Mumbai the Day after,Dont blame politicians!

The fallout of the Mumbai Terror attack has definitely made people ask questions, the amount of venom and invectives that are spewed on our politicians is quite understandable, however an analysis in to what is wrong with the system? Makes me conclude that the real villain is not the politician, not we the people, not even the terrorist, but infact is our administrative class and the system that they propagate.
Pay commission Bureaucracy Vs The Armed Forces

A retired civil servant once told me that India is a great democracy and will never get into a Pakistaniske dictatorship situation since It is to the credit of Indian civilian and military leaders and to our burgeoning democracy that the concept of civilian control of the military has been maintained in independent India. Unfortunately, its exact contours still remain unclear, leading to unavoidable incidents of civil-military confrontation.

The Armed Forces argue that while they accept political control, they rightly feel that "bureaucratic interference" is unacceptable. That much of the civilian bureaucracy—particularly the Indian Administrative Service—is seen as conniving and scheming, concerned only with furthering its parochial interests(which is actually fine by the theory of public choice), further inflames the Armed Forces' sense of injustice. As seen in the imbroglio on the recommendations of the Sixth Pay Commission, this resulted in a confrontation between the bureaucracy and the military brass

Angry over what they describe as a deliberate attempt by the bureaucracy to erode the parity of the crucial middle-rung officers — army lieutenant colonels
and their equivalents in the air force and the navy — with the civil servants, the three Defence services decided not implement the new central pay rules, notified on August 30.

The defence services pointed out that four successive pay commissions, including the recent one, had placed lieutenant colonels(The next rank that the NSG Commando Late Major Unni Krishnan would have got on promotion ) on a par with directors(selection grade) from the Indian Administrative Service(Equivalent of State HOD's and takes about 12 years to achieve and who can indefinitely delay passing the reward cheque that Unnis Father has been promised by the political class ). Expressing surprise at the decision of the committee of secretaries, which reviewed the Sixth Pay Commission report to change the award, the services have said that the civil officers of 'group A' services and the central paramilitary forces have also been placed in the higher pay band.

According to the burgeoning bureaucracy, the military's attitude towards the civil service stems from a fundamental misunderstanding of its nature and role. German thinker Max Weber believed that bureaucratic organizations were an attempt to align the decision-making process to "calculable risks", as rationality was inseparable part of the bureaucratic order. While Weber's rather romanticized vision of bureaucracy has been modified by later-day thinkers, the concept of "rational bureaucracy" has continued relevance in an era of increasingly complex decision-making process.

Bureaucrats are believed to act as a bridge between legislative intent and implementable policy—they are supposedly involved with all three functions of formal policymaking: agenda-setting, policy formulation and its implementation.

The civil servants have convinced the system that the tasks of modern governance are too complex, technical and enormous to be left either to the legislature or political heads of departments. Moreover, the political executive and Parliament may lose sight of the broader and serious questions of national importance if they were to enter into the details of routine administration.' The Devil in the Detail'

Therefore, the argument put forward by the armed forces that civilian control of military is restricted to politicians thanks to the prevailing bureaucracy has been made to look as blithe ignorance of basic tenets of public policy as well as the provisions of the Indian Constitution which provides an explicit constitutional basis to bureaucratic services—India's parliamentary form of government is enmeshed intractably with the support of the civil bureaucracy

Where did the civil service go wrong? Was it inheriting the British legacy?

When the country attained freedom, a major concern of our visionary founding fathers was to ensure that there was no disruption in administration and that the unity and integrity of the country was not undermined.

The task was not easy with over 600 Princely States spread all over the country, and each State having an administrative structure of its own. Besides achieving the integration of Indian States, the country had to face the aftermath of Partition
and look after millions of refugees who had to flee Pakistan.

To add to the problems, the country had to fight a war in Jammu and Kashmir, with a depleted Indian Army. The British Indian Army as it existed in colonial India was divided between India and Pakistan, and British Officers left India. So also the
officers of the Indian Civil Service.

