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Senator Dean Heller’s swing and a miss

Pursuant to a recent news article in the Las Vegas Sun, Senator Heller faults speculators on Wall Street – the in vogue practice – for rising oil prices, and consequently rising fuel prices. Heller’s remarks can be interpreted in one of two different ways. He’s scapegoating speculators for rising prices. Or he’s implying the subsidized speculator – speculators who have been beneficiaries of bailouts, objectively allowing risk-free trading and speculating. If it’s the latter, I fail to see how anybody could disagree. Do you want people getting bailed out with your money for bad decisions? But this transcends futures traders. Homebuyers made bad choices when they longed homes at pseudo prices with borrowed money. For the record, I sounded the alarm at that time. Meanwhile, the prudent savers were being priced out of the market.

I believe I know a thing or two about the futures market. I believe I also know a thing or two about economics. I’ve never gone into debt to buy a house nor a car, save a Mustang that I paid off over a decade ago. I stood on principle and refused to take anything from the taxpayer to go to school, while living well below the poverty line. Far from being rewarded, I’ve been penalized since only college graduates have the cognition to qualify for jobs that I don’t (e.g. as a legislative aide for economic policy).

Pursuant to conventional wisdom, I’m a speculator, rather than a hedger. It’s very misplaced to stigmatize speculators. Objectively, speculators are hedgers. Pursuant to prevailing orthodoxy, the distinction between the two is that a hedger enters the futures market to mitigate risk from assets already held, while the speculator is assuming new risk by entering the futures market. But it’s not that simple.

Suppose there’s a farmer who grows corn. For sake of illustration, he anticipates a crop size of 5000 bushels of corn. He wants to lock in the price of corn at, say, 615 cents per bushel (the present July 2012 contract price, which I’m long at 609 on the mini). He then takes a short position in the futures market that will offset his position in the cash, or spot, market.

When I went through my Series 3 course, I detected a flaw with prevailing orthodoxy when it comes to hedging. Prevailing orthodoxy says that farmer need not mind his business when placing futures trades. The futures trade is no different than wearing a life vest when out at sea. Since the short position in the futures market offsets that “risky” long position in the cash (i.e. spot) market, his position in the futures market is said to be a hedge. There’s a problem with that calculus. In an inflationary paradigm (i.e. the real world), the farmer’s true hedge is not his futures position, but his cash market position.

Saying that the farmer’s losses in the futures market will be offset by gains in the cash market is merely a different way of saying that his gains in the cash market will be offset by losses in the futures market. By taking a losing position in the futures market, the farmer…lost. To argue for indiscretion in the futures market is altogether chimerical. Rather than plagiarizing myself, I would refer the reader to a piece I wrote back in 2009: Just to make clear, there are long hedge trades as well.

Now let’s consider the “evil” speculator. The speculator who trades, say, corn futures, but does not grow corn. Guys like me. I’m not wealthy. I’m far from wealthy. Due to horrible healthcare at the VA, where I was considered to be delusional for believing things like hypothyroidism is symptomatic, that couldn’t have possibly contributed towards landing a meaningful job. After all, I’m totally “delusional”. I could go blow all my money on partying and travel and booze and be broke, but I would rather not, although pursuant to prevailing orthodoxy that would stimulate the economy since the problem with the economy is savers. I would rather better myself so that I can help not only myself, but others. So how do I better myself without taking anything from the taxpayer? I’m compelled to do things like speculate, which everybody does in every transaction. The pizza shop owner is speculating that people will feed themselves with the pizza he’s selling.

I have dollars – not alot, but some. I’m long cash. Everywhere I look, I see prices rising. How do I keep up with rising prices if I don’t generate a return that equals or surpasses the rate of inflation? By choosing to trade, say, corn futures, I’m hedging myself against dollar destruction, which is the present policy of Washington. If I stay long cash, I will be a certain loser since the value of the dollar will continue to go down as long as people blame speculators. Eventually, I will be compelled to use up what little savings I have on living expenses.

All “liquidity” has to go somewhere. By being in the futures market, I’m not driving up prices in the spot market. Would Senator Heller rather I go out and buy physical bullion? Or stockpile cans of corn? Furthermore, speculators don’t just take long positions. There are speculative short positions. Is a short position just as dirty and sinful as a long position? What if I wanted to short corn at the market bid, thus helping drive down the price of corn?

In a futures trade, like every other transaction, every long position requires a short position. Every short position requires a long position. There can’t be a buyer without a seller nor a seller without a buyer. There can’t be hedgers without speculators. If speculators are removed from the futures market, this will necessarily remove hedgers. Which prompts the question: If hedgers are saints, how can speculators be sinners? Furthermore, for the speculator, every long position eventually becomes a short and every short position eventually becomes a long, since the speculator offsets the position.

It isn’t speculators that create inflation. Inflation is central bank policy. We can’t debase the currency, suppress interest rates, combat deflation, say that spending and consumption stimulate the economy, preach about the virtues of conservation, preach about the “twin evils” of both inflation and deflation, demand higher prices of just some things (e.g. equities and homes, making them unaffordable), inflate even more to subsidize low income and affordable housing because people can’t afford higher priced homes, but then blame “sinful” speculators on Wall Street because prices are rising. Hell no, Heller.

There’s something fundamentally wrong when present policy has been crafted to prevent housing prices from falling, while simultaneously blaming speculators for rising oil prices. Scapegoating speculators for rising prices is not only wrong, it justifies faux solutions that engender greater problems.

If Heller really cared about rising fuel prices, he would be preaching about the need for monetary tightening. Priced in real money (i.e. gold) fuel prices have fallen. Fuel prices have gone up only when priced in dollars, not gold. Heller needs to tell us what he means when he blames speculators for rising oil prices. Does he mean that speculating in the futures market causes rising prices? Or does he mean creating inflation to subsidize politically-connected speculators causes rising prices? Until he explains this one, I’m saying it’s time to draft Kim Kardashian for a senatorial race in Nevada.

Updated: March 11, 2018 — 8:50 pm

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