English Pensioner - please note the huge irrigated area brought about by massive donations from Europe and elsewhere - Mobarak is a low-life that must, a priori, go! They did all that! Have a look as you can see it on Google Earth - I had a bit to do with this!

MA: Every politician in the World today is wetting his pants forwards and back - as they can see the "First Global Revolution" (ever)where the target is 'them'. BTW Wikileaks has been nominated for the Nobel Peace Prize! I find the irony of the greatest civilization of Earth has now returned to the fore after a few thousands of years in deep sleep.

I believe it was Egypt that first stored grain in the good years for the bad years. My best wishes go to the Egyptian people who express courageous will in confrontation of an old has been puppet and despot gone feral( nothing new here).

I have also blogged and with more to soon follow:

The world is becoming energized and aware; there is a message here and it is exciting (nice word).

BTW The rice prices are being manipulated by the big ten (US) grain privates - due to mainly climatic conditions which are to bring profits galore to the few (as usual) in the grain game.

Ho hum

Anonymous said...


Quite a contrast between the events captured in your post and those that played out yesterday and today.

Where did the rational actors go? Mubarak may be a tyrannical despot, but he's no dolt. Why resort to thuggery, violence and killing? It almost seems as if someone(s) purchased the rights to the end of this drama.

Watch for a curious phoenix rising from Cairo's ashes as several would benefit nicely by "brokering" Egypt's peace.


London Banker said...

@ PeterJB: I see part of the public policy of food security as reversing the financialisation of food commodities that has led to such massive manipulations by a handful of conglomerates and banks. I expect China and other states will lead the way on this, although Europe might be on the right side for once too.

@ TA: I'm not surprised by the orchestrated thuggery last night. The goons were clearly briefed, armed and organised by the government. The good thing was the Army staying neutral between the two factions. Too soon to tell the outcome now, but the speed with which the thuggery was broadcast did a lot to undermine its effect.

Daniel de Paris said...

Hi London Banker,

As a regular veteran reader and at times modest commenter of Roubini version 2006/2007, I lost contact with your interesting views when you fully stopped blogging.

Nice to have found you. The one who introduce quite a lot of non-bankers to Bagehot (Am I spelling correcty) and the art of fair central banking !

As a stubborn Austrian, French flavour (à la Jacques Rueff) I dislike the kind of Roubini that this juncture has nurtured.

Though you certainly do not belong to our nasty league, your neutral stance and tone is so refreshing that I'll most certainly set your blog soon in my list of link-up on my own blog en français.

Possibly replacing our dear Krugman. He changed as well and even more so than Roubini. I do not even find him humorous anymore:)

Anonymous said...

Revolutions start in the belly and power comes
from the end of a gun. Not a good combination.
Commodity speculation to preserve wealth from
ZIRP has ugly consequences.

PeterJB said...

@ LB
"I see part of the public policy of food security as reversing the financialisation of food commodities that has led to such massive manipulations by a handful of conglomerates and banks. I expect China and other states will lead the way on this, although Europe might be on the right side for once too."
Ah Yes, Food security; This is something I know a lot about and a subject that China takes extremely seriously.

I developed as a consultant in the Space Industry, a system that fixes the manipulations and distortions of a few big corporates (with powerful political influence) and rationalizes daily the Global grain reserves in a predictive mode of 12 months with risk minimization. Needless to say the game got dirty soon after we started to present the results. BTW, it was totally self realizing and self-funding and mathematically defined (after the design process).

"Public Policy" ain't interested and all the International Institutionalist, let be assure you and please take this seriously, have not one single idea and more importantly, nor do they care one iota, about their mandates. And I mean WB, UN, FAO, WFP, IMF etc., etc., which are organizations that more or less over the past 50 years or so, have failed on the most massive of terms. So, don't hold your breathe for "Public Policy" to kick in. It will not!

PeterJB said...