Remember this, the so called administrators (Government servants) had an adversarial relation with the national political parties during the fight for Independence the travesty was that post independence it was the same class of adversaries whom the political founders used for implementing the policies of the national government.

Much of the credit for the creation of the All India Services, particularly the IAS and the IPS should go to the first Home Minister of the country, Sardar Vallabhai Patel.

The administrative system was strengthened by the creation of the Indian Administrative Service and the Indian Police Service - as all-India Services. They were conceived as meritocracies. Selections were made on pure merit, on the basis of
competitive examinations, followed by interviews.

The officers were posted to different States after training. While the States had control over them, as far as disciplinary matters were concerned the Centre retained authority. This gave rise to a classic situation, a slave who had two masters becomes completely free.

The worst of the ills that followed were high level of corruption, increasing politicization and absence of accountability(read performance linked pay).The rationale for new pay commission was that these best and bright government officers needed to be benchmarked with say an IT Professional.

(Whereas during this slow down we are seeing these high paid IT Professionals being "laid of" and given "pink slips" what about the Civil Servant?)

Whereas a politician who does not 'deliver' is either kicked ( or atleast can be kicked) out by the real masters(people) or is chased by his vindictive political adversary(I am from Tamil Nadu!) and that a high paid corporate executive can be given a 'pink slip'. The civil servant neither has performance targets nor can technically ever be 'sacked' (at max only suspended or transferred).

There was a time when government servants/civil servants were universally respected. Their honesty, integrity and devotion of duty were taken for granted. This is no longer the case. They do not stand out from the rest of the bureaucracy any more; there are as good or bad as the rest of the system. Degeneration has crept into its cadre since the service no more continues to attract best of talents in the country.


The main reasons for the change that has occurred are

Overwhelmed by the constant feed of praise and adulation, the maturing entrant tends to lose his head and balance. He believes that he is infallible, thanks to his intellectual superiority and his gathered wisdom accumulated while working in different fields of government.
The rather enthusiastic diffident youngster of early idealistic years, in course of time, is transformed into an arrogant senior fond of throwing his weight around; he becomes a conceited prig.


The national emergency between 1975 and 1977. when the leadership spoke of a 'committed bureaucracy' that was running the country irrespective of the political instability.

The value systems crumbled further in the 1980s and early 1990s, when degeneration of political leadership created an ethos of unashamed corruption. The corrupt politician started working hand in glove with the corrupt civil servants and the two
blatantly threw political integrity and Service honesty completely overboard.(Remember the Lage Raho Munna bhai sequence where an old retired government employee strips himself bare to get his pension?)
The official does not realize that some time in the future the hunter would invariably end up getting hunted. This was shown beautifully in the 80's by the national award winning Girish Kasarvallis Kannada film Tabarana Kathe.

Tabarana Kathe is the story of Tabara Shetty, a government servant in the ranks of a watchman. Tabara Shetty serves the Government till his retirement period. He is a dedicated worker and respects the system that sustained him for so long. But problems emerge after his retirement. Tabara never gets his pension money(The System as of Today : A Pensioner even if from the Armed Services needs to prove every month that he is alive by submitting a life certificate collecting the pension in person is not a sufficient proof that one is alive).In his failing old age, Tabara approaches the officials he had served during his tenure. Except for a few sympathisers, nobody helps Tabara get his pension. Matters worsen when his wife and only companion in the world falls sick with diabetes. She has a sore foot which turns to gangrene. Tabara tries all means to get his pension to treat his wife(When Tabara fails to manage his wife's operation, in a moment of desperation, he goes to a local butcher and asks if he would ampute his wife's leg. This intense scene was shot brilliantly.). After a few months, his wife dies. The pension money arrives after that. Tabara curses his higher officials and the administrative system which ruined his life.
The climax was the highlight of the film as in all Girish Kasaravalli's films. Tabara finally receives his pension. But everything is over. His sole companion has left this world. Standing in front of his past government office, Tabara shouts at the office staff and holds them responsible for his wife's death.

