Re: End of QE and impending financial crisis : Tue Jun 25, 2013 8:48 pm  

This week's File on 4 is well worth a listen. It's about the manipulation of oil markets and how this adversely affects pump prices. I was astounded to hear that at any time "physical oil trading" is dwarfed x8 by "paper oil trading" (derivatives). It is the paper trading that is causing concerns on market rigging.

True to form, the OFT "investigated" and in January concluded that they could find nothing untoward, stating that if they were required to investigate further, they would require more evidence of wrongdoing.

Now I may be accused of naivety but I thought investigations were supposed to find evidence of wrongdoing, not the other way round.

Re: End of QE and impending financial crisis : Tue Jun 25, 2013 9:13 pm  

cod'ead wrote:

This week's File on 4 is well worth a listen. It's about the manipulation of oil markets and how this adversely affects pump prices. I was astounded to hear that at any time "physical oil trading" is dwarfed x8 by "paper oil trading" (derivatives). It is the paper trading that is causing concerns on market rigging.

True to form, the OFT "investigated" and in January concluded that they could find nothing untoward, stating that if they were required to investigate further, they would require more evidence of wrongdoing.

Now I may be accused of naivety but I thought investigations were supposed to find evidence of wrongdoing, not the other way round.

Buying and selling stuff that you don't actually have in your possession, nor ever will, nor ever will even have knowledge of where in the world it is located.

Can you imagine eBay working like that ?

Re: End of QE and impending financial crisis : Tue Jun 25, 2013 10:43 pm  

JerryChicken wrote:

Buying and selling stuff that you don't actually have in your possession, nor ever will, nor ever will even have knowledge of where in the world it is located.

Can you imagine eBay working like that ?

If I put 10% deposit on a new car, got the log book, flogged it to someone else and simply walked away from the deal, I'd be in bother. At least I'd have paid the dealership 10%, these fookers pay nobody anything (apart from themselves)

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 12:47 pm  

cod'ead wrote:

If I put 10% deposit on a new car, got the log book, flogged it to someone else and simply walked away from the deal, I'd be in bother. At least I'd have paid the dealership 10%, these fookers pay nobody anything (apart from themselves)

That's not how derivatives work though, it's not the commodity itself that is being sold, it is the option or obligation (depending on type) to buy the commodity at a certain price at a certain time. It started out as a way in which people who actually did want to buy or sell that commodity could future proof the price they wanted to buy or sell the commodity at. In the interim the price might move in or against their favour and they would either gain or lose out on the agreement, but that was the inherent gamble, they were hedging against the future price of something they wanted to buy or sell. Now many of the people doing the gambling/hedging have no real interest in the commodity itself, they simply gain or lose based on which way their bet moves versus the commodity price. The main issue is to what extent the gambles themselves can affect the price of the commodity because they express an opinion of how much analysts think they are going to be worth in the future and that feeds back in to price now. In your example you would actually be buying an option or obligation at buying a car at a ceratain price in X months time, and in the meantime the value of the car may go up or down and you gain or lose accordingly. You can only walk away from the deal if that's the type of derivative you've bought in which case you will have lost your stake, or you may actually have to buy the car or pay compensation to someone else who will buy the car at the price you agreed.

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 1:08 pm  

Kelvin's Ferret wrote:

That's not how derivatives work though, it's not the commodity itself that is being sold, it is the option or obligation (depending on type) to buy the commodity at a certain price at a certain time. It started out as a way in which people who actually did want to buy or sell that commodity could future proof the price they wanted to buy or sell the commodity at. In the interim the price might move in or against their favour and they would either gain or lose out on the agreement, but that was the inherent gamble, they were hedging against the future price of something they wanted to buy or sell. Now many of the people doing the gambling/hedging have no real interest in the commodity itself, they simply gain or lose based on which way their bet moves versus the commodity price. The main issue is to what extent the gambles themselves can affect the price of the commodity because they express an opinion of how much analysts think they are going to be worth in the future and that feeds back in to price now. In your example you would actually be buying an option or obligation at buying a car at a ceratain price in X months time, and in the meantime the value of the car may go up or down and you gain or lose accordingly. You can only walk away from the deal if that's the type of derivative you've bought in which case you will have lost your stake, or you may actually have to buy the car or pay compensation to someone else who will buy the car at the price you agreed.

I admit it was a poor analogy and I could understand selling futures but there's surely a major problem when the value of future sales is eight times greater than the value of physical sales.

Listen to File on 4 and let us know your opinion

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 1:17 pm  

cod'ead wrote:

I admit it was a poor analogy and I could understand selling futures but there's surely a major problem when the value of future sales is eight times greater than the value of physical sales.

Listen to File on 4 and let us know your opinion

Man Utd maybe get 70,000 at home games. But the worldwide market for their mwerchandise is much greater.

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 1:21 pm  

Dally wrote:

Man Utd maybe get 70,000 at home games. But the worldwide market for their mwerchandise is much greater.

Did you post that here by accident?

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 2:21 pm  

cod'ead wrote:

I admit it was a poor analogy and I could understand selling futures but there's surely a major problem when the value of future sales is eight times greater than the value of physical sales.

Listen to File on 4 and let us know your opinion

I'm in office today, but I will listen tomorrow as it's sounds interesting. I think the value of the future sales could be a red herring, as nobody involved in this believes the value of the derivatives is actually what is required in the real world, they are for the most part just bets, albeit in some cases the end product is actually needed e.g. my employer is a huge consumer of energy and hedges on energy prices to cap exposure to price rises. This kind of thing reminds me of sizing debt, in that adding up all the debts in an economy can give a misleading impression of how much money is actually needed to facilitate it, e.g. A lends B £500 who lends C £500 who lends D £500, we end up with £1500 of debt, but what really matters is that A can meet obligation to B and B to C and so on. The people speculating on derivatives need to meet their obligations to each other in cash, it doesn't really matter how many barrels of oil that equates to in the real world.

Speculation has been blamed for high energy prices/oil prices before, but I think it's a bit hollow, speculation is just whether people think prices are going to go up or down in future and the resulting changes in behaviour now that causes prices to go up or down. What I think matters is the expectation about supply and demand including all relevant factors like production and taxation and competition for resources.

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 7:39 pm  

JerryChicken wrote:

Indeed, there should be some register of predictors that we can re-visit on, say, a five yearly basis just to see who got it right and who was speaking out of their backside or simply writing stuff for the purpose of feeding the rabble with a story.

My favourite one is "Enoch Powell was right" which usually comes up every now and again.

If only Powell had left out the rivers of blood and predicted instead that multiculturalism would have seen the internet full of obsessed racists he would have been on the money...

Re: End of QE and impending financial crisis : Wed Jun 26, 2013 8:16 pm  

Kelvin's Ferret wrote:

Speculation has been blamed for high energy prices/oil prices before, but I think it's a bit hollow, speculation is just whether people think prices are going to go up or down in future and the resulting changes in behaviour now that causes prices to go up or down. What I think matters is the expectation about supply and demand including all relevant factors like production and taxation and competition for resources.

Speculation or not, there's certainly something fishy going on. In January the pre-pump price of fuel (as delivered to the forecourt), increased by about 10p per litre. The Petrol Retailers Association thought it strange given the relatively low wholesale price of fuel on the world's various markets, coupled with a lack of demand due to adverse weather and the fact that UK refineries were cutting down on activity because no one was buying fuel. They employed analysts to see just where the price increase came from and these analysts could only account for 3p of the increase. They did of course factor in currency fluctuations and all the other identifiable variables but they still came up well short fo the 10p rise.

The main suspicion is that markets are being rigged in a similar manner to LIBOR