@ London Banker said...
"I see part of the public policy of food security as reversing the financialisation of food commodities that has led to such massive manipulations by a handful of conglomerates and banks. I expect China and other states will lead the way on this, although Europe might be on the right side for once too."

I might also add that the "public policy" which is allowing Monsanto to exclusively hold strict copyright protection and IPP rights to what will become damn near every crop seed on the planet - while accepting Monsanto Lobby and influential efforts of Monsanto and interested party thereto, such as Hedge Funds, Banks, etc., etc., to forbid every farmer in the World to hold and use his own seed crops, is the most criminally minded insanity that has ever appeared before humanity - worse than dropping the second A Bomb on Japan - much worse.

China and Russian will not stand for this and neither should we the people. Imagine every damned seed that Monsanto wants to own and charge for from grains, to fruit to vegetables to weeds...

where the quantum entanglement of food crops ensures that Monsanto under this regime of public policy with control the World and everything in it.

BTW Wikileaks has been nominated for the Nobel Peace Prize and has been awarded (yet to be presented) the Sydney Peace Prize while the Australian Prime Minister and her moronic cronies, denies the most basic of assistance that any and citizen(s) is are entitled to. Its the problem arising from getting your orders from the UK Israel and the US plus the Bankers.

Australia still remains a British Colony.
Ho hum

London Banker said...

I'm feeling optimistic today. Egypt's protestors might still be crushed; it's too soon to tell. But whether or not they succeed, an inflection point has been passed. From now on, the governments of the world and the elites they answer to in the corporatocracy have to deal with an opposition that is diverse, fragmented, creative, expressive and hungry to change the system - and sometimes just hungry.

The Great Depression led to a similar reversal of political concentration and wealth inequality. Power was democratised, economic production was democratised, and the world experienced 60 years of growth as a result.

Would we have all the communications innovations we enjoy today if AT&T had remained a monopoly? Sometimes breaking up the big institutios is the best thing you can do for the economy. And that includes government, too. Egyptians have organised quickly into Neighbourhood Watches, and will soon question how much value was added by the police they so feared. They might wonder how else they might organise to more efficiently and economically provide social welfare, and so might we.

@ PeterJB - Interesting background on food security and inequality. It all goes back to Kissinger: "Control the oil and you control economies; control the food and you control the people." American policy for forty years has been about securing control of oil and food globally, with the military and UN/IMF/WTO all complicit in the effort.

If an inflection point has been reached, the system could unwind and become very unpredictable very quickly.

Anonymous said...


"If an inflection point has been reached, the system could unwind and become very unpredictable very quickly."

I understand the point you're making, BUT all of major indices remain green. When will the risk you're referring to be priced in?


PeterJB said...

@ LB
Interesting that Kissinger received the Nobel Peace Prize and now can't leave the US for fear of being hauled through the World Courts for crimes against humanity. Amazing what freedom of information brings to the fore about genocide, murder and the US spot of torture...
Egypt tells us now that the US "leadership" is about US money by total control of foreign nations through political criminals that Kissinger would call his friends eg Mubarak, Ali, etc., which isn't too far off, but it has now clashed with, the Neocons and Israel and their 100 years Zionist Wars against the "goy" .

LB... I am of the opinion that Ireland should follow the lead of Iceland and dump the bailout, which hasn't worked anyway, toss the Bankers and the "Leadership" and alleged guilty into the Courts. put all the Banks into bankruptcy (protection which keeps them open under new management) and tell the EU/EMU to jump. Keeping the Corporate tax level where they are and showing a bit of respect for themselves instead of allowing the "eat-what-we-kill-crowd" to go feed somewhere else.

As a central banker, your insights would be interesting and besides, considering Tunisia (Cathage) and Egypt are broken and will not be easily fixed. What we need is for peaceful transition through due process to work..

I am awaiting your comments from your Central Banker point of view.

Thanks - use the weekend.

Ho hum

PeterJB said...

@ TA
"I understand the point you're making, BUT all of major indices remain green. When will the risk you're referring to be priced in?"