The dilution of the original concept of meritocracy has crept in over a period of time.
The first blow to Patel's merit scheme came from the Constitution, which reserved seats for scheduled castes and tribes in the competitive examinations. Next, was the step taken by Charan Singh in 1979 when the promotion quota for the state civil
services was increased from 25 percent to 33 percent.

This was followed by the Late V.P. Singh(who infact died on the 2nd day of the Mumbai terror attack) who brought the total reservation to 50 percent by reserving seats for a new category of 'other backward classes'. Further additions to the list were made by the 'humble farmer' Deve Gowda who proposed to slash the percentage of direct recruits, and Dr Manmohan Singh who has declared reservation of three percent for physically handicapped persons.

The Service lost the habit of taking initiatives and became blind executors or "Dilbert's" of policy, perhaps because a larger proportion of the annual intake drawn from technical disciplines and premier engineering institutions(yours truly a Chemical Engineer) found itself incapable of intellectual initiative and people skills.
They were excellent test takers who could beat by hook or crook any psychometric test(Again Remember Munna Bhai?) but unlike their courses they did not have an exam to be graded end of the year.Blind execution without any application might be good but it also gives rise to comical situations.

The British bureaucracy had a post for a person to climb the cliff of Dover daily and report if Napoleon was coming The post was abandoned in 1946!

The Degeneration has continued unchecked, the service has reached such a deplorable stage that the government and the people would (if not already) refuse to accept it as the premier service if the 'real' truth got out .
Hence the whole strategy has been very cleverly evolved to blame the political class for all ills that ails the system wait for events like these terror attacks stand back and wait for the emotionally charged gullible public (who just want to give vent to their feelings for about 48 or in this case 62 hours) to further make the politicians look like villains, when infact Politicians are really simpletons, puppets who have always been frustrated with the Sir Humphry Appelbys and Bernards of the Burecrautic class.

The Great Britain as a standing Example.

If it can be done in Britain the birthplace of 'using the art of game theory by bureaucrats we can try to do it as well right here in India'.

The British Political class thought that they achieved significant progress by trying to make the civil service considerably streamlined and efficient atleast however it was just another classical case of government servants gaming the theory of public choice.


Public choice in economic theory is the use of modern economic tools to study problems that are traditionally in the province of political science.
In particular, it studies the behavior of voters, politicians, and government officials as (mostly) self-interested agents and their interactions in the social system either as such or under alternative constitutional rules

All these theories tended to support the beliefs of what were then fringe economists such as Friedrich von Hayek, whose economic models left no room for altruism, but depended purely on self-interest, leading to the formation of public choice theory.
The economist James M. Buchanan decries the notion of the "public interest", asking what it is and suggesting that it consists purely of the self-interest of the governing bureaucrats. Buchanan also proposes that organizations should employ managers who are motivated only by money. He describes those who are motivated by other factors—such as job satisfaction or a sense of public duty—as "zealots".

This( as well as works of other leading social engineers like Laing (who was infact a shrink) led to a widespread popular belief that the state created by these bureaucrats was purely and simply a mechanism of social control which calculatedly kept power out of the hands of the public and made it appear to the public that all the powers was with the political bosses and that the bureaucrat was infact a humble public servant. Documentary maker Curtis in this three part Documentary The Trap, shows that it was this belief that allowed the theories of Hayek to look credible, and underpinned the free-market beliefs of Margaret Thatcher, who sincerely believed that by dismantling as much of the British state as possible—and placing former national institutions into the hands of public shareholders—a form of social equilibrium would be reached. This was a return to the mathematician Nash's work, in which he proved that if everyone was pursuing their own interests, a stable, yet perpetually dynamic, society could result. The documentary ends with the suggestion that this mathematically modeled society is run on data—performance targets, quotas, statistics—and that it is these figures combined with the exaggerated belief in human selfishness that has created "a cage" for Western humans.

Way ahead.

'The First step in solving a problem is accepting there is a problem'-Anonymous Alcoholic! We cannot fight terror, with a pathetic back up system.

It must be recognized that a complete overhaul of the civil services structure at this time is neither feasible nor possible and hence the best alternative is to scrape the system completely and start out with a new system of administrative governance with proper checks, balances and performance linked pay.

