Guest column: Waiting for the market’s Godot to arrive
As usual, below is the weekly column of Taylan Bilgic of the Hurriyet Daily News, with comments from your favorite Turkey economist’s (I hope) right below:
[Transparency is a bit like religion - nobody dares to oppose it openly, but few do what it requires. This is especially true for companies and markets, which cleverly bypass even the most basic rules of transparency, exploiting the many holes of government regulation. In business journalism, one of the first things you learn is that if a publicly traded company is emphasizing “rising sales” or “operational profitability” in its earnings report, there’s a good chance that company posted a net loss. That information is the very essence of an earnings report, but it is generally buried somewhere beneath this and that. Of course, on paper, the company has fulfilled its responsibility.
Practicing what one preaches about transparency is even more important when everybody seems to agree that the main reason for the global crisis was opaqueness. However, steps to enhance transparency have been visibly lacking as the precious momentum to regulate financial excess is lost.
A case in point is trading in agricommodities – an area that’s been raising eyebrows, as speculative trading is seen as a huge contributor to the current boom in prices of products crucial for millions of livelihoods, such as corn, wheat, rice or cocoa. Some readers might remember that in July 2010, a position built up by hedge fund Armajora skyrocketed cocoa prices: The fund had placed orders to buy 250,000 tons of cocoa, betting with 650 million pounds that prices would go even higher. At the time, prices in London were the highest in more than three decades, having risen by 150 percent since 2008.
In a July 21, 2010 letter to the Financial Times, Chris Herman, head of operations at NYSE Liffe, the derivatives arm of NYSE Euronext, gave an encouraging promise that the bourse would “implement the publication of a report similar to that of the U.S. Commodity Futures Trading Commission” as of the third quarter of 2010. The CFTC’s weekly report reveals positions taken by commodity traders, showing the public who has invested where, giving hints to the purposes of those positions – a good practice of transparency.
It’s been a while since the promise was made, but we have yet to see action. “The third quarter came and went, and we are now rapidly heading toward the third quarter of 2011,” Gary Mead, the editor of worldcrops.com, teases in a June 29 article. “If we see NYSE Liffe come out with a CFTC-style report in the third quarter of 2012, we will be astonished!”
When I asked the reason to the delay, Ian Dudden, head of commodity products at NYSE Liffe, replied that the exchange is working to ensure it has “accurate and consistent position information” from which to generate subsequent reports. “Internal testing and validation is continuing with the aim of publishing the new CFTC-style reports in the third quarter of this year,” Dudden said.
Let’s hope that this report, which hopefully would be a real act of transparency instead of just talking about the virtues of it, comes out soon – and helps journalists and analysts better understand the dynamics behind the commodity price surge.]
I had missed the NYSE Liffe affair, so this was a good learning experience for me. Since this is not my specialty, I will not make detailed comments, just note that the role of speculation in commodity price movements is not so clear-cut. On first look, it makes sense that so such movements cannot be explained only by supply and demand factors. But an IMF paper finds that, at least for one particular commodity, known to elders as the black gold, was not prone to speculation during the sharp price swings of 2008. I remember reading about research on agricommodities in the FT, but a short search on their web page did not bring anything:(
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