Dynamite Economy 4.4.2 Key Factors of Productions (Commodities)

Oct 28, 2008
Solvere Lim
Cognose.blogspot.com
CtS Cognoscere tenus Solvere @ www.cts-ideas.com
Cognize before Happening
Solving beyond Root Cause

The world is now tightly integrated - suppliers supply to any consumer in any corner of the world.
Any major shortage of key supply will impact everyone.

Key factors of productions (commodities) affect economy deeper, faster, broader than non-factor of production (financial instruments).

If traders are not suppliers and consumers, certainly there must be significant potential profits to make before anyone will participate in such nerve wrenching sports.
If there are significant profits to be made by unrelated parties, then there is significant costs, losses, leakage from the real supply-demand chain.

This is free willing adventure at the cost of free market efficiency!
Now we examine if such transactions be essential for free market operations?

First we examine modern history, even in most terrifying disasters, with advanced technology, transportations, communication, the world community indeed come together, release from the silos, mitigate the sufferings, within hours.

But, if we read the commodities future markets for last six years, future contract quadruples, while notional values of over the counter commodity derivatives have raised 15 folds to $9 trillion.[1]
These drastic increases in size, frequencies, values in such a very short time window - testified it is not due to real supply, truthful consumption.

There is no shortage of supply of major commodities - there is no mountain, which cannot be overcome, between supply and demand, even in disasters stricken areas.

Future, derivatives trading of commodities not only has not contributed to market efficiency, in fact it delayed free market operations, weaken supply-demand connectivity - it added many hands intermediate, obstacles legal and beyond senses, cost expressed and hidden.

And that goes Free Market !

The commodities Future, Derivatives Trading are therefore not only unnecessary;
They are harmful to free market operations – therefore can be and must be eliminated.

No private, unaccounted privates should trade, stock, hog excessive commodities.

It is the duty of states, democratic or otherwise, market driven or otherwise, to stockpile for the event of catastrophes – natural disasters, or human mistakes, to look for silos when bumper harvest.

No one can imagine such drastic change of market order can be achieved, though many already thinking about this for decades.
However, with poor outlook of world economy, with little chances of making windfall profits, traders will be happy to be relieved of their baggage.

This must be done now, when everyone is worried about own basket of instruments, with no hope of taking a fraction worth home.
This is exactly the window for overcoming, that we must capitalize to overcome.

Therefore, to improve market efficiency, through better flow of information and economy of scale, states should help commodities industries to establish efficient, credible global connections between supplier and consumers.

With computer network, with audited real supply and real monies, free market economy indeed can be made into realities very fast, very reliable – when accountabilities, transparency with minimum delays, losses and leakages mostly removed.

Scale down, terminates all future, derivative trading, while letting existing future contracts and their derivatives expire.

The outcomes:
First, it will free up the people burdened with the baggage, looking for doors to escape, deals to bail out.
Second, it will make all traders more accountable of their actions, hone their product knowledge and become responsible actors that facilitate free market operations.
Then
Third, it will improve commodity trading efficacy (only real suppliers and consumers), effectiveness (focus on direct and speedy trading backed by product knowledge, abandon academic formulas, Nobel laureates’ calculus) AND efficiency (remove speculative fluctuation and agency costs.)

And above all
Fourth, release a few trillion book values dollars engaged in counter productive, heart-wrenching activities.
Resulting in
Fifth, a major source of real, urgently needed liquidity for growing real economy and healthier, happier, meaningful life for traders.

This is indeed freeing up free market – all activities are about real supply and real demand.

This is in fact the applications of strict discipline in research by western scientists – all facts experimented and measured, audited and apply, remove intermediaries, always making simpler, more direct – higher efficiency means bigger profit, proliferate, mass-produced - bring about industrializations, bring about billionaires.

Every action supported by logic, facts and real supply and demand.
Every movement with a real objective to improve efficiency, to satisfy needs.
In managing material side of society, we need such approach.