Suggestions for 'transforming' the civil services into an effective instrument of good governance and hence our Society

1) make the Service politically neutral and to insulate it from political influences or interferences that distort its proper functioning.
2) Raise the level of accountability so that the performance of the civil servants in administrative delivery at every level are objectively analysed to decide their individual future. The third
3) bring about systemic changes designed for qualitative improvement of the Service and the performance of its men and women.


Angry Mumbaikars and Ms.Shobha De.
Hence Ms.Shobha De The reason why the cops dont have proper protection gear is not politicians, it is the Multi layered process which is followed by the treasury and its secretaries by which even if protection gear were available they would have to sign a register which has green colour paper and red check boxes to get that by which time.......

Forgive 'em politicians they are simpletons.

P.S: Do you blame politicians or the administrative system that shepards our pride NSG commandos in BEST Buses? Are we not missing something here and blaming the wrong side?

Bombay

Spot Gold has been going up, We have seen in recent years that Precious metal command a "Terror Premium" and we have seen rallies in precious metals during such acts of terror.

Precious metals Futures markets in New York is closed today on account of Thanks Giving wouldn't be surprised to see the Gold Market re open with a Large Gap tomorrow.

Have been reading lot of Blogs and micro blogs on the Mumbai attacks.
Cant help noticing the anger which these guys show in the form of Invectives in their messages.

I think there is only one and quite a simple approach that we as citizens of India can adopt to win this war on Terror.
Just go out and Vote,doesnt matter who you support just go out and Vote and tell all educated people you know to come out and Vote whatever be the election, councillor,legislative,Parliament....

Terrorists hate the spirit of Democracy.


Dedicate this blog to the spirit of Bombay(ya ya you can keep renaming but it will always remain Bombay) and my late dad a true blue Bombayite who introduced me to Cafe Leopold and to Shamiana at The Taj (Cannot forget the unlimited rounds of coffee refils from 200 am (after a mondegar beer,bademiya dinner) till the guys start laying the table for breakfast.


Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Ha haa, ha ho ho, ho hi haa ha haa
Hm hm hm hm, hm hm hm , hm hm hm hm hm
Aye dil hai..

(Kahin building kahin traame, kahin motor kahin mill
Milta hai yahan sab kuchh ik milta nahin dil)
Insaan ka nahin kahin naam-o-nishaan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

(Kahin satta, kahin patta kahin chori kahin res
Kahin daaka, kahin phaaka kahin thokar kahin thes)
Bekaaro ke hain kai kaam yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

(Beghar ko aawara yahan kehte has has
Khud kaate gale sabke kahe isko business)
Ik cheez ke hain kai naam yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Aye dil hai..

Geeta:
(Bura duniya woh hai kehta aisa bhola tu na ban
Jo hai karta woh hai bharta hai yahan ka yeh chalan)
Tadbeer nahin chalne ki yahan
Yeh hai Bombay, yeh hai Bombay, yeh hai Bombay meri jaan
Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan
Geeta:
Aye dil hai aasaa jeena yahan
Suno mister, suno bandhu, yeh hai Bombay meri jaan
Rafi:
Aye dil hai mushkil jeena yahan
Zara hat ke zara bach ke, yeh hai Bombay meri jaan

commodityonline.com will be the number one portal for commodities by 31 Dec 2009 ?

Global Derivatives markets have gone to the next step indeed.

Organized Markets have existed to establish a fair value for a service or produce.
Now we have what are reffered to as prediction markets.

Prediction markets are sophisticated markets on which binary contracts are traded.

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of an underlying asset. The underlying asset on which derivatives are based can be commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates. Credit derivatives are based on loans, bonds or other forms of credit.

Binary contracts are double derivatives, i.e derivatives of derivatives.
Binary contracts on expiry either yield 100 or 0.

Currently one of the largest prediction market is The Ireland based Intrade(Intrade.com).


Intrade.com has created an exchange for participants to trade (speculate on) events that directly affect our everyday life, like politics, entertainment, financial indicators, weather, current events and legal affairs - these are the various trading categories.