I believe what is happening is that the FedRes and its co-conspirators have brought severe instability into the whole system by removing all constraints to the banking, finance corporate sectors while winding up constraints and limitations onto the main street sector. This gives an explosive effect to one side (keeping all the markets green) while shutting off / down the other side (unemployment / revolt / inflation).

IOW the FedRes has induced massive instability into an already unstable system and got it completely wrong. (See Minsky) Its a problem when you let the barbarians (Hyskos) inside the gates.

Risk is now priced in the volatility levels which are enormously high.
Ho hum

PeterJB said...

@ LB (me again of Food Security)

"Leadership is needed if the world is to head off mass famine, writes Ambrose Evans-Pritchard."

As you are aware I have been saying for sometime now that the current crisis is a "leadership" crisis where current global "leadership" just do not have the necessary intelligence and competence (not mentioning integrity, will, courage interest, knowledge, etc., etc. so things get worse; no surprise here.

Also now, global "leadership" all fear that they will be next - how astute - with John McCain calling the Global Revolution a Virus which must be stopped or cured.

I include in global "leadership" politicians, bureaucrats, bankers (private and central), major Corporate officers, economists, international institutions such as UN, WFP, IMF, FAO, UNDP, WB, etc., where in my opinion, none of the above have a reasonable graps on the plot or on "Economic Theory"(at least not an economic- theory that works)

Courtesy of Robert K @ Steve Keen's Blog, "Quand des hommes sont raproches, ils ne se decident plus au hasard et
independamment l’un des autres; ils reagissent les uns sur les autres. Des causes mutiples entrent en action, et elles troublent les hommes, les entrainent a droite et a gauche, mais il y a une chose qu’eles ne peuvent detruire, ce sont lleurs habitudes de Panurge. Et c’est cela qui se conserve." quoted from Jules Henri Poincare which roughly translates to: 'When men are close to each other, they no longer decide randomly and independently of each other, they react to the others. Multiple causes come into play which trouble them and pull them from side to side, but there is one thing that these influences cannot destroy, and that is their tendency to behave like Panurge’s sheep. And it is that which is preserved.'

It appears clearly that current "leadership" show no interest in solutions - their focus is fixed on longevity of office, a priori.

And the essence of this fact is also clear as it means the GLC (global leadership collapse) will get far worse.

"A horse, a horse, my kingdom for a horse"

PeterJB said...

Sigh, yet another comment:

Food Security and how the US has screwed every nation it comes into contact with: And its abuses of WTO and just about every other Internationally excepted protocol.

From Eric Margolis:

I understand that the ruling elite and all that hangs off it, are crapping their pants big-time and this includes Israel and the "neocons" (is there a difference?) as well as every crack-pot religious from Palin to Kissinger.

Fear, sometimes is good!

PeterJB said...

@ LB Guess Who 9(as I listen to the marvelous voice of Billy Holiday)

I just love this from Ambrose Evans-Pritchard:

"José Manuel Barroso, the ex-Maoist President of the European Commission, has told Ireland that it is entirely and alone responsible for the disaster that has befallen the Irish people.

“The problems of Ireland were created by irresponsible financial behaviour of financial institutions and a lack of supervision in the Irish market.

It was not Europe that created this fiscally irresponsible situation and this financially irresponsible behaviour,” he said.

“Europe is now part of the solution.”

Me: Get this: Say that again? LOL - "Europe is now part of the solution" ?? LOL

Once a Maoist, always a Maoist, I suppose. Mr Barroso misrepresents what happened, falsely denies any EU culpability, and equally falsely misclaims a “solution” – unless you count the solution of the economic graveyard."

Have you ever noticed LB, just how Marxists, become Maoists, become Socialists, become Social Democrats and then become libertarians, and then fascists and eventually make it to the hangman's noose?

Natural Justice for hypocrites. And Barosso comes over as the biggest dip-s*&t (store high in transit) in the Global Richard Cranium Club and tell me why, he has a position within the EU?

