As you all know, we haven’t been exactly complimentary of speculators on this blog as we have previously reported here and here. The number of dollars going into commodity hedge funds ($55b in 2007 vs. $15b in 2005) according to Cole Partners Asset Management is significant. And we have all witnessed frothy metals markets say for copper or steel (though steel is not yet traded on an exchange). Everyone we speak to from distributors, to OEM’s to value-added suppliers, all feel the market has structurally changed (and not necessarily for the better).
However, we should all be horribly worried about US Senator Joseph Lieberman’s suggestion that more regulation is “needed to limit the role of speculators in the markets,” according to this Bloomberg article. Ah wonderful, more government meddling into the free markets…kind of like the over-reaction to the Enron fiasco with the brilliance of Sarbanes-Oxley (ask any public companyÃ‚Â executive what they think about that piece of legislation). We may be a bit more protected from that law but not without a cost. According to this CNN Money article from last year, “In 2001, 12 of the top 20 global IPOs were listed in the U.S., according to Dealogic; last year, just two of them were… an upstart over-the-counter market in London called AIM raised as much in IPOs last year as Nasdaq.”
It’s tempting to hate the speculators but they are a necessary evil. They do in fact create the free flow of cash and market liquidity necessary for a global economy. According to Martin Abbott, the CEO of the London Metal Exchange (the largest base metals exchange), “Governments would be “foolish” to limit participation in commodity markets and curb speculation because prices are based on supply and demand.” We couldn’t agree more (though we will say supply has had a greater effect this year than demand). We’re not saying there aren’t going to be huge hiccups either (e.g. the current financial crisis) but the alternative is price controls and economic stagnation and finally this (you will recall President Mugabe put in place price controls and other ridiculous governmental policies which effectively choked off all economic development). We should be very weary of Senator Lieberman’s suggestions!