Within each category Intrade.com lists a set of contracts, a contract is an event that will have an unambiguous result.


One trades (speculates on) what one thinks the outcome of that event will be.

For example a political contracts - Will Obama be re-elected President in 2013. There are only two possible outcomes for this contract - Yes, he will be re-elected or No, he will not.

If Obama gets re-elected that contract will close at 100. If on the other hand he fails to win the general election in 2013, the contract - Will Obama be re-elected President - will close at 0.

However, until the election is over that contract will fluctuate in value between 0 and 100 just like a stock, reacting to the news of the day and buying & selling by traders and speculators.


Other contracts listed on them included

1) Will the US economy head into a recession during 2008.(The most active contractlast traded price 91.3 on 13 Nov, this means that participants on Intrade are predicting that there is 91.3 % that US will head into a recesion in 2008, you think they are correct you buy , you think otherwise you sell (Depending on where the prevailing bid and ask are for eg in this contract it is at 91-92)
2) Will Gold close on or above 1000 on 31 Dec 2008.(currently at 15% and quite an active contract)
3) Who will win the Indian elections in April 2009? (not much liquidity)
3) will Britney spears go to the Rehab by 31st Dec 2008? (Dont wish to comment!!)

What the prices mean

Since these contracts trade between 0 and 100, One can think of the price at any time to be the percentage probability of that event occurring.
Going back to our Obama, example, lets say on December 1, 2013 the Obama re-election contract was trading at 63, meaning, traders gave him a 63% chance of being re-elected.

If you thought President Obama will be re-elected you would expect that price to go up - towards 100. In that case, if you bought one contract at 63 and Mr. Obama did get re-elected you would make the difference between your purchase price - 63 - and the closing price - 100 - or 37 points.

Who determines the prices?

Participants decide the price - along with thousands of traders around the world. Just like the price of Google stock is determined by the buying & selling activities of thousands of traders in the financial markets, the price of Intrade contracts are determined by traders,who are confident enough to back up their opinion by risking real money

How does one calculate profits and losses?
Profits are calculates in terms of PIPs, price in points, when a contract trades from 63 to 73 - that's 10 points. Each point is worth 10¢.

If you bought one Obama re-election contract at 63 and he does win the election, that contract will close, or settle, at 100. Your profit will be 37 points x 10¢ per each point or $3.70.

Settlement price – purchase price = your profit
OR
100 – 63 = 37 points X 10¢ per point = $3.70 a profit
On the other hand, if he does not win re-election that contract will settle at 0 and your loss would be 63 points.
0 – 63 = – 63 X 10¢ per point = – $6.30 a loss

Remember, One does NOT have to hold onto any contracts you buy or sell until the election, you can trade out of them any time!

Let’s take another example, you buy 6 contracts at 50 in the morning and sell them out at 73 later that day. You collect 23 points (73 – 50) times 6 contracts times $.10 for each point or $13.80 in profit.

23 points X 6 contracts X $.10 = $13.80.


Coming to contracts of our Relevance, Namely commodities contracts, there are a few active commodity contracts especially in Oil and Gold.


For serious Gold and Oil traders here is a tip, do keep checking every day these markets, they are definetly a clear indicator of the trend and also tell you what one could expect(or not expect) from the market.

Being a new market, Intrade also has a feature called suggest contracts.
And hence i plan to mail them "Commodityonline.com will be the number one portal for commodities by 31 Dec 2009" ? Any one for this bet !

The Intelligent Investor.

First they came chasing the commodity broker
and I did not speak out
because I was not a commodity broker.

Then they came chasing the p-note FII broker,
and I did not speak out
because I was not a p-note FII broker.

Then they came chasing the local Stock broker
and I did not speak out
because I was not a local stock broker.

Then they came chasing for me
and there was no one left
to speak out for me!


Inspired by Niemoller

Watch out for the Commodity boom ahead

Bail out Good for Commodities.We will see huge run up on commodity prices.



