Speculation and bubbles

In the previous post below this, I talked about Short Selling. As I said at the end, it is wrong to single out Shorting. It is Speculation that is the problem, not just shorting. Or more accurately, the problem is when the balance between investment and speculation gets out of whack. 

There will always be speculation and to some extent it is a fine thing. Speculation is what SHOULD help drag the markets into the future.The differences between investing and speculation are sometimes subtle but are nevertheless important. Investing tends to be for the long term. The investor puts her money into a business so as to propel today’s business into the future. Investing is thus about shaping the future and assuring profits in that future. Speculating is shorter term. Although it is also about peering into the future, it has a different relationship to the future. Speculating isn’t so much about assuring profits in the future as it is about dragging those profits out of the future to be enjoyed NOW, taking that profit today.

Investing pushes today forward into the future. Speculating steals profit from the future so it can be had today. Now lots of speculators would balk at this as unfair or just plain wrong. And of course I’m neither an expert investor nor speculator so I could well be wrong. In which case stop reading now and go enjoy the sunshine instead.

Still here? OK.

Speculation has little to do with providing money for companies to grow. That’s investing – whether it is done by banks or bond buyers lending money, or by people buying shares. Speculation is about quick profits on volatile movements. It has nothing to do with jobs, investment, social good or helping people.

Speculation works best the further away it is from actual physical stuff. Speculation, is purer and works best with derivatives and the more synthetic they are the better. Bubble formation is speculation going UP. It’s hard but not impossible to have bubble formation without speculation. You need prices to go up in advance of, and out of proportion to, any decrease in supply or increase in demand. The price rise must precede the market and propel it up, rather than follow and reflect the market.

I know that’s not entirely clear, so try this.

Property prices go up as demand for houses increases with population and inflation. Like they did in the 50’s to 70’s. But imagine if you could start to buy contracts on houses that weren’t even built yet. Or on land that hasn’t even been offered for sale at all yet. You buy a speculative contract to buy something that doesn’t exist yet but will, in the future.

At first you are buying a futures contract. You pay at a price fixed today, for something in the future. You do so because you feel sure the price is going to go up by the time whatever you purchased is available. You will then be in possession of something whose price is already worth more than you paid on the very day you take delivery of it. In house terms you then ‘flip’ the house. You bought it for a price fixed months ago. The day the house is finished, you immediately sell it for whatever new higher price the market has risen to. This is ‘Flipping’.

This works as long as the rise is above the return you could have got for, lets say, putting that money in a savings account, during all the time you were waiting. You can see that flipping gives a major incentive to push the new flipped price UP. And so it did as we all know.

Of course this sounds like it might help the builders cash flow and it does. But at the cost of inflating prices. Flippers buy up everything. Houses sell before they are built. Real buyers, people who want to live in the house, find house prices bring driven up. Once it starts derivatives start to be bought and sold based on house price rises. The mere presence of these ‘bets’ serves to increase the signal that house prices are GOING to go up. More speculative money pours in eager to get their piece. Prices rise on the swelling expectation of flippers, derivatives speculators and CDS gamblers, and up it all goes. Huston we have a bubble.

The problem, as we now all know, is ‘Flippers’ and speculators get greedy and borrow massively to fund their speculative buying. Banks comply because they see it as a no-risk – house prices can never come down – one-way bet. So they too borrow in order to have more to lend. They also get to service larger and larger numbers of mortgages. The banks need, of course to make those mortgages more and more generous/unwise, in order to ‘help’ buyers afford the inflating prices. They not only help, they have a real need to push buyers to over-reach themselves because these same banks are also lending to the derivatives speculators and the flippers and builders. If the bank can’t keep lending to ever more, ever less credit worthy people, then the whole thing slows and the banks lose out from all sides. So make no mistake the banks pushed sub-prime. They were NOT the victims.

So the banks sit firmly in the middle of the bubble creating it in both directions – sellers and buyers.

All it then takes, however, is for the market to turn down, buyers to dry up and prices to go down instead of up, and BANG – developers implode as they don’t make the profits they needed to pay off their borrowings. Those who took bought securities and derivatives and who made CDS

In a market where all you can by is the stuff itself, then the stuff rules the market. The availability of the ‘stuff’versus demand for it, is the market maker. Once you invent Futures it starts to change. If it were only houses it wouldn’t be so pernicious. But sadly speculation has moved into food. And this is where unwise mutates into repugnant.

In this excellent article you can read about how Big Banks and traders have speculated on food and in so doing drove up the price of food and contributed to the starvation of millions.

For those who don’t want to read the whole thing the crux of it is how in the 90’sGoldman Sachs and others lobbied to have the regulations changes to allow derivatives to be created on Futures for agricultural products. Before that trade had to be between people who had a direct interest in the actual physical stuff – the food. Once you were allowed to create derivatives then these contracts could be traded on their own. A derivative based on wheat could be traded between parties who would never buy the food. The supply and the demand for the food remained fairly constant. BUT the demand for the derivatives went up. As it did the ‘value’ of the derivatives went up. As that happened so more speculative money poured in to buy more derivatives priced ever higher. Although the derivatives are NOT the food. The fact they were shooting up in price meant somewhere along the chain from farmer to consumer, very large price increases could and did occur. Needless to say NOT at the level of what was paid to the farmers. The increase happened between the Futures sellers and the ‘higher’ level speculators.

Those just trying to afford food for their children were priced out and died. Killed by speculators. But as with all modern warfare it is done remotely via computer terminals and the killers never see the victims.

http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-how-goldman-gambled-on-starvation-2016088.html

1 thought on “Speculation and bubbles”

  1. Pingback: Banned Documentaries, The Memory Hole. Grub Street Journal #4PampleteersSpecialEdition. #COVIDPURPOSE #PaedoBrino #4PAMPHLETEERS @GRUBSTREETJORNO @SURVATION @WIKI_BALLOT @FINANCIALEYES #WIKIBALLOTPICK #IABATO #SAM #GE2019 ROGER LEWIS ( PORTHOS) @JOEBLOB20 – Not The Grub Street Journal

Leave a Reply

Your email address will not be published.