in the works in a parallel universe, the commodity bust of 2008.
The commodity panic was not limited to a specific country or a specific product. Modern trade and the speed of information allowed the panic to spread quickly across the world. The list of culprits is long. Evil speculators, farmers who overplanted fields, hoarders who withheld goods from the market, consumers who raced each other for more goods than they could possible use, and, of course, the pigs on Wall Street. Rather than take the time to go over each individual market, the focus of this story will be placed on the biggest commodity market in the world – crude oil.
Crude oil has been a major source of energy for more than 150 years. Fortunes have been made and lost acquiring it. Nations have been built on its back. Nations have gone to war to acquire it. It is a god of wealth to some and the devil for others, but one thing is clear: Twenty-first-century society needs crude oil.
The bubble in crude oil started as countless panics that preceded it, with a gradual inflation of price. Less than 10 years before the bubble burst, the price of crude oil was $17 a barrel.
Iraq was selling as much as it could produce to cover its costly mistake with Kuwait and the resulting war with the US-led coalition. In addition, financial problems in the Far East reduced the demand, making it unprofitable to recover crude from marginal fields.
Demand was not suppressed for long, though, and crude oil prices reached $60 a barrel in June 2005. By the summer of 2006, crude oil futures at the NYMEX peaked at $77 a barrel. After the summer surge, prices retreated and closed on New Year's Eve at $63. However, the uptrend did not halt for long. In September 2007, crude took out the previous year's high and closed at over $80 a barrel.
Multiple factors were cited for the increase in price.
US oil reserves had fallen to dangerous levels, OPEC was reducing production, leftist rebels had attacked and destroyed pipelines in Mexico, an El Nino was predicted, the US dollar was getting pummeled, there was social unrest in Turkey, and Elvis had been sighted in Reno. In November 2007, oil hit $90 a barrel on fears of social unrest in Turkey; the US dollar was getting pummeled. Every bit of news, no matter how bizarre and unrelated, was a reason to buy oil.
On January 2, 2008, crude hit the magic $100 a barrel level. Prices continued to skyrocket throughout the spring and early summer. Finally, on July 11, 2008, oil peaked at $148 a barrel. Now under extreme pressure from the public, President George W. Bush issued an executive order on July 14 removing the ban on offshore drilling that had been in place since 1990. This was largely a political tool, as it did not change production or distribution capacity. By the end of July, oil had retreated to $125. It appeared that the worldwide demand for oil, which six months before could never be satisfied, was now overwhelmed by supply. The global meltdown in housing prices further reduced the amount petroleum by-products needed in construction.
Throughout the fall, oil prices continued to collapse, as the global stock markets plummeted and cash was poured into US Treasury Bonds. The world didn't seem to care that the yield on the 30-year investment was less than 3 percent, the lowest return in 80 years. The cash price of West Texas crude oil bottomed at $38 a barrel on December 21, 2008. In less than six months, the price had fallen by 75 percent, and trillions of dollars had been lost.
Who was to blame for this unprecedented implosion?
Well, according to testimony before congressional committees, the government claimed that there was a single source – the usual suspects, the greed on Wall Street. On June 3, 2009, testimony before the Senate Committee on Commerce, Science, and Transportation, former director of the CFTC Division of Trading & Markets Michael Greenberger fingered the Atlanta-based Intercontinental Exchange founded by Goldman Sachs, Morgan Stanley, and British Petroleum as the agency playing a key role in the speculative run-up of oil futures prices traded off of the regulated futures exchanges in London and New York. In January 2011, crude oil reached the $100 a barrel mark once again.
Bitcoin 2009 to Present: Crypto-Currency Meets Greed
The last bubble we will examine is one that is current, and the final results are not in. Proponents claim that this is the techno-currency of the future; detractors claim it is a way for criminals to hide transactions and is most likely a Ponzi scheme.
Look at the results thus far and you can be the judge.
Bitcoin first appeared in a scientific paper and is credited to the name Satoshi Nakamoto. Since no one has come forward to claim its authorship, it is difficult to determine if it is a pen name or simply an individual or a group that wants to remain anonymous.
Bitcoin is a digital currency that doesn't have any ties to a central bank. The point-to-point payment system allows for transactions to be made in complete anonymity. The coin is created by a complex set of computer codes that create the currency through a process called mining. Unlike central bank–issued currency, which can expand and contract the money supply, bitcoins have a finite number, and once the final coin is mined, it is a closed environment. In addition to being untraceable, the value of the currency is not being manipulated by a central bank. Proponents claim that in the long run, it will allow for a stable market and that supply and demand will establish its value. Opponents claim the opposite – that this trait gives it all of the features that promote extreme price manipulation and can give seeds to a massive Ponzi scheme.
The price history of Bitcoin suggests that the opponents' view is hard to argue.
In 2011, the price of a single Bitcoin fluctuated from a low of 30 cents per US dollar to as high of $32 before crashing back to $2. If this is supposed to be a way to put stability in a currency system the initial result seems to indicate the opposite. In March 2013, the Bitcoin exchange known as Mt. Gox had a software meltdown and triggered another massive selloff in the crypto-currency, as prices plunged by 70 percent in less than three hours. The market recovered and rallied back to over $1,100 a Bitcoin before a selloff in January of 2014 saw the price go down to $500 in less than a month. A rally in February of 2014 took the price back to $1,000 until money laundering and Internet scandals involving one of its strongest proponents rocked the currency. Later in February, Mt. Gox was again the victim of a computer glitch and suspended withdrawals. This time, the exchange closed and admitted that $350 million worth of Bitcoin was missing from its vaults. The victims of the loss are currently looking for a legal jurisdiction to pursue criminal action. The irony of this is that the traders who are searching for their money ($) were using the Bitcoin to avoid legal detection, and were manipulating the crypto-currency for profit; they are now complaining that they were scammed!
Isn't this the same defense that Bernie Madoff's minions used to defend the millions that they helped to steal off of investors? They also claimed that they were the victims because they took the stolen money and invested it with Mr. Madoff!
As of this writing, the Bitcoin is trading around $350, a drawdown of over 70 percent from its peak value during the height of the mania in December of 2013. Whether it will turn out to be a highly speculative investment or just another Ponzi scheme can't be determined at this point, but one thing is certain – it has not proven to be anywhere near as effective as advertised in combating the weakness of central bank–issued currency. In fact, it has multiplied any of their shortcomings many times over!
Lessons to Be Learned
Six famous markets have been examined. The time frame stretches for almost 300 years. Four of these markets resulted in bubble tops, one ended in an implosive bottom, and one is not a final score. Various reasons were given in order to justify the price action. Various underlying assets were involved in the bubbles.
Can we find a common thread?
● At market extremes, emotions drive the markets, not rational thought!