The recent argument that all this financial crisis will lead to economic slow down, causing a soft landing it is also believed that this is going to bring down the price of commodities, however contrary to popular perception people are over looking one fundamental fact, or rather the basic definition of the term INFLATION

In economics, inflation or price inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation.Inflation can also be described as a decline in the real value of money—a loss of purchasing power.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.Views on which factors determine moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. The consensus view is a sustained period of inflation is caused when money supply increases faster than the growth in productivity in the economy.

Now is this not the case; The whole world is talking of slow down economic recession et all,lowering of productivity which is causing markets all over the world to tank, and how do the biggies try to solve this 'pseudo liquidity' problem.Presto by printing more notes.Which is extremely inflationary.

One will see the effect of this inflationary measure hitting back at the markets,and leading to a boom in commodities.

SU rep Ron Paul said to CNN " Something has to give. You just can't create more money out of thin air and propping up everybody. It's an immoral system. You're asking the poor people to bail out the rich. You're asking the innocent people to bail out the guilty. You're asking people to just totally defy the Constitution because there's no place in the Constitution that says that we can do these things.

Besides, economically, it's a disaster. This is going to cause a great deal of harm. It's like a drug addict taking a strong fix, and he feels better for a day or two, but believe me, we're going to kill the patient. And the patient here is the dollar system and our entire world economy. I would say let's get off this addiction.

credit markets seem to start loosening a bit to some degree in the short run, but that just means we'll have more inflation. You can't create $5 trillion out of thin air and not expect inflation. So although the dollar may be up a little bit right now because the markets are a little calmer, this just means that in time we're going to all suffer and pay for this, and we're going to pay for it with higher prices"


Obviously Gold investors are going to be very happy about this, since the best hedge against inflation is Gold.
After all The Fed and Treasury are merely cushioning the massive deflationary forces in the financial system by printing more notes!!!

I have been talking to my circle this logic and impressing on them as to why it is still a very good time to be buying into gold and commodities.
After all this is just the beginning of the Commodities Boom,would definitely be surprised if commodity investors do not endorse my view on this! or come with an alternative argument against the commodity bulls who are being now pampered by the global central banks.And definitely the commodity bulls are going to be laughing all the way to the bank.

And then Sachin created God!

4 E's That Determine Gold Prices

In 2006, My paper 4 E's that cause the Gold Prices to Rise was treated with utmost contempt.
I can now say after 2 years that though I dont consider myself as a clarivoyant atleast I now believe that Markets are after all about common sense which is pretty uncommon.

Thanks to Sangeetha Shah of Financial times for this write up.

Impact of sporting Events on Commodity Prices. Singapore F1 GP ?

Beijing olympics had a huge impact on prices of commodities as China had to procure
previously unheard quantities of Steel,copper, Cement etc ahead of the Beijing Olympics.

Similary Singapore ,started the Same, Last year August 2007,which saw a considerable run up in prices of commodities,My Colleague Manoj and I had the opportunity to see the construction activity of the First Night Race GP at Singapore in person way back in July and had come out with our advisory on the same, Due to Compulsions we had to keep these details in private till now, now that there is Just a week away for the Singapore f1 GP here I share my view as well as Snaps of the same,

The 5.05km long street circuit would offer a number of 'twin side' overtaking
opportunities, fast turns and technically challenging sections for F1 race drivers would definetly make this wet race hot!

More than 70 per cent of the street circuit is made up of Singapore’s existing road network. The Paddock building houses the control tower, garages for the teams, hospitality lounges, Press Room and other facilities( A beautiful view of this from the Singapore Flyer is presented above, thanks manoj for this lovely shot taken on a very ordinary SLR)
i. Construction of a 1.2 km road that will form the eastern section of the circuit
ii. A new vehicular/pedestrian underpass and service road leading to the Pit Building
iii. Widening of a stretch of the promenade between the existing outdoor seating gallery and floating platform in Marina Bay
iv. Widening a section of Raffles Boulevard from Nicoll Highway to Temasek Avenue
v. Modifications to existing road kerbs and traffic islands.

