Enter the Dragon- first published March 29, 2005

March 2005 Article:

Kudlow’s Guest Commentary:


Enter the Dragon – New Dynamics in the Oil Market

By Tom Nugent and Warren Mosler

Traditionally, the hedgers and speculators have ruled the commodity
markets. But now a new behemoth has stepped in- the institutional ‘long
only,’ ‘real money,’ fund manager, who has incorporated indirect ownership
of raw commodities as an ‘asset class.’ Yes, there are very large commercial
hedgers, and there are very large hedge funds who are speculators, but this
new entrant with $ trillions of assets under management is changing the
landscape.

In a recent Dow Jones Newswires article by Spencer Jakab, entitled
“US Pension Funds Dip Toe into Commodities, Roil Waters” the author
presents his research into the prospective impact of direct investor
involvement in commodities:

“…the advent of new funds that have allowed pension trustees to buy
a basket of commodities without dabbling in futures themselves, has
unleashed a torrent of money — an estimated $50 billion of flows into
indextracking funds in the last two years alone, with estimates of
another $50 billion on the way in 2005.”

What makes these funds qualitatively different is that they buy and,
for all practical purposes, never sell. In fact, most of them continue to net
buy an asset class as a percent of their total assets, which means as their
financial assets grow over time they buy and hold more and more
commodities. And this is exactly what the crude oil markets are telling us.
Even as inventories continue to grow well beyond commercial demand, the
price continues to rise, as pension funds continue to buy and hoard
inventory. And, if allowed to continue, this building inventory will grow
indefinitely and NEVER be used! Yes, price is still a matter of ‘supply and
demand,’ but in this case the demand is to hoard- continuously buy and
store, and NEVER sell.

At the macro level, our own pension funds are buying crude oil to put
away forever, by bidding up the price and depriving us FOREVER from using
the crude oil they purchase. This is truly a bizarre set of circumstances
at the macro level, while it makes perfect sense at the micro level. It is a
classic and colossal case of failure of institutional structure to serve a viable
public purpose.


To make matters worse, this monster has staggering geopolitical
consequences that are currently being played out. Hopefully essays on this
developing story will trigger more of the same that will enlighten our
leadership to these new forces in motion. But be prepared for things to get
much worse before they get better.

*Thomas E. Nugent is executive vice president and chief investment officer of
PlanMember Advisors, Inc. and chief investment officer for Victoria Capital
Management, Inc.

*Warren Mosler is a principal of Valance Co. and associate fellow at the Cambridge
Centre for Economic and Public Policy in the United Kingdom.

German Economy Grew at Fastest Pace in Two Decades

It’s been a long two decades, and 3.6% growth coming out of a 4.7% slump, slowing to 2% this year, isn’t anything to brag about.

And with the German dependency on exporting to the rest of Europe they’ll likely support continued ECB funding assistance.

The austerity measures, which make euro ‘harder to get’, combined with ECB funding assistance, which addresses default risk, also continue to fundamentally support a stronger euro.

And higher crude prices, which make dollars ‘easier to get’ off shore, work to both weaken the dollar and weaken US domestic demand.

German Economy Grew at Fastest Pace in Two Decades

By Christian Vits

Jan. 12 (Bloomberg) — Germany enjoyed its fastest economic expansion in two decades last year as booming exports spurred hiring and consumer spending.

Gross domestic product jumped 3.6 percent, the most since data for a reunified Germany began in 1992, after slumping 4.7 percent in 2009, the Federal Statistics Office in Wiesbaden said today. The figure was in line with the median forecast in a Bloomberg News survey of 28 economists. GDP probably rose 0.5 percent in the fourth quarter from the third, the statistics office said. The official fourth-quarter report is due on Feb. 15.

The Bundesbank expects Europe’s largest economy to expand 2 percent this year and 1.5 percent in 2012 as the sovereign debt crisis damps demand in the euro area, its main export market.

Germany’s Continental AG, the second-biggest tire maker in Europe, yesterday reported sales and earnings that beat its 2010 goals.

“The growth momentum continued into the first quarter and current forecasts might turn out to be too pessimistic,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “The German economy will likely have returned to its pre-crisis level in the third quarter.”

The euro traded at $1.3032 at 10:13 a.m. in Frankfurt, up from $1.3005 before the GDP report.