Market pricing broken - no longer free, fair, or believable

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1

While the actions of the SEC to suddenly change the rules mid-game were troubling, as were the recent Fed decisions to blatantly ignore its own charter, I am seeing something equally worrisome developing out there.

There is a breakdown between what the paper markets (futures, options, stocks, Foreign Exchange, etc) are saying is "the price" and what we are experiencing out in the real world.

Here's one example from the gas shortages plaguing the Southeast:

[quote]The shortage began two weeks ago in Atlanta, the region's largest city, when oil refineries on the Gulf Coast were shut down by hurricanes Gustav and Ike earlier this month.

The effects on motorists have been dramatic. Most service stations in Atlanta are out of gas, with plastic bags placed over the pumps or signs saying "out".

As a result, drivers are cruising the city hunting for gas -- often with a fuel meter needle hovering close to empty. When they find gas, it's often above $4 a gallon.

"It's a little scary. It's concerning. You see how fragile our whole world and economy is and how reliant we are (on oil)," Stuart Canzeri, 39, a financial planner.

A free market can address a shortage in a number of ways, including raising prices to curb demand and increasing supply, according to Hashem Dezhbakhsh, professor of economics at Emory University.[/quote]

I wholeheartedly agree with this assessment...the way a free market works is that together, supply and demand influence the prices of goods.

At least that is how it is supposed to work.

Let's check our national supply of gasoline at the Dept. of Energy.

The blue smear undulating across that graph is the five-year average range for gasoline stocks. Well before the hurricanes ever hit, gasoline stocks began to fall pretty seriously, and are now farther below the five-year average than I have ever seen them.

This represents a severe shortage of product.

So we know we have a shortage of gas. In a free market that is functioning, we would expect to see a sharp rise in the price. Let's check on that.

 

 

Huh. How about that? During the exact same time that gasoline stocks began their plummet to all time lows (in mid-July), price also began its harsh decent, culminating in an astounding 9% decline just yesterday alone.

What sort of 'free market' mechanisms can we concoct to explain this backwards supply/price behavior? Did demand drop enough to explain all this? Well, demand has dropped 3.4% from last year, but supply is down 6.6%, more than canceling that out. The only possible "free market" mechanism that makes any sense is that the free market has decided that demand is going to start dropping faster than supply, and soon.

Otherwise, we have to admit that something is broken here. We don't know what, we can speculate about what it might be, but it doesn't matter. A country with broken supply/demand markets is a country in trouble. It is a very serious issue, as it prevents accurate and timely information from reaching people. At this pace we could easily see a severe gasoline crisis for this country, coincident with a return to wholesale gasoline prices in the single dollar range. That's what I'm talking about.

The same situation exists in the silver markets right now in an enormous way...the US paper markets are setting one price, while in the real world there are shortages and a very different price. Try finding retail silver in any appreciable quantity, and you'll find your self on a long search and paying anywhere from 30% to 40% over the "official" spot price for silver. Why? A severe imbalance between price, supply, and demand.

And this is true for a lot of other commodities out there. Very strange behavior indeed.

And here's the most mystifying of them all:

 

 

This massive move is utterly counter to everything contained in any economic textbook regarding supply and demand.

There are two possibilities here:

  1. The free market is speaking, and all price levels reflect all available information.
  2. Price levels reflect heavy interference by market-movers (governments, central banks and/or their proxies), who are attempting to set prices for key items because they don't like, or are afraid of, the free market prices for these items.

One of these possibilities requires believing that market behavior that's held true over thousands of years suddenly no longer applies. The other requires believing that its possible that the many known and admitted market interventions might have been extended into a few other not-as-yet-admitted areas.

 

Your faithful information scout,
Chris Martenson


P.S. For the record? The last time I saw such a mystifying move in gasoline prices was in September/October of 2004....also a presidential election year.

