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Wallace's World

Has the U.S. Turned Against Consumers?


"It is a self-fulfilling prophecy. They can invent reasons why oil prices go to $130 or $150, but history shows that these people are capable of moving markets. It is not Exxon (XOM) or BP (BP) or Shell (RDS.A) that moves the oil markets. It is the financial players. It is the Goldman Sachs (GS), the Morgan Stanley (MS), or the other guys. It is a shame on the government that allows them to get away with that." —Oppenheimer oil analyst Fadel Gheit, Bloomberg TV, May 25, 2011

I recently explained here how excess liquidity lent to investors by the Federal Reserve at virtually no interest—helping investors use leverage as never before—created a maelstrom of activity in the commodities market. All that cheap money has pushed oil prices much higher than actual supply and legitimate demand would dictate. Covered also was the fact that during the campaign of 2008, when oil was nearing a new high of $147 a barrel, Presidential candidates Barack Obama and Senator John McCain (R-Ariz.) knew why and promised to fix it.

Both candidates recognized what was happening in the markets and promised to repeal the Enron loophole that was created in 2000 by the Commodities Futures Modernization Act. This essentially deregulated financial products known as over-the-counter derivatives and loosened capital requirements. It allows traders to run roughshod over our economy, pocketing excessive profits and slowing the pace of recovery.

Amazingly, many continue to debate whether or not commodity traders are even responsible for today’s outrageous oil pricing. To industry professionals—among them Fadel Gheit, one of the most respected oil analysts; key members of OPEC; Rex Tillerson, chairman and chief executive of ExxonMobil; and the heads of Petronas (PTG:MK) of Malaysia and Total (TOT) of France—what is taking place is obvious.

Not long after these columns were published, Gary Gensler, head of the Commodities Futures Trading Commission, slammed the commodities markets with his sharpest criticisms yet. Gensler pointed out that as of today, 88 percent of recent trades for benchmark West Texas Intermediate Crude are made solely by speculators, not by the real end-users of crude.

When speculators make 88 percent of all trades, they’re not just heavily influencing the market. They have absolute control.

Speculators Control Food, too

Gensler went on to state that creeping control of the market was similarly occurring in food commodities. He said speculators accounted for a whopping 90 percent of recent trades for wheat on the Chicago Board of Trade. A recent column in Foreign Policy magazine concurred. The market has gone from $13 billion in total contract holdings early in the last decade to $318 billion in contracts as of July 2008 (the same month oil peaked at $147 a barrel), driving food prices up 80 percent from 2005 to 2008. Foreign Policy quoted Kendell Keith, president of the National Grain and Feed Assn., as saying: "It’s unprecedented how much investment capital we’ve seen in the commodities market."

Is it any wonder that the average American working family is holding back on consumer purchases, thereby throttling the economic recovery? Two critical monthly expenses—energy and food—keep rising, steadily draining what little disposable income consumers might otherwise be able to spend on consumer goods.

Why?

As McClatchy’s Washington Bureau pointed out in a column covering the CFTC’s announcement: "… these [commodities] markets have driven up prices to the speculators’ profits and to the punishment of the public."

While the U.S. remains focused on high and unjustified prices for oil products, the discussion in Europe has started leaning toward the record food prices that the same speculators have forced on the public. The Guardian reported on June 2 that the G20 agricultural ministers would meet in Paris on June 22 to discuss food security and how best to contain speculative activity as it pertains to pricing. A day later, the paper pointed out that the ministers were incapable of coming to any meaningful agreements as to what should be done about it.

In Germany the discussion is more pointed. As Der Spiegel wrote the next day: "In today’s Europe, the people are no longer in control. Instead politicians have become slaves to the financial institutions and the markets. Democracy, after all, is not doing splendidly, or even well. It is gradually becoming a casualty of the financial crisis."

The Enronization of America

As stated previously, speculators have powerful enablers. The Federal Reserve, after all, opened the floodgates with nearly free and unlimited funds. Now our politicians can’t quite seem to get the markets under control and back to the sanity that predominated for nearly 70 years.

This country shouldn’t forget that the period saw some of the fastest economic growth rates in U.S. history, with rising personal wages and no financial crises. What has changed? For whatever reason, our lawmakers decided that the business model that had performed nearly flawlessly was outdated and somehow anti-business in its philosophy. To replace it, we got what I call the Enronization of America. That’s the business theory—put into practice by the failed Texas energy giant—that it is far more profitable to gamble on the paper prices of commodities than it is to be involved in creating and bringing actual commodities to market.

Ever since this new business paradigm began to evolve and spread, we have witnessed one financial disaster after another—the manipulation of electricity in California, then of oil stocks at Cushing, Okla., and then of natural gas and the propane market—and have twice seen oil prices hit highs that weren’t justified by supply and demand. Yet any elected official who publicly says anything about restoring sanity to these markets is immediately labeled an "anti-business" crusader.

This country has never been anti-business. It has become anti-consumer.

This new paradigm, which hasn’t yet drawn much attention, weakens consumers’ ability to retain income, diverting more and more of it into investor’s profits by boosting the cost of energy and food. These are not discretionary purchases. They are items no family can evade buying. After paying for necessities there’s increasingly little left to make discretionary purchases; is it any wonder that the economy’s growth can’t get past sluggish and that the recovery has stalled?

High, Volatile Prices Curb Hiring

Worse, playing with commodities creates high and volatile pricing in energy and raw materials, which also drains major corporations’ bottom lines. This partially explains why industry, notwithstanding record amounts of cash, is reluctant to bring unemployed laborers back into the workforce.

Don’t hold your breath waiting for elected officials to put sanity back into the markets to better profit investors and ease financial pressures on the average family’s incomes (or other corporations’ profits). As the New York Times pointed out on June 13, President Barack Obama and the Democratic National Committee "kicked off an aggressive push by Mr. Obama to win back the allegiance of one of his most vital sources of campaign cash—in part by trying to convince Wall Street that his policies, far from undercutting the investor class, have helped bring banks and financial markets back to health."

In this country, the debate on why energy pricing is so outrageously high—verified by respected oil analysts, the CFTC, and such hedge fund managers as Mike Masters, who fully understand how markets work and are willing to testify in front of Congress—is over. The commodities speculators’ impact on pricing has been confirmed by two key Fed regional presidents, who question whether so much liquidity and super-low interest rates work against an economic recovery.

In Europe the discussion targets the impact on food prices of unwarranted speculation. In Germany it condemns how politicians and the public are being held hostage by the financial services industry. In America, dining at Daniel’s on June 23 with the cream of Manhattan’s financial elite, President Obama was reassuring wealthy investors not to worry, he’s on their side.

Ed_wallace
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Assn. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to Businessweek.com, and hosts the top-rated daytime talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net, and read all of Ed's work at his news site, www.insideautomotive.com.

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