Tuesday, June 03, 2008

Oil prices: George Soros warns that speculators could trigger stock market crash


George Soros. Photograph: Suzanne Plunkett/AP

I think its about time governments start heeding the warnings of George Soros.

He, along with Warren Buffett, are trying to warn everyone, but they just aren't listening. Or at least the right people aren't listening. You and I can't solve the problems of speculators and pull the country out of recession. Washington's players can.

I suppose its more practical to listen to what the person at the supermarket checkout stand has to say. If they aren't worried, no sense contacting Congress about any of this.
Geoge Soros, the billionaire hedge fund manager, will warn later today that the oil price has become a bubble that could trigger a stock market crash.

The Financial Times reported today that Soros will tell the US Senate commerce committee that oil was pushed to its recent all-time peak of $135 a barrel by a new wave of speculators.

He believes that the doubling in the price over the last year is partly due to investment institutions, such as pension funds, who are pumping money into indexes that track the cost of crude.

According to the FT, Soros will warn that there could be very serious consequences for global stock markets if the institutions suddenly began betting on a fall in the oil price.

He compares it with the stock market crash of 1987, which was partly caused by a sudden rush of money into portfolio insurance – which institutions used to protect themselves against a fall in share prices.

"In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash," said Soros, in remarks prepared for a committee hearing later today.

Last week, the Senate commerce committee heard that the amount of money pumped into commodity-index investing has soared to $260bn (£132bn) this year, from $13bn [approx £25bn] in 2003. [emphasis mine]

A few years back I was talking to someone at Merrill-Lynch. They said the problem with speculators and market fund managers is their tendencies to do the same things at the same time. They all use the same indicators and if a handful bet on falling oil prices, most all will. The markets are really sitting ducks.

This use of indicators isn't dangerous for one manager of one pension fund to use, but if all the pension fund managers are using the same data and come to the same conclusions about what they mean, it can be devastating to the economy.

Note: Headline links to source.

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