Peak Oil News and Message Boards

The fly in the ointment - Hedge Funds:
Hedge funds, an investment vehicle to protect, (or hedge) against more volatile and risky investments seem to feel oil futures are bullet-proof. These giant investment firms wield enormous power & influence, and employ some of the best analysts anywhere.

Seems the smart money thinks oil is going to get more expensive. So much so they are willing to buy, in massive quantities, oil futures even at todays record price.

IMO this may well be the most convincing argument that a real peak is upon us. Goggle hedge fund. Not oil hedge fund or whatever, just hedge fund. How many links related to oil do you see?

However, today oil company shares are trading at modest earnings multiples and have been ignored in the market recovery. If the market goes up they should be dragged up too; if the market falls for reasons related to the oil price then oil shares will still go up. Oil is a great hedge fund right now.

http://www.ameinfo.com/news/Detailed/35907.html

http://www.ipe.com/article_default.asp?article=16757

LONDON (Reuters) - Pension funds, often among the most cautious of investors, are sizing up oil and other commodities as a permanent way to secure robust returns, helping sustain prices near multi-year highs, analysts say.

The record level of fund investment in oil is now formidable so that there is a real danger of a rapid sell-off that could wipe several dollars from the price in a matter of days.
But even if oil prices fall from current highs, funds might see this as an opportunity to reinvest. "If there's a sell-off, followed by a quick recovery and a new net high, it'll probably go higher," said Craig Reeves, managing director at hedge fund Platinum Capital Management. "I wouldn't be surprised if you saw $50 a barrel, but that would be speculative and not based on real demand."

link

Government will try real hard to keep it down untill after the elections. IF kerry get in, bush may leave him w/ a nice mess.

I'm not sure what "the fly in the ointment" means, but it makes sense to me that people are investing in oil futures. This is what economists are talking about...increasing scarcity, supply unable to keep up with demand, those with large holdings a priori will make a killing. Up to a point, I guess, then the risk becomes too much speculation and a "bubble", meaning over-valued commodities, which would burst if supply increased or demand decreased, right?

Fly in the ointment means that the idea that everything is hunky dory is wrong, and major investment brokers investing in energy futures is the "fly" which shows us the truth. Our ointment is nasty, despite cover-ups, and hedge funds are the fly which exposes this reality.

Thought this Roach commentary illustrates the excessive liquidity policy that characterizes the reign of Alan Greenspan: World's Biggest Hedge Fund

I happened on this particular Roach commentary when poking around this site: link I recommened spending some time in it.

Regarding the above article, I think the most interesting aspect is the approach the fed took in 1987 when the market melted down. For the younger members of this board, that was a day to remember. People were walking around the office reporting that the market had dropped x number of points, then returning to indicate that it had dropped again. Just about everyone thought this was the start of the next great depression. The following day, I happened to be on a research vessel that left Los Angeles. As we pulled out, we saw some lightening flashes. My boss asked what it as, and I responded that it was civilization as we new it coming to and end. He didn't find it too funny: a lot people were quite depressed about how much money they had lost in the market (I was a kid and wasn't too concerned personally, though we all wondered what was going to happen).

The Fed then came to the rescue, pumping liquidity into the monetary system. That really set the stage for the approach that fed has taken since. When the financial system tanks, or hits a rough patch, pump up liquidity. Step on the gas. Unfortunately, as the article points out, the fed pumps on the gas when the market stumbles greatly but does not adquately pull out the stops when assets are overpriced.

So we have an unbalanced approach. The fed believes that if the market crashes, which is one way of saying that the equity prices are underpriced, the fed will race in to save the day. But when the assets are overpriced, the fed does little or nothing. This philosophy of only cleaning up the mess has created a perception that the market always recovers, that drips and crashes are buying opportunities.

Unfortunately, one can prime the pump like this only so long, deferring problems into the future. Perhaps it's similar to pumping water into the oil fields. At some point, all you get out is water. Similarly, at some point, creating additional liquidity in the market just won't do it. We'll be drowning in liquidity.

Yes, and what is even more ominous this time around is that the M-3 money supply is at a high only seen after the 1987 crash. As I have consistently stated, I think the FED's ability to control anything is gone. Let's see if the dollar rebounds today after the FED raises interest rates. Of course if the CAD comes in over the projected $53 billion, that consideration may be moot. The currency market is looking at the structural basis for the dollar, not the speculative. The debt is just too big an elephant anymore.

It's déjà vu all over again. I'm old enough to remember the late '80's. We all thought it was the end of the Reaganomics economy.

To put it in perspective, just put a chart of world oil prices cira 1970-present on top of it all. Oil plunged in the early eighties and we quickly went back to business as usual bringing on another bubble and recession, which was swept away by another collapse in oil prices. In fact, adjusted for inflation, oil was cheaper in the late nineties than ever before in history.

No worry, all we need to bail us out of our current predicament is another collapse in oil prices. That's going to happen, right?

Kingcoal wrote:It's déjà vu all over again. I'm old enough to remember the late '80's. We all thought it was the end of the Reaganomics economy.