[1] “Of Froth and Fundamentals” Oct, 17, 2008, Economists - According to Barclays Capital, Institutional Investors had around $270 billion in commodities-linked investment at end of June 2008 from $10 billion six years ago. Yet the future contracts quadrupled since 2001, and notional values of over the counter commodity derivatives have raised 15 folds to $9 trillion.

Dynamite Economy3.5 Who is at Fault?

Solvere, Cognose LIM Swee Keng (Sep 22, 2008)
http://www.cts-ideas.com/ tab Cognose.blogspot.com
Dynamite Economy 3 - Deadly Urgency
3.5 Who is at Fault?

To resolve any issues, we must seek the causes.
For such unprecedented scale, unprecedented spread, as Dynamite Economy, we must also understand the very motivation forces that effected these causes into affecting whole world economy.

But the spread, magnitude determined that even there is a person, a group, an industry that is liable for this disaster, the greater environment allowed it to exist, propagate, proliferate, eventually almost everyone participated, so affected.

To assign fault to anyone, is so very easy, is definitely possible.
In this situation that demand unity, if we focus on fault assignment, will only divide the people, divert the resources.
We cannot afford it, can we?

Even everyone is at fault,
Even so,
we must objectively study every wrong move,
1. Not just the effect, but the broader, deeper impacts.
2. Not just the causes, but the immense motivation forces behind that bring these effects to cause series of over whelming failures.

Dynamite Economy 3.12 Approach – Essential Commodities

Solvere, Cognose LIM Swee Keng (Sep 22, 2008)
http://www.cts-ideas.com/ tab Cognose.blogspot.com
Dynamite Economy 3 - Deadly Urgency
3.12 Approach – Essential Commodities

The values of commodities cannot multiply over a short span of months, yet their prices did.

This is only possible because Prices detached from Real Values.

If we examine carefully, deeper, it becomes clear that the real supply and demand of commodities, especially with immense stockpile by nations, cannot swing violently within short period, yet the prices of energy, metals, grains etc commodities did.

This is only possible because Purchases independent from Actual Demand.

Demand cannot swing so much. Other than those resources really need for real operations, who would purchase something higher than its real values?

Speculations - especially those who are well endowed with OAW, who found no place to park their liquidity will speculate, were speculating.

It is because after the injection of well governed sovereign wealth into free private hands, the scale of OAW available for trading in commodity market is multiplied, become significant, adequate to SIGNIFICANTLY INFLUENCE prices, faster, more effective, effective in inflicting bigger effects, unprecedented swings these are witnessed only after governments dispensed huge sum to intervened in Sub-primes.[1]

The whole world is tightly connected, integrated.
If commodities need to be physically transacted-delivered, the price would not swing so violently.
Commodity traders in fact devised futures, on top of other instruments, to facilitate immediate, easy, many unwarranted, transactions.

The operations of such markets, are they essential to Free Market operations, Free Market objectives?
If free market means the linkage of suppliers and consumers in the most effective, efficient manner -

Does these markets improve efficiency, or hinder transactions, multiply agency cost?

This hurts the real suppliers, the real consumers, which eventually passed on the losses to the economy.
This is agencies theory, but in this case, the agents are performing transactions without real supply nor actual demand.

They are not even agents, merely interfering parties who has no interest in the real commodities.

There will be no urgencies for governments to intervene, if the impact is small, short-lived.

But the impacts become real, severe, stark.

if all traders are likely to make great profit

The inertia to accept change, regulation will be formidable

But with such gloomy economy, without recovery insight

would traders not want to bail out?

From governments, international regulatory bodies

it is the best window to get the support of traders!!

[1] Sep 16, AIG, the biggest Insurance Group declared great losses, price drop from US$79 a year ago to $1.25. Not a world renowned tycoon, Oei Hong Leong bought 1 million share. The Fed gave a US$85b loan. The price escalated to $3.75 end of same day. Oei could easily move into his Free Private Hand more than double his original.

How much money moved from Well Governed Sovereign Fund actually help the economy?

Oei donated the shares to LKY School of Public Policy
This also demonstrated that market move with expectation than real impact manifested!