My Discussion with Marcus at Patrick.net

I decided to respond to a discussion with Marcus, with an article showing that stocks and commodities can actually act like the underlying commodities they represent. They become scarce and price is affected regardless of the supply of underlying commodities. I posted this at Patrick.net in response to Marcus:

Again, maybe you should read this and find out you don't know as much as you think you know [Marcus and I were actually arguing past each other as you can see if you read on:
http://seekingalpha.com/article/1189671-cash-hoards-on-the-sidelines-and-the-great-rotation-old-myths-meet-a-new-reality

From the article, James explains that the amount of available cash and the amount of available stock are usually constant, but now are NOT constant. Therefore, a large increase in available cash, with the inelastic availability of the financial product, and that could be stocks, commodities or houses or anything that is sold, will push the price up.


I said:

So, what James is saying is that the underlying commodity, ie the value of a company, or the supply of oil, may be relatively constant, but in this age of imbalance, there are too few dollars chasing the contracts, stocks, financial products. 

The products themselves start to behave like commodities, with fundamentals not being important.

And Marcus, that is exactly what happened in the housing bubble. The house became a liquid asset, with too much money chasing too few houses. Prices were distorted. Same happens in all financial when there is easy money, and for investments the banksters have way too much easy money.

Another similar view is posted here.


And, finally, proof was given by David1 who commented at the above Patrick.net link:

[About] specs driving the prices up. Look at the collapse in 2008. $100 in 2-3 months price collapse. This was as panic was setting in - this wasn't oil producers suddenly opening up the floodgates on oil supply - it wasn't global demand fallng by 50% or more - it was panic selling by specs. The recession was caused by a credit crunch - the global economy might have retracted by 10% at the worst. Nowhere near the level needed for a price collapse of that magnitude.
So then, as David astutely says, we know by the collapse in 2008 that oil supplies were fairly steady. The only reason for the collapse was lack of credit for the speculators! That is why oil prices remain too high today.

As for today, David1 observes that the number of players has increased in the oil market all moving in a net long direction, and that this movement is in the contracts rather than a reflection of the fundamentals relating to the oil markets.

It is a scam folks, and we all are paying for the scam in the form of higher gasoline prices at the pump. 

Marcus finally understood that I was not saying a few wealthy players should try to corner a market. I am saying an industry is cornering the market, and that industry is pushing up the price of the underlying commodities. He didn't disagree.

And what industries are subject to bubbles? Every one of them because of so much easy money. I said to Marcus:

Well, as James said, it could apply to any industry and any bubble. It could apply to stocks, commodity contracts, houses, gold, bonds, etc.
The first time I saw stocks act like commodities [instead of like reflections of actual value of the companies] was in the dot com bubble. It was a phony bubble generated by lots of easy money and marginal buyers, and the stocks were in such demand that the price had nothing to do with fundamentals [of the companies themselves].



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