To put it in perspective, just put a chart of world oil prices cira 1970-present on top of it all. Oil plunged in the early eighties and we quickly went back to business as usual bringing on another bubble and recession, which was swept away by another collapse in oil prices. In fact, adjusted for inflation, oil was cheaper in the late nineties than ever before in history.

No worry, all we need to bail us out of our current predicament is another collapse in oil prices. That's going to happen, right?

It's interesting to review the many books that proclaimed the 80s the end of the US era of dominance, that the budget deficits would break us, that the Japanese model was the wave of the future, etc. Then the Japanese hit the skids and the US scooted on past them. Some, like the Economist, would say the the US was able to quickly restructure in the face of problems, like the S&L crisis or the housing crash in 90 or so.

I've also wondered whether the saving grace was cheap oil. And I think we're beyond the days of $10 oil, $20 oil, and probably $30 oil.

Analysis such as this paper shows how it is possible for the US to continue for years with fiscal and current account deficits, but the odds of a argentinian financial meltdown increase significantly when a shock--most likely an oil shock--shatters the glass pyramid.

In fact there are signs that the excessive liquidity is causing more inflation in producer prices than the government would like to admit. This article details some of the alarming signs tat are present.

Canaries and Coal Mines

Rob Kirby wrote:In more than 20 years around financial markets I have never known PPI to be delayed like this. I can say with clear conscience that a great many base materials and inputs that one would normally associate with PPI have recently undergone unprecedented price increases. Reporting of much higher producer prices would not only increase costs/obligations of government but be highly inconsistent with the Fed's low interest rate policy we are currently experiencing.

Sharply rising precious metals prices have traditionally signaled inflationary pressures building in the economy. In response to rising inflation, prudent central bankers generally raise interest rates to quell demand for goods thus slowing the economy and enticing would be consumers to save. By capping the prices of precious metals [gold and silver] with derivatives or through outright gold sales [or leases that amount to the same thing], a central bank would mask a critical telltale symptom of rising inflation.

When I speak to knowledgebell people about peak oil I often get te answer that the price is going up because of hedge funds and speculators. The bring up the price not a world shortage of cheap oil.
Some say that we pay at least 30 to 40% to much because of speculation. Could there be some truth in this. Afterall who doesn't want to make money... And oil seems an easy target. Others say it is because the Dollar is so weak and the EURO is strong.

SD_Scott wrote:Isolated incident or the first of many?

Totally unqualified guess: Canary in the mine shaft.

"Please hold your breath and calmly move to the nearest exit"

While the aholes that launched such nonsense as 'Hedge Funds' make millions/billions on this ridiculous foray into human arrogance and greed, in the near term, it will be us 'little guys (and gals)' that pay for their hubris. In the long term though, things will even up.

http://www.post-gazette.com/pg/05194/537132.stm

Despite the losses, Mr. Berg wrote: "We intend to do everything possible so that 2005 is not our first losing year."

Man, that is a big loss. Remember in the spring, there were nervous rumors of a hedge fund that had major losses? People were so worried about it the stock market fell. Was this the one, I wonder?

Is it just me, or is my logic messed up?

For every person or other entity that makes let's say $1,000 on the sale of a stock, someone else lost $1,000. No money is created, correct?

When that stock I bought for $8 dollars goes up to $10 and I sell, someone out there just sold something else and bought the stock, and I made $2 per share profit. Now everyone's happy, and everyone keeps making money, until the stock hits the fan. Then, the last guy to buy that stock gets hit and gets hit hard. 10 or 20 people may have bought and sold that same stock through the years, and let's say they all made money by selling at a higher price. It's the guy at the end who's screwed and taking a huge loss.

Common sense just tells me that once the initial investment money has been collected and spent by the actual company, then every purchase of that same stock after that is just a gamble as to whether you will be the sucker at the end holding the worthless pieces of paper.

I'm not exactly sure how come the stock market keeps going up and up, when for every winner there is an equal and opposite loser. What am I missing?

Yeah, a real "conundrum," Alan G.!!

lateStarter wrote:While the aholes that launched such nonsense as 'Hedge Funds' make millions/billions on this ridiculous foray into human arrogance and greed, in the near term, it will be us 'little guys (and gals)' that pay for their hubris. In the long term though, things will even up.

Well being an optimist is fine. However I don't see very many people anywhere that are going to make that happen. People with money and control of the resources will rule until they are possibly overthrown.

And by "even up" when they finaly eat up all the resources etc, and have to come down to were the "bottom dwellers" live in a resource depleted world.

Thats no Victory.

I'm not exactly sure how come the stock market keeps going up and up, when for every winner there is an equal and opposite loser. What am I missing?

You are missing the essence of capitalism. It requires constant growth. That's why companies are expected to report growth every quarter, year after year after year.

Coca-Cola makes billions of dollars a year. Why does Wall St. expect them to show growth every year? What's wrong with just staying the same, when you're making that much money?

It's to avoid the problem you describe. The company must keep growing, or someone is going to end up a sucker - the last guy to buy the stock, as you put it.