Just some questions for you.

First doesn't hot money try to find hot prospects as with .com then housing then commodities? Why do you think that part of hot money that seeks those sorts of prospects would possibly move to either the dollar or Treasuries? What is it about them that could be construed as hot?

Second, you suggest that the hot money might look for a safe haven. What suggests that either the dollar or Treasuries are safe? With the inflationary policies of the Fed and all of the as yet hidden down side liabilities in U.S. financials how could you possibly see either the dollar or Treasuries as being "safe"? Particularly when compared to the far more inflation wary policies from the Euro zone.

Finally isn't it likely that what we are witnessing is the necessary cleansing of hot money from the system and that the likelihood is that the hot money will just keep running after opportunities to lose itself although each such opportunity will at first present as an opportunity to preserve or increase? In other words the hot money will follow whatever upward trend appears only to sink that opportunity with its own weight.

Bubbles are a lot like Ponzi schemes. The people who get in and out first profit hugely. The money doesn't so much go away as it changes hands. If this is indeed a bunch of bubble money racing around the system, it will get concentrated more and more in the hands of middlemen, or of the people who move the fastest. The former isn't so bad, but a bunch of nervous money rushing from place to place seems like a nightmare scenario if the amount is sufficient to cause 50% spikes in prices.

In other words, hedge funds put their money in Treasuries and cash when they don't see any alternatives. This could be because there are no obvious new bubble areas to invest in, or because they are worried they will lose some of their investment in a credit default.

It looks like the commodities boom was the last big bubble left. Hedge fund money may be attempting to pump up the stock market now, but they keep running into reality - corporate earnings are declining, the big earners in the market like the financials are not getting any better, and the tech sector is going to thrive only if the global economy starts moving forwards again, which it is not.

I'm think hedge fund assets are susceptible to chasing after "safe" Treasuries if they see nothing left, or more likely, some new scare in the financial sector crops up. This may be the move coming up in the next two or three months. After that, though, someone will start asking just how much more debt the U.S. government can issue. As of this morning, with Fannie Mae's earnings coming out much worse than expected, it looks like the bailout of the GSEs is going to happen pretty soon, so we are approaching another "tipping point" where the market has no choice but to sell off Treasuries. It may occur in late autumn.

Where hedge funds go at that point is really problematic. Cash deposits in a few safe banks in Europe or Japan? Probably not gold because the metals were part of the commodities boom and are getting dragged down in the commodities bust.

Most commodities (like oil) are still double what they were one year ago. Got a ways to go before bust is apropos.

The move from $85 to $140 looks very much like the type of spike in prices that many commodities display at the end of a fabulous run. Gold in the 1970s had a similar blow-out around $800. Indeed, though, once the spike move is retraced, real damage tends to set in. It wouldn't be unreasonable to see oil at $50/bbl.

But what if the little dust up in Georgia becomes just a tad hotter. Price of oil?

Surely the Russians wouldn't consider recapturing strategically important land which would have the not inconsequential result of raising the price of oil which is now slumping.

it is allocated across how many positions are long and how many positions are short. Not all the buying of oil futures by speculators are long. Last I saw, during the peak in July the majority of speculation was short, and in fact the spike to $135 occurred when a number of the speculative buyers had to cover their short positions, and when it went to $147 they went bankrupt. In late July all those positions were liquidated and that could have contributed to some of the recent decline as well. There are five hedge funds that went bankrupt on short positions in oil.

As far as a bubble goes, oil is not a bubble. The present decline is the result of demand destruction. US demand for gasoline is down 5% from last year, it is down 8% in Europe, it is down 10% for jet fuel in the airline industry. This is totally unlike the housing industry where the price of housing led to a flood of new supply and a glut of unsold houses. There is no new supply in oil, there is demand destruction on a global scale. That's just supply and demand dynamics, not bubble dynamics.

Not to mention that oil demand from China right now is very low because of their efforts at controlling smog. Half the cars can't be driven right now, and huge areas are forbidden from running their diesel generators for electricity. It is part of the mix right now, and there will be some catchup after the olympics.

At the end of the day it is most amazing to me that we say the price of oil is collapsing at $115, which is basically what it's price was in what May? A price that was NEVER supposed to go through $100 in 2008 and now its at $115 and that price is considered LOW.

