NEW YORK (TheStreet) — We all know by now what’s wrong with gas, oil and food prices: They are toohigh, and that’s because of speculators.
President Barack Obama has told Attorney General Eric Holder to form a task force to probe manipulation of the oil market by speculators.
“We are going to make sure that no one is taking advantage of the American people for their own short-term gain,” he told a town meeting a few weeks ago.
The opposite is the case with stock prices. We don’t want them low, we want them high. If they’re too low, that’s because of speculators too, specifically short sellers. So regulators imposed hysterical restrictions on shorting during the 2008 financial crisis, moves that didn’t do a blessed thing except restrain liquidity in banking stocks.
What we’re seeing here are opposite sides of a trend that’s accelerated recently, which is that politicians and regulators have tended to scapegoat speculators whenever prices of pretty much anything head in a direction they don’t like. As my old colleague at BusinessWeek, former chief of correspondents Joe Weber, pointed out in his blog recently: “Forget the rise in population to nearly 7 billion souls. Disregard the astonishing expansion of economies in China and elsewhere. No, it’s the sinister folks at Goldman Sachs(GS) who have made wheat so costly.”
That was a reference to an article in Foreign Policy that blamed Goldman for the food price increase. I’m actually not prepared to let Goldman off the hook quite so easily, but I think Joe is on the right track.
The problem with the focus on speculators, as was demonstrated during the financial crisis, is that it tends to divert attention from the real villains. During the financial crisis, the villains were the actions of the banks, not the speculators betting on bank share prices. Today’s spike in gas prices is a product of oil refiners curbing production and boosting exports. That has kept prices up and doubled oil refinery profits, as Steve Everly reported in the Kansas City Star over the weekend.
ExxonMobil(XOM) reported a 69% increase in first-quarter profit to $10.9 billion, much of that because of richer margins on oil refining. John Watson, CEO of Chevron(CVX), urged Congress last week not to punish the oil industry for “doing its job well.” But taking away $4 billion in subsidies and tax breaks is not “punishment,” but common sense. (Disclosure: I’m ashamed to admit, but glad to recall, that I have some shares of Chevron sitting in an IRA rollover account.)
One problem with the focus on speculation is that it tends to promote the growth of the great intellectual cancer of our times: conspiracy theories. Short-selling conspiracy theories are so rife that they went mainstream during 2008, when old mythology over naked short-selling was adopted by Lehman Brothers CEO Dick Fuld and Alan Schwartz of Bear Stearns to deflect blame for the demise of the firms they ran into the ground. As I’ve pointed out in this space previously, every history of the financial crisis, including the official report of the Financial Crisis Inquiry Commission, has pointed to every other conceivable cause of the crisis except speculation in bank stocks.
Conspiracy theories feed on opacity, and that’s a longtime problem with short selling. Large long positions must be reported to the Securities and Exchange Commission in public filings, but not large short positions. Trading data do not distinguish between long and short trades. The other day, the SEC took a step in the right direction by asking for public comment on a rule that would require public disclosure, on the consolidated ticker, of trades made by shorts.
Short-sellers perform a useful function in the market as conduits of negative information, and shorts often complain that they are discriminated against by regulators. There’s a lot of truth to that. But if shorts wanted to be treated equally, their actions needed to be made known to the market just as longs are subject to disclosure. As things stand now, people can only guess if stock prices are moving because of shorting or short-covering. There simply is no logical reason for that. The SEC is studying this because of a mandate in Dodd-Frank, but it’s a shame that it wasn’t considered a long time ago.
The SEC should adopt the short-selling disclosure proposal, but it needs to go further. Large short positions need to be reported regularly, just as large long positions are reported. It also would be greatly helpful to the cause of transparency if the stock exchanges reported total short positions in individual stocks every week, or daily, rather than every month.
These kinds of disclosure rules won’t curb speculation, but they will tend to shine a hot light of facts in an area where ignorance, rumours and stupidity tend to dominate. Meanwhile, the SEC can focus on the real problem — CEOs who screw their shareholders. And Obama, perhaps, can do something about the oil-company machinations that artificially boost gas prices. Crooked CEOs, and greedy oil companies, will, of course, much prefer that we continue to focus on speculators instead.
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