Poorer

I still remember the lecture on the oil price increases of 1973 and 1979-1980 in the business economics class at MIT's Sloan School of Management. This was 1979 and its effects were still being felt. The professor simply said that such an increase in the price of an important, irreplaceable (in the short term) raw material was going to make everyone poorer. There was no way around it - poorer. Those oil price increases were quite sudden. The current wave of oil price increases are occurring over a few years - from a monthly chart, oil prices broke out in 2004 at $40/barrel and the trend has been up ever since.

The professor said there were two outcomes from a sudden oil price spike: recession or inflation. The inflation occurs if the central bank monetizes the oil price increase. A third outcome exists in a steady price rise: a slowdown. I note that hourly earnings are nearly flat in real terms. But productivity was up about 2.5%. So what's going on ?

The gains in productivity are being used to pay for the higher cost of oil, not to increase the standard of living of the common man. Coupled with the continued avarice of the ruling classes, the common man is experiencing a decline in his standard of living as he must work harder and learn new skills to stay even.

Ruling Classes

These hogs are continuing to create trouble for the common man. I heard this morning from an analyst in Europe that for five years there has been an aversion to investing in equity. The beefers*, who were getting all the funds flows, instead heavily played in spread products, creating the debt bubble and the current credit crises. And they are playing in commodities. Together with their friends/clients in the pension funds, they are buying oil futures. Not investing to find more oil. Just buying futures and swaps. For every buyer there is a seller - that is a truism in any derivative product.

Who are the sellers in oil futures/swaps ? There is a limited universe of strong sellers: oil companies with oil in the ground. But they limit how much oil they will sell forward. OPEC and other governments don't sell oil in the forward markets. So this stampede of money into commodities has overwhelmed those derivative markets. That's the cause of this oil price increase since $100. Anyone saying that's not possible simply hasn't done the math. I did a quick calculation last Friday and it's rather easy to prove this flood of pension and beefer money into the oil derivative markets can overwhelm them.

I have no problem with pension funds investing in real assets, but futures are NOT real assets. If a pension fund wants to own oil, it should buy physical oil in the ground, as they do for timber - they buy forests. Or invest in drilling and other real, physical oil investments - that creates more supply. So the old rules against pension funds speculating in futres should be reinstated. Bring back the "unrelated business income tax" for these activities. And beefers must be regulated stringently.

*big, evil funds.

Markets

Ugh. Obviously the markets can't sustain a bullish trend until the upper limit to oil prices is known for the intermediate term.

Hmmm ... I see Goldman, Sachs is building a new, palatial corporate headquarters with six huge trading floors. See my blog post of june 4 for "Truisms", #1. Perhaps this will signal a top in this unholy focus on "trading" as a source of income. How unproductive is that ? Nothing is created by that huge human activity of talented people. They just try to skim money off their institutional clients. What a despicable business for a corporation !

Word of the Day

"Congener" - noun [$10]
Congener means 1. a thing or person of the same kind or category as another, esp. animals or plants of a specified genus; 2. (esp. US) a by-product giving a distinctive character to a wine or spirit.
Sentence: Huge Wall Street firms that focus huge capital and effort in trading, such as Goldman Sach, are simply gargantuan congeners of the beefers. They must be heavily regulated to prevent them harming the common man with their shenanigans.