This is a lot of spin without an underlying understanding of the facts. Spring and fall are the low demand periods for oil, and typically the period of lowest price. Spring and fall are times of moderate climate. Oil is most heavily used globally in winter time for heating, and it is the pre and post period of driving demand. Its the winter season that is the historic high price of oil, summer the historic high price of gas.

We will see.

Once they get started, they are reinforced as word gets around about the fabulous gains achieved by the early investors. Then stories develop about shortages, or new technology, or some new market paradigm that proves the bubble is not only justified but is going to go on forever.

This really is when investment gets divorced from reality, and growth becomes the focus, not return on investment or risk from credit default.

Banning naked short selling is already happening for financial shares. This will probably become permanent.

Looking more broadly at your question, Lesly, of what is institutionally out of control, at least in the U.S. there has been a complete breakdown in the proper use of debt. The consumer has been paired up with a financial industry that has sold debt as an answer for stagnant wages, and that misrepresented what the debt entailed. Total debt was ignored - only the easy monthly payment was emphasized once low interest rates were brought in by the Fed in 2002. Repayment didn't have to come from sacrifice and savings, it came magically from the market as your assets appreciated forever, since housing prices would never go down.

Here are some more culprits: Dick Cheney and Grover Norquist. Cheney believed that federal government deficits had no adverse consequences. Reagan, he said, proved that, so the government could issue endless streams of debt. That is still going on due to a complacement Congress that cannot possibly vote against military expansion. Norquist holds the Republican Party hostage with his campaign never to raise taxes, as if this were some type of moral failing. He ignores the reality that government spending never goes down, certainly not in tough economic times or during "war", so the debt keeps accelerating.

You've got government and industry pushing debt to higher levels, and consumers eager to burden themselves with more and more debt. There is your institutional failure, on a massive scale.

With the government literally handing out money; banks, taxpayers, farmers, military, etc., the real bubble is government paper.
The reason the government borrows so much money has a lot to do with the fact that it is a significant percentage of investment capacity. Where would it go, if the government wasn't borrowing it?
Volcker gets credit for curing inflation last time, but tightening rates also caused a recession. How do you soak up excess money when you've also reduced demand? Government borrowing cured inflation. Not only does it absorb money, but so does the Keynesian pump priming from the resulting public spending.
Money is a medium of exchange that amounts to a public utility. It is the oil in the engine, not the fuel. I don't really like sounding like a socialist, cause I'm not overly social, but the problem is that the act of hoarding money beyond what can be effectively invested is the source of the problem, as it gravitates into ever larger pools and drains the rest of the economy, leaving only those sectors serving these pools functioning. We all worship at the alter of cash, but it's an illusion that like any religion allows us to overcome our inherent distrust of others motives and build up a world on this illusion until it can no longer be sustained. We have to accept money is simply a tool that we cannot afford to break, not a God that answers all our prayers.

:)

^{“Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
Ryszard Kapuscinski}

are in the oil and shipping business.

http://www.vitol.com/assets_investments.php

http://mauberly.blogspot.com/

http://www.mcclatchydc.com/251/story/52241.html

Posted on Thursday, September 11, 2008
By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — Federal regulators have uncovered evidence that oil speculators operating in unregulated "dark markets" may have helped drive the price of crude oil to record highs this year, McClatchy has learned.

The Commodity Futures Trading Commission is expected to issue a long-awaited report before Monday, perhaps as early as Thursday, on what role oil speculators played in the 50 percent rise in oil prices earlier this year. The report isn't expected to declare that speculators are the main cause of the price rise, a conclusion the agency rejected in an interim report in July.

One CFTC commissioner, Michael Dunn, signaled in a speech last Friday in Switzerland that the pending report would be inconclusive, noting, "I doubt it is possible to come up with a definitive answer one way or another at this time" about the role of speculators.

However, unregulated markets account for about two-thirds of oil trading on financial markets, and they could be used to manipulate oil prices on the regulated exchanges that account for the remaining oil trading.

The finding that some speculators exceeded positions allowed in regulated markets is sure to spark debate about how much the CFTC knows about the markets it regulates, whether more stringent reporting requirements are needed and whether the government should require more disclosure from speculators and investment banks.