This is a companion discussion topic for the original entry at https://peakprosperity.com/market-pricing-broken-no-longer-free-fair-or-believable-2/

2

Not to mention gold and silver.,…there is very little gold 1oz bullion supply…the mint just announced buffalo rationing. And silver, there really is no supply; and the markups over spot are 3 buck and up. It is clearly paper manipulation of commodities; like stocks were made to manipulate things that are really valuable…

what are etf’s for but to keep the prices down

 

3

I can tell you for an absolute fact that it is extraordinarily difficult to find gold in any quantity in the Seattle metro area. Last week I learned that I would have had to drive 40 miles to buy about three coins – that was all that was available. Six months or a year ago a person could pretty much get what they wanted when they wanted it.

4

I’d never heard of Don Coxe but came across him last night thanks to CMIs newsletter. Here’s how greenlight advisor describes him:

Donald Coxe, Global Portfolio Strategist of BMO (Bank of Montreal?) Financial Group, has
established a great “big picture” track record and built a large
following over the years. His eloquently phrased investment
recommendations are particularly insightful.

Don does a monthly newsletter called Basic Points. Here’s a link to download a pdf of the September issue where he does a great job explaining his view on how and why the commodity crash/financial stock boom was orchestrated over the past few months.

Basic Points September 2008 http://freefilehosting.net/download/3mf8d

I’ll definitely be adding him to my reading list. This issue also covers "autarky, a policy of nation states aim at self-sufficiency in important products—food, metals, energy, etc. As national policy it is completely antithetical to free trade. Supply and demand will be coming under constraints as nations re-evaluate their policies at a time of high food and fuel prices." Coxe illustrates Russia’s move towards this stance.

ps - Just looked him up on BMO’s website and this publication is supposed to be for clients only, but it seems someone found it important enough to share. Chris, hope you’re ok with it being linked here…

5

He’s one of the best. I like his ability to communicate and connect dots. I trust his long experience and always read what he has to say.

The September 2008 document you linked is a keeper.

Regarding gold and silver availability I’ve now heard from people all across the US and in Europe reporting product being very hard to find and usually running well over the spot price.

At some point we might have to admit to ourselves that a disconnect exists between reality and the "official prices".

Laughing

What do the former soviet crop reports and the Comex pricing have in common? Everything.

6

Last week I drove around the San Francisco Bay Area like a madman trying to locate the last supplies of pre-1965 90% silver as well as gold coins. This is an example of how it went:
"Hello, do you have any 90% silver?"
"Yes. It’s going fast though."
"Okay, I’ll be right down."
20 minutes later I arrive. During that time, three people had come in and purchased everything they had (which wasn’t much in the first place.) Same story over and over again.
I finally located both gold and silver, and was lucky to pay only a very small premium over the price I was seeing just a few days before, prior to the serious supply crunch.
It’s difficult to imagine any free market mechanism that would explain a falling or even flat silver price when the demand so obviously exceeds the supply. I tend to agree with Chris here… something fishy is happening. I’ve seen commentaries elsewhere which suggest manipulation is occurring by banks holding large short positions in silver. Apparently two U.S. banks recently increased their short positions by 450 percent and controlled 25 percent of the market.
The Commodities Futures Trading Commission’s enforcement division is now investigating the silver market.
See here for more info: http://arabianmoney.net/2008/09/26/best-outlook-for-silver-since-the-days-of-the-hunt-brothers/
BTW, apmex.com had 90% bags of silver yesterday "in stock" (I didn’t call to confirm, but they said clearly on their website that they were out of stock up until yesterday). If you’re still looking, you might want to check them out. Sell price is at 10.35 right now. Probably a better price that you’ll get locally - assuming you can find any.

7

Thats a quick conclusion to come to.

A shortage of gas in Atlanta at this time is to be expected given the disruption of supply. Prices rising in such a situation are normal, and illegal, price gouging I think its called.

As for gas stocks going down - That does not necessarily mean anything other than less stocks are held. In tough time it makes sense to carry the least amount of inventory you can. Especially in what is a declinging market place.

So you have not actually shown any shortage at all, only that less stock is being held and the market place is shrinking at the current time - For this you would expect to see prices going down, not up, which is what is happening. Atlanta is a local supply issue only, it will be resolved after necessary infrastructure repairs.

In your example you have interchanged stock with supply, they are not the same thing at all.

