March 16, 2011
When I came to the Commission in 2007, I began to hear rumblings about "new" speculators in commodity markets, and their effects on prices. Now I was quite familiar, as we all were, with the traditional hedger and speculator roles, but as security portfolios began to show weaker returns, folks started to try and figure out how to improve their investments, and many of them looked to the commodities world. This "new" class of investor represented a significant asset class shift from what most of us were familiar. And, as these commodity investments began to pay off, this new class increased in size—in fact, they became massive. In just a few years, by 2008, over $200 billion in "passive" investment (that is, folks who are going long and staying long) came into the commodities markets. The question is: What does this mean? Is it a good thing, a bad thing, or neutral?
Well, we all know what else happened in 2008. Gas prices breached 4 dollars at the pump. Crude touched 147.27 a barrel and we watched the flaming downfall of financial behemoths like AIG, Bear Stearns, and Lehman—paid for by the American taxpayer. So it wasn't an unreasonable question to ask: Is there some linkage, some cause-and-effect between these "new speculators" and the unheard of commodity price increases in 2008?
I asked that question at the time, and you'd think I had questioned whether the earth revolves around the sun. I was bombarded with mischaracterizations of what I had said, what I had asked, what I had questioned. To be clear, the issue was, and is, this: Is it possible that there is some relationship between the presence of "massive passives" in the marketplace (either on the long or short side) and commodity prices?
I've said several times that I don't think these investors are the cruise control of prices, but I do think they tap the gas pedal. I think they can have some effect on driving prices up when they are long in the markets, and I believe they can have some effect on declining prices when they exit.
My primary purpose today, however, is not to tell you what I think. It's to get folks to come to their own conclusions. We've heard so many people say "there's no linkage whatsoever between passive investors and prices" (mostly in an attempt to mischaracterize something I've said). We all know that the easiest way to shoot down an argument is to contort it in such a way as to make it vulnerable to easy refutation. But I'd like to address this in a more sophisticated way. It's simply not the case that "there is no evidence that financial investors affect commodity prices.” In fact, let me give you a few examples from some academic studies, papers and comments over the past few years:
Are you all bored yet? There's more.
That's ten. I'll stop there, but there are dozens of other examples.
Hemingway said, if you really want to write, start with one true sentence, and from that sentence, you can form your opinion of the truth. Well, here is one true sentence: We have more speculative positions in commodities markets than we have ever had in the past—in fact, they are up 64 percent in the energy complex from June of 2008. You can draw your opinion of the truth, your own conclusions as to whether there is a cause-and-effect—looking at the price trends as these investors enter and exit markets. Read the studies, on both sides of the issue, and draw your own conclusions.
As regulators, our job is to ensure that prices are fair, and that's what I'll be looking at as we proceed to review our proposed rules on speculative position limits and bona fide hedging. I believe that we'll be able to find a balance—to protect consumers and markets—while still allowing these critically important markets to perform their price discovery and risk management functions.
Last Updated: March 16, 2011