When Ken Livingstone was in New York a few years ago he was asked why London was doing so well.Â He replied: â€œTwo words, Sarbanes Oxley.â€
Londonâ€™s financial markets are not keen on regulation.Â Okay, there is regulation, but itâ€™s nothing like the draconian measures seen in the US.Â Â Â And that is why London is such a success.
Sometimes it seems as if Londonâ€™s unique selling pointÂ is US politicians.Â Â Â They overreact so.Â Â They put the kybosh on Middle Eastern investors buying US assets, so they buy British assets instead.Â Â Â Enron and WorldCom go bust, so Congress imposes a straitjacket on US corporations.Â The result: chances of another Enron are diminished, but then the money flowing into New Yorkâ€™s stock exchanges diminishes too, and it flows into London instead.
Of course this is not unique to US politicians.Â Overreactions seem to be the way us humans do things.Â Â Â Â Someone leaves the stable door open, the horse bolts, so Farmer Giles gets a new solid steel door, with a state-of-the-art security system, when all he really needed was a less-forgetful stable boy.Â
But now, the focus is on oil speculators.Â Â Â Â Are they to blame?Â OPEC puts the high price of oil down to speculation.Â Â Â Â In the US, senators are spitting feathers. And London is in the spotlight.
So, are speculators to blame for the price of oil?Â Â And whileÂ we are busy blaming them for oil, why not see if we can think of some other things to blame them for, such as the price of food, the credit crunch, Englandâ€™s failure to qualify for the European Championship, all that rain we have been having lately; oh, and why not blame them for sterling getting kicked out of the ERM in 1992.Â
Sorry, IÂ forgot.Â These days, people seem to think the UKâ€™s ejectionÂ from the ERM was a good thing.Â Â Â George Soros, once vilified as the man who beat the Bank of England, is now a hero for hastening the day the UK was able to step out of the straitjacket that was the ERM.
Yesterday, on Capitol Hill, Daniel Yergin, who is one of the leading energy analysts throughout the entire US of A, spoke to the US Joint Economic Committee.Â “In such circumstances as these, there is a tendency to seek a single explanation,” he said.Â “History, however, demonstrates that changes of this scale and significance result not from a single cause, but rather from a confluence of factors.”
“Phew,” said the speculators,Â but then Mr Yergin added: “Financial markets are today playing an increasingly important role in price formationÂ â€“ responding to, accentuating, and exaggerating supply and demand, geopolitics and other trendsâ€¦ As prices go up, this psychology becomes self-reinforcingÂ â€“ at least until the market turns.”
Others put it more strongly.Â London Metal Exchange Chief Executive Officer Martin Abbott told Bloomberg: “It would be very foolish of any government to stifle participation in markets.’‘Â He added: “Why would an elected politician have a better idea of what the price is than the summation of the entire world’s oil industry trading across an open exchange?… For a government to try and determine a good price for something is nonsense.’‘
Writing in the FT, Martin Wolf was just as dismissive. He talked about this: â€œsilly idea that price jumps [in] oil or food are the result of â€˜wickedâ€™ speculationâ€™ â€“ a fantasy promoted by dangerous populists across the globe.â€
Writing in The Times, Carl Mortished said: â€œThose pilgrim puritans are at it again, threatening to ban, regulate and smother all forms of risk-taking. After adultery, booze, ciggies and online poker, Americans have invented a new vice and its home is New York’s Mercantile Exchange.â€
Warren Buffett once said: “Financial derivatives are weapons of mass financial destruction.“Â Â But futures markets also enable business people to insure against risk.
More to the point, speculators donâ€™t lean against the wind.Â Â They only bet on prices going up if they think underlying factors will drive price up. They only go short if they think there is a good reason for price to fall.
As such, they can provide a counterbalance to the rubbish put forward to vested interest groups.
If you had followed spread betting trends, you would have known the City expected a house price crash when the property industry itself was still saying prices would go up this year.
When the government tried to protect sterlingâ€™s unsustainable exchange rate, Soros knew it wouldnâ€™t work.Â
What do you do when there is bad news ahead?Â Bury it?Â Pretend it is not there?Â That is what governments try to do. Speculators merely tell the truth, and they speak the truth with their wallets; and the truth is then there to anyone that wants to listen.
© Investment & Business News 2013