By Paul Amery
Social exclusion is the least of your problems if you’re a speculator.
The same activity, undertaken in Russia or China in the not-too-distant past, could easily lead to a bullet in the head, or at least a 10-year stretch in the gulag.
For those of us trading in the “free” markets of the West, it’s just a matter of money. Unfortunately, getting stung by having the rules of the game changed when you’re already set in a trading position is a painful reality. It happened to me last July when I had a short position in JP Morgan (NYSE:JPM) shares, and the SEC’s emergency order against “naked” short selling (whatever that is) in the securities of Fannie Mae (FNM), Freddie Mac (FRE) and 17 primary dealers caused a huge price spike in all those companies’ shares.
The US$10 jump in JP Morgan’s shares that resulted was enough to blow through my stops, turning a decent profit into a loss. Tough luck for me, but it’s still galling in hindsight, when you see that those short-selling restrictions didn’t do a whole lot of good for investors in Lehman Brothers, Fannie Mae or Freddie Mac, to name three of the companies on the list, and the reason for the introduction of the rules was given as the need to prevent downward pressure on the banks’ share prices.
So when you see the CFTC start to take a look at position limits in futures for all “commodities of finite supply”, watch out. Incidentally, the only commodity I can think of that is not in finite supply is helicopter Ben Bernanke’s US dollar, but I suppose it’s too much to ask for the US authorities to turn that tap off.
We’ll have to wait a bit longer to see what the CFTC comes up with, but if they are in the business of trying to stop energy price “manipulation”, why don’t they take a look at the oil price recommendations put out by Goldman Sachs (NYSE:GS) since the beginning of last year?
To recap, the US bank forecast a “super spike” in the price of crude to $150-200 a barrel last May, not long before the oil price hit a peak of $147. Then, in January this year, the bank predicted a dip in prices to below $30 a barrel, just before the bottom in the crude price. On 4 June, it raised its 2009 price forecast to $85 a barrel, showing uncannily wrong timing again, since the price of WTI crude has since fallen back from over $73 a barrel to the current $60.
Suggestions that the bank has been saying one thing and trading in the opposite direction itself are not new—Forbes ran a story on this a few months ago—but are notoriously difficult to prove. Let’s just say that, if the bank’s proprietary traders had been following their own analysts’ advice, it’s unlikely that the press would be talking about record bonuses in 2009 for Goldman employees.
I’m not holding my breath that the regulators will even turn an eye to this—after all, conflicts of interest in large securities firms have long been endemic. Unless regulators are willing to bite the bullet and fully separate trading and investment banking activities from advisory ones, markets can hardly be seen as a level playing field. Eliot Spitzer had a go at changing things a few years ago, but with little success.
From past experience, unfortunately, complaints against “speculators” are likely to be used as an excuse to favor one group of market participants over another. And the small guys that invest in index-tracking products are unlikely to wield the same clout as the big players in determining how these rules are set.