Does Congress have time to 'fool' with index funds?
Jul 08, 2009
Chore time for me isn't what it used to be when I was growing up on our eastern Iowa farm, but taking care of two horses in the morning before I head in for work gives me a little time to think about the day ahead. Each morning, stop at this spot to get a feeling for the "tone of the day" - and some attitude about agriculture and the markets.
I was thinking…
... about where we're headed from here -- on many different levels.
I know where I'm headed next week... the 2009 Pro Farmer Leading Edge Conference in Des Moines, Iowa. The focus of LEC is going to be the economy and it's impact on ag markets and agriculture in general. A favorite Pro Farmer presenter will be back to talk economic conditions -- Dr. Vince Malanga, president of LaSalle Economics, Inc. This guy nailed the outlook for the economy last year... including the push for economic stimulus from Washington.
Which got me thinking about the "stimulus package." You know how you sometimes have to live through something -- or at least "get into a scenario" -- before the outlook becomes more clear. We're well into the stimulus package... and there is still time for the package to actually provide stimulus. But now there's talk the "states" are finally starting to use the stimulus money the way they are supposed to. Question... How were the states using the money up to now!?!
But then I thought about the infrastructure spending that has started... and is yet to come. That should help the economy... right? Except for the fact these jobs will be temporary jobs and cost billions of dollars that eventually need to be paid back. How does that help the long-term economic security of this country?
And lost in the economy and a national energy policy and a national health policy and a new nuke treaty with Russia and North Korea's bad-boy actions and everything else a well-intentioned and (overly?) enthusiastic President Obama is tackling is an economic train wreck that USED to be a front-burner policy issue... saving Social Security. What happens when more Baby boomers call it quits (if they can) and turn to Social Security to at least supplement retirement? Will there be "actual" money in the system to write checks -- or will the Treasury Dept. fire up the printing press again?
And with all of that going on... Congress has decided to crack down on speculators in the commodity markets. Is there a need to put limits on how speculators "play" in the commodity markets? Well... it depends on the speculators. You know by now there's a difference between "traditional commodity funds" (these funds will trade on both sides of the markets), large specs, small specs, individual speculators, local traders and (look out!) "index funds." The "problem," if there is really a problem, is the index funds.
One of the best definitions of index funds I've heard is "Zombie Funds." These funds don't know what the fundamentals of the markets are... they don't know the technical conditions of the markets... they don't care. And these funds are long only. They only buy futures... the only time they sell is when they are liquidating long positions. Oh... and they will liquidate contracts held in the front-month contract ahead of the delivery period and roll the long positions out a full year. When these index funds entered the scene, they were forced to trade with the same position limits as traditional commodity funds, large specs, small specs, individual speculators and local traders. Over time and because there was a huge demand for investment in these index funds, the exchanges continually increased position limits to allow the money into the market. Now, Congress wants to limit the positions the Zombie Funds can hold. Which is fine... except for the fact there could be a long transition period in which the index funds are liquidating long positions without rolling those positions forward. That, my friends, will bring some hefty pressure to futures.
Or... should I say, is bringing hefty pressure to futures. The Congressional hearing yesterday that included a mention of potential position limits for index funds in commodity futures was enough to spur a round of liquidation -- and that liquidation probably didn't include any Zombie liquidation. What's happening now is the liquidation of long positions held by traditional commodity funds, large specs, small specs, individual speculators and local traders... the traders that pay attention to market fundamentals, technicals and policy changes that could impact trade. They may be exiting the long side of the market before the index funds start a liquidation phase. I know... scary!
On a side note, the impact of yesterday's hearing is being felt in the stock market, too. The exchanges are publicly traded companies... and the value of exchange stocks are falling today in anticipation policy changes will result in lower volume (and profits) for the exchanges. And lower volume means lower liquidity in the markets. It's going to be a tough transition... with a long list of unintended consequences this Congress will undoubtedly (once again) deny it caused.
... about what makes the new profarmer.com different from other web sites. You know... why you should subscribe to Pro Farmer newsletter to maintain access to profarmer.com.
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