Any guess on the quantity of commodities used, the unofficial news is that the Contractors Chan & Chan Co Pte Ltd estimated almost about 77 million dollars to raw material consumption alone :) !!! (Does not include the Lighting,energy and related tertiary commodity consumption)

Definetly a race that would have delighted Senna(and his fans as well), Afterall you can be 100% sure that it is going to rain in Singapore,not to rule out Proffessor and schumi as well.

There were a section of tracks that I observed (The new 1.2 km eastern section you can view that section from the verandah of the Indian Restaurant at the singapore Flyer).This section inspite of it being new I think would be extremely bumpy hopefully it is safe one.(and not end up a tamborella!)

As of rubber burning be sure that you would go back home with that 'incense' deep in yournose adicttive and making you want more and more of that smell!!


Dont miss out this 'commodity prices sensitive' Race Next week!! !!

More Snaps at http://picasaweb.google.co.in/dindiz/F1GPTrack

Will she save America from the Oil Crisis ?

Was really surprised when i came to know about McCains mate, Sarah Palin(pronounced Pay lin),I first read about her a few years back when i was tracking Crude oil.

I read about this alaskan pipe line (apparently her pet project) and also how prosperous Alaska would become due to high oil prices (Every citizen of Alaska was promised that they will get some 1000-1500$ of Oil Debit Cards).

She was also some kind of Miss USA or Something (Sandra Bullock Miss Congeniality types).

Will her capable administration and ability to handle sensitive Oil Policy on which she is an expert (yes yes when she becomes the president, afterall Mc Cain has had some hundreds of surgeries!!) help America out of the Oil Glut.

Will The NSE "Rentseekers" be future of the Indian Democracy ?

The NSE has successfully launched the currency futures contract.
In about a couple of decades, if What Robin Hanson predicts comes true,it would be this seemingly innocous building which is currently a rent seeker in the Indian derivatives market that would become the seat of all Political Action.
Laws and policys would not only get vetted by servers at Bandra Kurla Complex but also get official thumbs up or down?
And who would give this thumbs up or down ?Politiciants? Officials ? Voters? No SPECULATORS would !!!

Robin Hanson had coined the term Futarchy way back in 2000 however at that time we would have only laughed at that idea! Here is his argument

This short "manifesto" describes a new form of government. In "futarchy," we would vote on values, but bet on beliefs. Elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare.

Democracy seems better than autocracy (i.e., kings and dictators), but it still has problems. There are today vast differences in wealth among nations, and we can not attribute most of these differences to either natural resources or human abilities.

Instead, much of the difference seems to be that the poor nations (many of which are democracies) are those that more often adopted dumb policies, policies which hurt most everyone in the nation. And even rich nations frequently adopt such policies.
These policies are not just dumb in retrospect; typically there were people who understood a lot about such policies and who had good reasons to disapprove of them beforehand. It seems hard to imagine such policies being adopted nearly as often if everyone knew what such "experts" knew about their consequences. Thus familiar forms of government seem to frequently fail by ignoring the advice of relevant experts (i.e., people who know relevant things).
Would some other form of government more consistently listen to relevant experts?

Even if we could identify the current experts, we could not just put them in charge. They might then do what is good for them rather than what is good for the rest of us, and soon after they came to power they would no longer be the relevant experts. Similar problems result from giving them an official advisory role.

"Futarchy" is an as yet untried form of government intended to address such problems. In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be:

When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Futarchy is intended to be ideologically neutral; it could result in anything from an extreme socialism to an extreme minarchy, depending on what voters say they want, and on what speculators think would get it for them.
Futarchy seems promising if we accept the following three assumptions:
1)Democracies fail largely by not aggregating available information.
2)It is not that hard to tell rich happy nations from poor miserable ones.
3) Betting markets are our best known institution for aggregating information.

GDP is today the most common measure of national wealth. It seems hard for frequent travelers to escape the impression that people in high GDP nations tend to be richer and better off than those in low GDP nations. Economists thus tend to be willing to recommend policies that macroeconomic data suggest are causally related to increasing GDP. It seems that it is not that hard to, after the fact, tell rich satisfied nations from poor miserable ones. GDP may be good enough, and with the full attention of our elected representatives, we should be able to do even better, such as by including happiness, inequality, health, leisure, and environment measures.
If we can measure how rich nations are, we can use such measurements to settle bets. This is good because betting markets, and speculative markets more generally, seem to do very well at aggregating information.

