Credit expansion drives financial market speculation

Dalian Jul11.pngThe world’s major central banks, particularly the USA and China, have been the main driver of financial markets since the start of the Great Recession, due to the liquidity they have provided:

• China’s credit bubble has funded astonishing growth in futures markets
• Monthly volume in LLDPE* (above) has averaged 44MT since Q4 2008
• This is more than total global production in a full year

• The US Fed’s ‘quantitative easing’ has had even greater impact
• It has enabled high frequency trading (HFT) to dominate the markets
• HFT now accounts for 60% of all US share trading

The context of this trading game were defined 20 years ago by the legendary trader, Victor Sperandeo, who noted that:

• An investor’s concern is with the fundamentals
• A speculator’s concern is with price movement

He advised that when markets are being driven by credit expansion, as now, it is prudent to speculate, not invest.

Yesterday’s report from oil analysts Petromatrix provides an excellent insight into today’s speculative mentality. They cynically forecast:

“If the US debt extension passes, then it will be spun as something extremely positive for oil demand. If not, then it will be spun as negative for the dollar and so positive for commodities.”

The blog will look in more detail tomorrow at the speculative impact on oil markets.

* LLDPE = Linear Low Density Polyethylene

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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