Ok, OK... I know

Ho hum

Mark said...

Firstly, my apologies for what has turned into a lengthy post.

I am no Egypt expert although I learned a small amount about the country a number of years ago. Back then it was said that US aid put a loaf of bread on every Egyptian table every week. Perhaps with aid being measured in $bn instead of bushels of wheat and the rise of crop prices we now have the situation where US aid is simply not putting enough loaves on Egyptian tables to keep people happy.

It is puzzling to understand what the US now believe they want - will we be testing soon the proposition that the only nation that commands a 2/3rds majority in Congress is Israel?

The generally modest manner of the Cairene protests and the behaviour of the army reflects well on the country under Mubarek, whatever the future now holds for it. That future remains uncertain - perhaps more so now that Egypt has become less important as an oil transit route with Suez flows being small on a net basis, and SUMED pipeline flow much reduced because of increased availability at Ceyhan, and lower oil demand that leads to lower tanker rates and promotes (along with low interest rates) Cape laden VLCC voyages as being cheaper than Suezmax ships on the shorter route. Container ships from China (the EU's largest source of imports) probably dominate the flows via the Canal.

China of course has the benefit of a large warchest of funds that it can use to subsidise key commodities internally. From the point of view of the leadership that has to be a better investment than pumping the next Shanghai property bubble when the going gets tough on food prices. Not everything is now the market economy in China I suspect. The main Chinese concerns will be about maintaining security of physical supply - something that I know from personal experience has been a concern for perhaps three decades already. An interesting corollary as an aside is that it is the Chinese who can offer the best hope of security for South Sudan, since they are the buyers of the oil.

The history of corporate and banking involvement in commodities is much more tortuous than your friend Mack Frankfurter at Seeking Alpha seems to be cognisant of. Moreover, it has often been producer government companies who perhaps have had at least as important an influence - and mostly not for the common good. For example certain OPEC countries were widely rumoured to trade on NYMEX under sovereign protection in large volume: they tended to lose because they had to liquidate positions so as not to be seen taking delivery of US oil in a landlocked location at Cushing.

Mark said...


He is perhaps unaware that the Japanese keiretsu used commodity trading to bolster their turnover and prestige, and in some cases took extremely large positions - think of Mr Hamanaka of Sumitomo and his role in the copper market. London has long been the dominant centre for global commodity trading for most things other than grains. Much of that trading was self regulated by the main traders, producers and consumers in each commodity, with limits on financing from banks constraining it. Banks made their money by charging for Letters of Credit and traditional financing. The collapse of the tin market in 1985 accompanied by legally permitted sovereign default of obligations to support the buffer stock manager perhaps woke the banks up, but already large oil barter deals were surfacing as the cracks in OPEC began to appear, attracting interest for financing deals. Oil trading itself had been given a massive shot in the arm by the 1984/5 miners' strike in the UK, which required the import of heavy gungy oil from the Middle East to fuel power stations and the export of almost all the light sweet North Sea production. Arthur Scargill is a true father of the Brent market.

The other big event of the times was the Big Bang in London - the Financial Services Act 1986. It attracted the major Wall Street banks to establish large commodity trading operations in London in the days when Enron was still humble Internorth (though already plagued with rogue traders working for Ken Lay). Commodity trading had until that point relied on forward and term contracts in the main, with some small futures markets and a few spot transactions to balance demand at the margins. All the contracts including futures were physically deliverable.

The FSA 1986 made financially settled paper contracts legal for the first time since the Gaming Act of 1844. That changed the game, because it became possible to take a large paper long or short position with no intention of liquidating it prior to expiry, offering massive gearing to trade in the underlying physical market leading up to the expiry day. It meant that real expertise in commodities could be replaced with walls of money: deep pockets and knowledge of order flow became more important than weather forecasts and satellite intelligence on crop yields. Weight of money could force genuine hedgers to liquidate positions at large losses because of constraints on their ability to finance mark-to-market margining, or simply fear, even though they could have profitably delivered their own production at the price they committed to. The effect is similar to shaking the tree to see what falls out of it. Banks did bring other large players into markets: governments could be persuaded to hedge their oil imports or their cocoa crop, banks often posing as being on the side of their new customers when in practice they were taking large margins. Then of course came the index plays.

