The Goldman Food Bubble

Description: Democracy Now interview with Frederick Kaufman
Excerpt:

"""The wheat markets, in particular, in this country are the outcome of a process of development of over 150 years. And that is why, from about 1903 to 2003, the real price of wheat in this country has gone down. And this was one of the great reasons for America’s great twentieth century, the fact that we had cheap food, we had cheap bread. And Goldman, in 1991, came up with a new idea and a new product, which, as I said before, completely restructured this market and completely threw it out of whack.

But before we go there, we just have to maybe review for a second a little bit about how these markets worked and what kept that wheat price stabilized. And Juan, you mentioned the Minneapolis Grain Exchange, this kind of obscure syndicate in the Midwest, which is where the price of this particular kind of wheat, hard red spring wheat, which is the most widely traded wheat in the world, and it’s the most widely exported wheat from the American continent—we kind of set the world price on this wheat. This is where it happens. What’s the history of that price being stabilized is you have, traditionally, in the wheat futures market, two kinds of players: one of the farmers and the millers and the warehousemen—right? And this, of course, includes players like Domino’s Pizza and Sara Lee and General Mills, very large business, capitalist stakes are in this wheat market, right? And they are called bona fide hedgers, because they’re actually buying and selling real wheat. As the price fluctuates in the futures markets, you also traditionally have speculators in this market, people who don’t want wheat, who wouldn’t have any place to put it if they bought it, but they’re making money off buy orders and sell orders, as the price fluctuates each day, and hopefully they’re bringing in some money for themselves every day. That’s the idea.

Now, the key here is that both the bona fide hedgers and the speculators, every time they buy, they’re also selling, and every time they sell, they eventually buy. So their positions are cleared off at the end of the day, OK? Goldman, we have to understand, and a lot of these banks, are not interested in the particular structure of any of these markets. I think it’s a lot of mistake people make when they think about how these bankers are working. We think that they’re actually interested in the markets. We think that they’re—no. What they’re after are very large pools of cash for themselves. They’re after accumulating huge pools of money that they can do with whatever they like on a day-to-day basis. Right? And so, Goldman, in 1991, came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. It wasn’t really about the markets, anyway. The market was just an excuse. And so, the fact that they threw these wheat markets out of whack didn’t really matter to them.

How did this work? Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called "going long." They started going long on wheat futures. OK? And every time one of these contracts came due, they would do something called "rolling it over" into the next contract. So they would take all those buy promises they had made and say, "OK, we still—we’re just going to—we’ll buy more later. And plus we’re going to buy more now." And they kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a "demand shock." Usually prices go up because supply is low, right? That’s the idea. There’s not a lot of supply, so the price goes up. In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. Now, a lot of people are saying, "Oh, it was biofuel production. It was drought in Australia. It was floods in Kazakhstan." Let me tell you, hard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel.""" (click here for audio)

Bloomberg Businessweek - 26 July - 01 August 2010

Bloomberg Businessweek - World's leading business magazine.
Timely, useful, provocative, innovative. Each issue of Businessweek features in-depth perspectives on the financial markets, industries, trends, technology and people guiding the economy. Draw upon Businessweek's timely incisive analysis to help you make better decisions about your career, your business, and your personal investments. (more)

The Coming Silver Supernova

“Few investment opportunities arise in our lifetime like silver. The stage is set for a silver price percentage gain of extraordinary magnitude! Forget the popular refrain of “Got Gold?” and make some additions to your portfolio to take advantage of the coming silver supernova!"

So said Donald J. Poitras in an email he sent me after reading an updated version of a recent article by me about the possible impact the historical gold:silver ratio could have on the price of silver should gold go parabolic to various levels. With Poitras’ permission I present below, in a reformatted and edited version, his views on why he believes there are other sound reasons why silver, in and of its self, can expect to experience a “percentage gain of extraordinary magnitude” in the years to come. As Poitras sees it: (more)

20% of Americans hit by major economic loss

(CNNMoney.com) -- A new study released Wednesday estimates that 20% of Americans suffered a significant economic loss last year - the highest level in the past 25 years.

The new Economic Security Index looks at the interaction of three key variables that have a direct bearing on a person's economic security: income loss, medical expenses and debt.

The index, which tracks data since 1985, shows that economic insecurity has risen across all groups, not just among low-income families and those without much education.

The index was constructed by Yale political scientist Jacob Hacker and a team of researchers, and the project was funded by the Rockefeller Foundation.

The ESI defines people as economically insecure when their situation meets two criteria. First, within a year's time they have lost 25% or more of their available gross income. Available gross income is the money they have left over after paying for medical costs and debt. Second, they don't have enough in an emergency fund or other liquid reserves to make up the difference. (more)

Why Not Another World War?

By Peter Schiff,

There is overwhelming agreement among economists that the Second World War was responsible for decisively ending the Great Depression. When asked why the wars in Iran and Afghanistan are failing to make the same impact today, they often claim that the current conflicts are simply too small to be economically significant.

There is, of course, much irony here. No one argues that World War II, with its genocide, tens of millions of combatant casualties, and wholesale destruction of cities and regions, was good for humanity. But the improved American economy of the late 1940s seems to illustrate the benefits of large-scale government stimulus. This conundrum may be causing some to wonder how we could capture the good without the bad.

If one believes that government spending can create economic growth, then the answer should be simple: let's have a huge pretend war that rivals the Second World War in size. However, this time, let's not kill anyone. (more)

China: The US Is "Insolvent and Faces Bankruptcy"

The common thought amongst even reasonably educated and economically literate Americans is that China is 'stuck with US Treasuries' and has no choice, so it must perform within the status quo and do as the US wishes, or face a ruinous decline in their reserve holdings of US Treasuries.

And with real short term US Treasury interest rates decidedly negative, meaning that it is costing you money to hold dollars, there is a case to be made that there are a lot of 'price takers' out there in this world. Wow, they are just that good, aren't they. Having their heyday in a genuine deflation. A subtle tax levied on all holders of US dollars, probably more significant because of the official understantement of inflation. Yo, come git some.

I think China is already diversifying their reserve portfolio, and more stealthily and effectively than one would imagine. (more)

U.S. Stocks, Euro Gain, Treasuries Drop on M&A, Stress Tests

Blommberg,

U.S. stocks rallied, sending benchmark indexes to one-month highs, after Genzyme Corp. received a takeover approach and General Electric Co. boosted its dividend. The euro appreciated after 84 of 91 European banks passed stress tests. Treasuries dropped.

The Standard & Poor’s 500 Index climbed 0.8 percent to 1,102.66 at 4 p.m. in New York, its first gain above 1,100 since June 22. Genzyme, the largest maker of medicines for genetic diseases, surged 15 percent and GE rose 3.3 percent. The euro strengthened above $1.29 after dropping 0.8 percent earlier. The 10-year Treasury yield increased five basis points to 2.99 percent. Copper rose for a fifth day, capping its best weekly gain since February, while oil fell from an 11-week high.

The S&P 500 drifted between gains and losses for most of the day before early afternoon reports that Sanofi-Aventis SA made a takeover approach for Genzyme bolstered optimism that a rebound in mergers and acquisitions is accelerating. GE helped the Dow Jones Industrial Average briefly erase its 2010 loss after lifting its payout by 20 percent.

“Companies are sitting on records amount of cash which are they either returning to shareholders or using for consolidation,” said Frank Ingarra, a Stamford, Connecticut- based money manager at Hennessy Advisors Inc., which oversees about $800 million. “The GE dividend news was positive and industry consolidation is good for shareholders.” (more)