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Friday, September 5, 2008

India: Also Has Dumbest Idea, No More Commodity Futures

“Inflation is always and everywhere a monetary phenomenon.” –Milton Friedman

This would be funny if it wasn’t so sad.

In a misguided attempt to tame inflation (which is always and everywhere a monetary phenomenon) all futures trading in certain select commodities was banned in India back in May. Unexpectedly, this ban has now been extended to Nov. 30th.

First, this CANNOT work. (I’ll leave it at that for now. I’m not getting into a debate over inflation on a Friday afternoon.) Second, it did NOT work. So why bother extending the ban? Why for DEMOCRACY of course. The powers that be in India are facing an election. I think Winston Churchill had it right when he said, “The best argument against democracy is a five minute conversation with the average voter.”

India isn’t alone. Just recently the clowns over in Pakistan had a similar brain fart. Pakistan: Has Dumbest Idea, Sets Floor for Stocks. That will work out just as well…

Anyways, the long run economic consequences of disrupting the futures market like this will be massive. Producers can’t hedge. Suppliers can’t hedge. Everybody is exposed. A complex economy also requires clear and transparent rules that don’t just suddenly change. Larger, more complex enterprises need to be able to plan and require a predictable regulatory framework. Price discovery is now impossible. The result will be a massive supply and demand imbalance and a dead weight loss large enough to cripple an entire economy.

The big sucking sound you’re hearing off in the distance is the sound of institutional money fleeing India. (The same money fled an unpredictable and bellicose Russia over the last month.) These are the risks of getting into the BRIC (Brazil, Russia, India, and China) markets. You just can’t predict what economically illiterate politicians might do.

This also demonstrates just how fragile capitalism and globalization really is in these countries.

India Unexpectedly Extends Ban on Four Commodities (Update1): “India, the world's second-largest importer of vegetable oils, unexpectedly extended a four-month old ban on futures trading in soybean oil, rubber, potatoes and chickpeas to cool inflation holding at a 16-year high.

The ban has been extended till Nov. 30, said Anupam Mishra, director at the Forward Markets Commission, the commodity market regulator. The decision comes a day after a top official at the federal consumer affairs department, Yashwant Bhave, said it hadn't recommended prolonging the ban, which ends tomorrow.

Prime Minister Manmohan Singh's government faces elections in less than a year and higher prices can influence poll results. The Congress party-led coalition halted futures trading in wheat and rice last year, and lentils in 2006, to keep prices of food affordable.

“As long as inflation remains a concern, it would be difficult for the government to remove the ban,” said Naveen Mathur, head of Mumbai-based Angel Commodities Broking Pvt. “The market sentiment, already at a low, will take a further hit.”

The ban was imposed on May 7.

India's inflation rate has more than tripled this year, driven by surging global prices of crude oil and commodities. Benchmark wholesale price index gained 12.34 percent in the week ended Aug. 23, more than double the central bank's 5 percent target, government figures showed yesterday.

“The decision to extend the ban has been taken as a measure of abundant caution,” Rajeev Agarwal, member of the Forward Markets Commission, said in a telephone interview. “They have taken into consideration the government's concern on inflation.”

The Congress party-led coalition had banned exports of rice, corn, wheat and cooking oils to tame prices.

The trading restriction should be lifted because the measure failed to cool prices, B.C. Khatua, chairman of the Mumbai-based commodity markets regulator, said in an interview July 17. The comment echoed that of a government-appointed panel, which in April said it found no conclusive evidence to suggest futures trading fueled price increases.

Natural rubber prices in India have risen 12 percent since the ban was imposed in May, while soybean oil and chickpeas have risen 4 percent each, according to data from commodity exchanges. Only potato prices have fallen 18 percent.

The Multi Commodity Exchange of India Ltd. and the nation's other exchanges may need at least one month to resume trading in the banned commodities as contracts need to be reworked and fresh approvals from the regulator are required, Agarwal said.

Turnover on India's 22 commodity bourses rose 40 percent to 16.5 trillion rupees ($369 billion) in the four months ended July from a year ago, according to the regulator. Trading value jumped 11 percent to $922 billion in the year ended March 31.

Domestic traders, producers and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million people in the country who trade stocks. Overseas funds aren't allowed to trade commodity futures.”

This last bounce was rejected at the declining 20 day EMA (blue line). Prices are now trapped below the 20, and 50 day EMAs (blue and red lines) with support at the 200 day EMA (green line). The last significant level of horizontal support is around $30. After that... who knows?

BTW, Milton Friedman was a monetarist.


giocatoli said...

Bravo! well-said. This is one reason why I have little ultimate long term fear regarding the dollar or the US economy.

Anonymous said...

wtf was with BAC today? More unwinding of the long oil/short financials trade?

The claims numbers, NFP jobs and unemployment all spell doom. Other than the oil/financial trade unwinding, the only thing I can think of that pushes BAC higher is new hope for a Fed rate cut, further steepening the yield curve in order to aid the banks' balance sheets.

Any technical reasons for the 5+% move today?

-Mike J

gnuttall said...

There is big rally going on in the after hours market...SKF hit 108...

It HAS to be huge funds unwinding short positions...can anyone prove if this is true or not ? (perhaps dropping short interest)

Ben Bittrolff said...


I just saw that. I'm looking for a reason. Hmmmmmmm...

gnuttall said...

I think we might have found our answer:


dougiefreshhh said...

Well, Ben, you called it!

Fred/Fan - now gone and in the hands of Ben & Paul.

They should open up an ice cream shop.

Ben & Paul's - using only the freshest printed money. This weeks flavor: Chunkey Funkey Bailout!

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