I do not see any supply issues other than a local one, which the origination of this problem is well known

I see less demand , so hence dropping prices, this is normal.

I see less demand, do decling stock levels, this is normal.

I think you have read this completely wrong Chris, sorry.

8

Here’s a link to a summary of his August issue. At the bottom of the page there’s a link to get the full pdf of the August issue.

http://www.investmentpostcards.com/2008/08/08/donald-coxes-investment-recommendations-august-2008/

9

there are a number of things that are inconveniently "sold out"–gold, silver, platinum, GRAIN, MREs, paper money…

(recently went to a local branch of usbank, asked to withdraw $5K. they said, "umm… you can take $2K." whoa! several people had been in that day withdrawing any funds in excess of $100,000, leaving the bank short.)

fascinating.

not only are items out of stock or limited in inventory, but these necessities can take a LONG time to move from a shop or bank to the safety of your home storage center.

if you’re purchasing anything (food, precious metals) online, keep an eye on the shipping policy. if they don’t ship it immediately, a sudden fuel crisis can leave your purchases in a UPS truck several states away. fun! :slight_smile:

i’m guessing some things will be in surplus soon: plasma tvs, gas-guzzling trucks…

trying to time my purchases just right.

has anyone else noticed that this backwards supply/demand phenomenon is happening in the service industry, too? companies seem to be pretty stingy about dropping prices. they’re obviously feeling "the pinch" and can’t afford to give a deal. ahh, the house of cards continues…

now’s a good time to use your bank card as a debit card, and pull out ALL possible cash on each purchase. saves a trip to the bank. (also–now’s a BAD time to lose your bank card in the ATM machine in the next town over) oops!

 

10

How is it possible for me to confuse "stock with supply"?

They are the same thing.

And re-read that part about supply dropping faster than demand…that covers the rest of your objections.

11

guess what! i found silver in the trash! keep your eyes open–america is still 95% sheep. sheep who have no idea what they’re throwing away. from what i found in the trash, it looked like a previous tenant got rid of reminders of a marriage, including a decorative silver cup. also found a windchime made of old silverware–at another rental.

bizarre.

 

ACT TODAY! :slight_smile:

12

that happened here :

"Let’s check our national supply of gasoline at the Dept. or Energy. " - You then showed a graph showing stock levels.

Here is an example - A gas retailer supplies 1000 Gallons/day, they have a stock of 200,000 gallons. Demand drops by 10% - the amount they supply has dropped, not the normal stock the company holds. To ensure that the the company maintains maximum profits in a shrinking maket they decide to reduce their Stock by 100,000 gallons to 100,000 gallons a stock reduction of 50% , Supply on the other hand dropped by 100 gallons (10%).

I have re-read, other than a shortage in the south, there are no other shortages being reported that i am aware of - and we understand why this is the case in the south. Again you are confusing ‘Stock’ and ‘Supply’. Stock is what you hold, supply is the your ability to meet the demand on time. If you have no stock , you cannot supply. If you have stock , you can supply. Stock has gone down, that is what it says on the graph, not supply. If it said supply, it would be like saying sales have dropped.

 

13

Oh - now I see where you are getting confused.

Stocks and supplies (or stock and supply) are precisely synonymous when we use them both as nouns. This is how I use them and it is traditional to refer to commodities this way.

The act of providing supply - a verb - is a totally different thing and it is indeed confusing to try and compare nouns to verbs. It shouldn’t be done. Supply can be either a noun or a verb depending on its use.

Here’s a representative sentence:

The nation’s supply (n) of gasoline can be measured as the sum of its stocks (n).