Still, it is worth noting that the real fundamental change in oil markets came in 1999 when Hugo Chavez came to power in Venezuela. The ongoing price war between major OPEC producers for market share was replaced by production discipline aided by lower production from PdVSA on the back of kicking out its technocrats. Without agreement between Venezuela, Iran and Saudi, we would have seen a continuation for a while longer of the "new paradigm" of "permanently cheap oil" that some pundits had projected at the time.

Mark said...


Your Famine Futures article mentioned the disconnect between CBOT wheat futures and cash markets without pausing to consider the explanations. The heavily bowdlerised version from the CBOTis here:

In essence they are saying that the contract got hijacked because it was used as a marker price that could be controlled by the few able to involve themselves in actual delivery, and that the narrowness of the market was also reflected in the arcane contract rules and squeezes on available storage. Exploitation of the regulator's rules was a big feature of Enron's distortions of the California electricity markets. Paradoxically, it can be much harder to create opportunities for such massive exploitation where regulation doesn't force the market to act through a common set of rules on a given exchange. Counterparties who deal with each other on a bilateral OTC basis tend to be aware if a particular company is establishing a large market position, because they see them on the same side of their trades: they can limit their trades and refuse to let the big player add to its position. In a futures exchange, or elsewhere where there are central counterparties, that is no longer so, and we depend on the central counterparty and regulator to monitor the situation adequately. Repeatedly, they have shown themselves incapable of performing that task in market after market.

2008 was an interesting time in commodity markets. WTI peaked at 147.27$/bbl in July, yet by December it fell to just 32.40$/bbl - 78% down. Wheat touched 13 $/bushel yet fell to 4.55$/bushel - 65% down. What drove these movements was the evaporation of bankers' money in the markets, as they were forced to liquidate positions to release capital to fight off the collapse in MBS and CDOs. Just as pumping up property had created capital to be invested in commodities, the bursting of the property bubble also deflated the commodity one. Banks with large index play and other "customer" positions on their books were able to profit by front running with a short house position, knowing that customers would be liquidating on the back of the sharp down movements. QE money is now pumping up those markets again. It perhaps gives a new meaning to Uncle Ben's Long Grain Rice.

Commodities are now performing increasingly as a store of value - albeit full of bubble and market specific risk themselves - in the face of default through inflation by monetary authorities. There are of course those who suggest that some pseudo Sraffian commodity bundle should replace gold as a standard since fiat money has shown itself to be unfit for purpose. Given the mess that banks have already made of their involvement in commodities that is a notion that should perhaps be roundly discouraged.

London Banker said...

@ Mark:

You write: Banks with large index play and other "customer" positions on their books were able to profit by front running with a short house position, knowing that customers would be liquidating on the back of the sharp down movements. QE money is now pumping up those markets again. It perhaps gives a new meaning to Uncle Ben's Long Grain Rice.

It feels like another round of pump and dump with Ben's cash supplying the liquidity and the "customers" as the sheep to be shorn. The markets are now so hugely concentrated that the top four banks have visibility of 85 percent of all positions through their books. Customers/hedge funds are leveraged to 2007 levels again. Given that the big four banks also dominate HFT for frontrunning orders, it is fair to suggest that manipulation - if not already established business practice - will be a compelling business model going forward.

I'm guessing this ramp will be unwound with a thud in the not distant future, particularly as they will want to secure QE3 (and QEn) when the current facility nears expiry.

There is strong reason to think that China's growth has slowed dramatically, and confirmation of this once the New Year holiday is over could be the impetus for a nasty crash in commodities and energy.