Futures trading 101

futures graph As noted many times over the years on this blog (recently here and here), the instinct of most politicians and much of the mainstream media is to embrace simple "villain and victim" morality plays when attempting to explain investment loss. The more nuanced story about the financial decisions that underlie the failed investment strategy doesn’t garner enough votes or sell enough newspapers to generate much interest from the pols or muckrakers. That’s why we are currently enduring demagoguery regarding speculators and why it’s so important that citizens who are not familiar with the function of speculation in markets take a moment to read  Mark Perry’s primer on the economics of future trading:

In fact, speculators don’t determine market forces, they respond to market forces of supply and demand.

Therefore, speculators can’t be blamed for high oil prices, because high oil prices are ultimately caused by factors beyond the control of any speculator: rising global demand in places like India and China, and global supply in places like Saudi Arabia, Nigeria and Venezuela. No individual speculator, or any group of speculators has an iota of influence over the demand for gas or oil in Brazil, nor do they have one iota of influence over the amount of oil in Canada or ANWR, or any control over OPEC quotas. Think about it – Exxon Mobil, one of the largest oil producers and private oil companies in the world, has NO control over the world spot price of oil, so how could a small group of speculators?

Read the entire post. Part II is here and an additional post on the same topic is here.

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