The last time I checked, we were still in the throes of a recession. A big one. Not technically, mind you. Technically we are in recovery mode since economists have declared an end to the Great Recession, though we are still feeling the very real effects of a global economic slowdown. Unemployment is dangerously high, several European nations are on the brink of financial collapse, and U.S. debt levels are at an all-time high. Yet as we recap 2010 and look forward to 2011 the financial markets appear ever more divorced from reality.
As of this writing, the Dow Jones Industrial Average is hovering around 11,500, and the price of oil has topped $90 per barrel. While this column will deconstruct the latter and offer reasons behind skyrocketing oil prices, the former bears noting for contextual purposes. If this subject as a whole makes your eyes bleed or you are pressed for time during the holidays, I shall spare you several paragraphs and jump to the finish: Financial analysts and traders are stupid, and their bosses are greedy. Godspeed and Merry Christmas to those of you who are taking leave of this diatribe.
Now, for the rest of you.
A little over two years ago I found myself obsessed with the fluctuations on the commodities exchanges when oil prices soared to nearly $150 per barrel. Determined to understand how this could happen, I embarked on a three-month excursion into the world of commodities trading and wrote a story about just how dirty and manipulative this arena had become. In short, we have all been duped by the scoundrels behind deregulation—one of the greatest heists in modern times. One of the least publicized results of deregulation was the mini oil crisis during the summer of 2008, which was entirely engineered by a handful of people in two firms: Morgan Stanley and Goldman Sachs.
Faced with declining portfolios and the near-collapse of the entire banking system, the analysts at Morgan and Goldman basically manufactured easy, short-term gains in the market by releasing competing forecasts on oil prices that drove the market sky high—one more absurd than the next. First, Morgan Stanley announced that crude oil prices could top $150 in 2008. Not to be outdone, Goldman countered days later that they believed it was trending closer to $200. If either scenario was sustained for any prolonged period of time, the global economy would have come to a screeching halt. Magically, both banks backed off these prognostications when the government began to hold public hearings, and price hikes cooled down, although an argument can certainly be made that prices have still been egregiously high compared to the demand in the marketplace over the past two years.
The disquieting aspect of this fluctuation was that Morgan Stanley in particular had more than just a motive to push oil prices—they had skin in the game. As an outsider looking in, I was shocked to discover something that was fairly common knowledge in financial circles: Morgan Stanley is more than just a primary analyst and investor in this field—it is one of the largest oil-related companies in the world. Morgan has significant direct holdings in nearly every aspect of the oil industry, from refineries to shipping to stockpiles and reserves.
But wait, it gets better.
One of the central characters in my Press story was an analyst from Morgan named Doug Terreson. By all accounts, he was a rock star in this field. But just weeks before Morgan’s ridiculous $150 forecast, which came during the beginning phase of the banking industry meltdown, Terreson retired from the firm. Or so Morgan claimed. Other reports indicated he was fired. Co-workers based in Texas, where he worked, thought he’d gotten a big job at a hedge fund and were curious as to why he exited the company so quickly. At best, the circumstances surrounding his departure were confusing. What made it stranger than fiction was his replacement: nobody.
Instead of relying on their high-profile analyst to make the $150 forecast, Morgan parted company with Terreson and allowed Richard Berner, Morgan Stanley’s co-head of global economics and chief U.S. economist, to issue the statement even though his assistant said he “doesn’t deal in oil” and a publicist for Morgan confirmed that Berner “doesn’t do interviews on oil stuff.” When I finally tracked down former Texas-based Morgan analyst Doug Terreson at his mother’s house in Alabama, he simply said, “I don’t feel comfortable talking about it,” and promptly hung up the phone.
Fast-forward two and half years and Morgan has a new oil guru named Hussein Allidina, who believes crude oil will rise above $100 per barrel in 2011. His reasoning? “Regarding crude oil, the need for increased OPEC production will lower spare capacity.” Is he claiming the Middle East has officially reached peak oil, meaning oil production is declining?
Because OPEC sure isn’t saying that, whether it’s true or not. Is he saying demand is increasing? If he was, why not say so? Because it would be difficult to make this claim with a straight face knowing how fragile the global economy still is.
Essentially Allidina’s prediction is capricious.
My favorite part is Morgan’s phrasing. Instead of saying “Bullish” on oil or that they expect it to rise, they say they are “most constructive on crude oil.” Makes you feel all squishy, doesn’t it?
So what are the qualifications of the lead commodities analyst for Morgan Stanley, the man who can move the entire market by issuing a two-sentence statement? According to his LinkedIn profile, prior to his four years at Morgan he spent one year as an analyst at Goldman Sachs, two years as an analyst at the International Monetary Fund and one year as a research assistant at the Bank of Canada. Oh, and Allidina holds a bachelor’s degree from the University of Western Ontario. The man in charge of the world’s most important oil price forecast is about 29 or 30 years old. I am aware of how snide this sounds, but stay with me to understand why his position and his lack of credible experience are so important.
One of the primary exchanges where oil futures are traded, called the Intercontinental Exchange (ICE), is based in Atlanta and was only formed in 2001. The three primary founders and owners of the exchange are BP, Morgan Stanley and Goldman Sachs. It is a completely opaque exchange that skirted American rules of transparency by being considered a London-based exchange despite the headquarters and trading infrastructure being based in Atlanta.
Recognizing the ICE was one of the first gifts handed to us by then President George W. Bush.
No, this is not another “how Bush screwed America” column. To the contrary, this type of trading wouldn’t be possible without the support of President William Jefferson Clinton, who signed the now-infamous Commodities Futures Modernization Act, commonly referred to as the “Enron Loophole,” into law after Sen. Phil Gramm attached it to a massive appropriations bill in December 2000. Gramm, you may remember, is the same jerkoff who crafted the legislation that repealed the Glass-Steagall Act, also signed into law by President Clinton.
And today? Deciding not to attack deregulation of the financial markets is one of the grossest cases of negligence the Obama administration is guilty of. They know better but have chosen to do nothing for fear of upsetting the markets. So what we’re left with is a commodities market that can be easily manipulated by a young man with a bachelor’s degree and less than eight years of experience. Oh, and he works for a firm that has the money to move the entire exchange (it’s relatively small compared to the bond and equity exchanges) without anyone seeing. Oh, yeah, and that firm also has holdings in the very industry it can pour money into and artificially create value in.
For quick reference and in honor of our “Sound Smart at a Party” column here are the answers to some of the inevitable questions that will arise in 2011:
Q: “Why the hell is gas at $4 a gallon?”
A: “Some kid from Morgan Stanley was told to jack oil prices up to help his bosses collect bigger bonuses.”
Q: “Why is my home-heating-oil bill so damn high all of a sudden?”
A: “Morgan Stanley was awarded the contract to hold the home-heating-oil reserves for the entire Northeast, so you should probably ask them.”
Q: “Why are oil prices so high if everyone claims we went to war in Iraq over oil?”
A: “We did, silly, but not for the reasons you think. We went to war to control the oil infrastructure there, but we actually buy most of our oil from countries like Canada and Venezuela. America doesn’t really benefit from controlling Iraqi oil, but our oil companies sure do!”
Q: “OK, now I’m confused. Who is to blame for high oil prices?”
A: “Gosh, that may take a while, and it’s really hard to explain. And since you’re probably not really interested in the answer anyway, just blame Barack Obama. Come on… Everyone’s doing it.”
Same Old Shit—Happy New Year.
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