14

Seems like there is an opportunity to exercise the "take delivery" feature of the futures exchange for some of those big silver bars to see if it works. Get five of your best friends together, take delivery of a futures contract, and theoretically each person walks away with a 1000 oz silver bar. Seeing if that works would be just about as much fun as trying to withdraw large sums of money from my local bank.
Oh my God I just realized each bar weighed 62 pounds. Maybe "walks away" is more like "staggers away groaning under the load…" :slight_smile:

Grade and Quality Specifications
In fulfillment of each contract, the seller must deliver 5,000 troy ounces (±6%) of refined silver, assaying not less than .999 fineness, in cast bars weighing 1,000 or 1,100 troy ounces each and bearing a serial number and identifying stamp of a refiner approved and listed by the Exchange. A list of approved refiners and assayers is available from the Exchange upon request.
Some of the online shops I’ve seen offer "comex bars" for a small premium over spot. Maybe those are more expensive, but easier to execute on because they will ship to you, and you don’t need all those friends to split the contract with.
Dave Fairtex

15

Stock vs. Supply
To be sure of what you are saying I’m going to go over it in my words first:

  1. Supply: The amount of product, in this case gasoline, that is taken out of the tanks at the station and sold to consumers.
  2. Stock: The amount sitting in their tanks
    I’m going to place #1 in the demand category, and call #2 supply. The amount that people are purchasing and taking out of the station’s tanks is the amount demanded and taken from supply. Hence, supply and demand.
    I don’t follow nor do I agree with your terms for supply and stock.
    "To ensure that the the company maintains maximum profits in a shrinking maket they decide to reduce their Stock by 100,000 gallons to 100,000 gallons a stock reduction of 50%…"
    Also, why would a company decide to reduce their stock (supply)? If they are out of gas they are not making any money.
    -T
16

With markets around the world plummeting could money repatriation from foreign markets be behind the dollar rise?

17

My understanding of why gold and silver are artificially low is that financial institutions are being forced to sell off the good assets (gold, silver, commodities) to raise capital and cover the losses from the bad assets that they cant sell. At some point this will end and gold should eventually pop…

18

[quote]That leaves the United States with the lowest fuel stocks since 1967,
when America’s gasoline demand was just 5 million barrels a day, almost
half its current daily consumption of 9 million[/quote]

Link

If things don’t reverse in the next two weeks (especially if Oil and Gasoline stocks continue to fall hard), expect to see an enormous gasoline / oil cost spike come this winter.

19

Stock - what you have on the shelf and in the store room out back.

At this point no supplying has occured has it ? You just have … stock … your product (s)

When you make a sale , you have supplied somthing, your stock.

If i make a deal to supply you with 1000 pairs of shoes a month for the next 5 years, I almost certainly will not have that in stock, I will however be able to supply you as I will have the shoes made to replenish the stock I sell to you.

The graph Chris has included shows us how much gas is available. This available gas is stock, it does not tell us about how much gas has been supplied, is being supplied today, or will be in the future.

"Also, why would a company decide to reduce their stock (supply)? If they are out of gas they are not making any money." - Again , it is not supply. And reducing stock is not the same as having none at all. Reducing stock to levels that you don’t need immediately is considered a sensible management move in a contracting market. If you have not ordered the product yet , you don’t need to pay for it yet, thats just cashflow. I included some links to help.

Perfect stock is to only have one gallon of gas (or any product ) more than is needed in that moment and have the gas arrive at the required POS , JIT. Many many businesses (and governments) work this way, it has advantages and dangers.

Supply and Stock are NOT the same thing at all.

http://tutor2u.net/business/production/stock-control-introduction.htm

http://www.jstor.org/pss/223140

http://logistics.about.com/od/supplychainmodels/Modelling_the_Supply_Chain.htm

supply is a process, an event or series of events. Stock is a product(s) that hopefully is part of supply.

20

Silver seems to be under attack today…with huge volume relative to normal levels… all selling. The dollar is going up, gold more or less holdings its own. The dollar action and silver decline make no sense to me…and the fact that silver is dropping much faster and deeper than gold or the dollar suggests that market is being attacked because it is thinner, perhaps hoping it will spill over to gold market.

It certainly looks like manipulation and I am sure it is, but I am a bit confused as to the point. The fact that silver is falling does not give me confidence in the dollar, it perhaps does make me nervous about buying even more…for fear my wife will kill me, ha…but logic tells me to buy…just wish the premium had not shot up so high.

Six months ago I paid about .40 per ounce premium for junk…today the premium is 2.05 per once and two days ago it was only 1.00 per ounce for physical…just as Chris has pointed out.

I am interested in what the manipulators are trying to accomplish…any thoughts?