To have a say in a speculative market, you have to "put your money where your mouth is." Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias.
Speculative market estimates are not perfect. There seems to be a long-shot bias when there are high transaction costs, and perhaps also excess volatility in long term aggregate price movements.

But such markets seem to do very well when compared to other institutions. For example, racetrack market odds improve on the predictions of racetrack experts, Florida orange juice commodity futures improve on government weather forecasts, betting markets beat opinion polls at predicting U.S. election results, and betting markets consistently beat Hewlett Packard official forecasts at predicting Hewlett Packard printer sales. In general, it is hard to find information that is not embodied in market prices.

A betting market can estimate whether a proposed policy would increase national welfare by comparing two conditional estimates: national welfare conditional on adopting the proposed policy, and national welfare conditional on not adopting the proposed policy.
Betting markets can produce conditional estimates several ways, such as via "called-off bets," i.e., bets that are called off if a condition is not met.

Whether this is just fancy write up or the prediction of the future ? Any one wanting to bet on this ?




p.s:However The Trap a three part BBC Video documentary by Adam curtis is definetly an eyeopener, and answers the question is Market economy the real panacea of all ills ?(will definetly post it in My blog)

Commodity Futures Markets,Singer-Prebisch thesis and Jevons Paradox

The Singer-Prebisch thesis (often referred to as the Prebisch-Singer thesis or sometimes the Prebisch-Singer hypothesis) is the observation that the terms of trade between primary products and manufactured goods tend to deteriorate over time. Developed independently by economists Raul Prebisch and Hans Singer in 1950, the thesis suggests that countries that export commodities (such as most developing countries for agriculutral commodities ) would be able to import less and less manufactured goods for a given level of exports.

Singer and Prebisch examined data over a long period of time suggesting that the terms of trade for primary commodity exporters did have a tendency to decline. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

Some regard the Singer-Prebisch thesis as important because it implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality. As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing (ISI) policies and an expansion of the role of the commodity futures exchange as a tool for development.

Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.

The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.(CHINA AND DENGISM(my friend says dengism is a bad word in telegu!))

However I was not able to personally think about the relevance of this to Crude Oil,which made me think more,get more confused and make me further search for answers.

I finally did hit upon an answer which made my confusion permanent! (and not temprorary as usually the case).
It was the Jevons Paradox,

In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource. It is historically called the Jevons Paradox as it ran counter to popular intuition. However, the situation is well understood in modern economics. In addition to reducing the amount needed for a given output, improved efficiency lowers the relative cost of using a resource – which increases demand. Overall resource use increases or decreases depending on which effect predominates.

What this means is that Because we think crude oil is expensive and hence make investments in enhancing energy efficeny then contrary to popular perception, the Demand for Crude oil would INCREASE FURTHER!!!!(yeah I am right and I smoke only tobacco nothing else mixed).

One way to understand the Jevons Paradox is to observe that an increase in the efficiency with which a resource (e.g.,Fuel/ crude oil) is used causes a decrease in the price of that resource when measured in terms of what it can achieve (e.g., work). Generally speaking, a decrease in the price of a good or service will increase the quantity demanded .
Thus with a lower price for work, more work will be "purchased" (indirectly, by buying more fuel).

The resulting increase in the demand for fuel is known as the rebound effect. This increase in demand may or may not be large enough to offset the original drop in demand from the increased efficiency.
Jevons Paradox occurs when the rebound effect is greater than 100%, exceeding the original efficiency gains.

Consider a simple case: a perfectly competitive market where fuel is the sole input used, and the only determinant of the cost of work. If the price of fuel remains constant, but the efficiency of its conversion into work is doubled, the effective price of work is halved and so twice as much work can be purchased for the same amount of money. If the amount of work purchased more than doubles (i.e. demand for work is elastic, the price elasticity is larger than 1), then the quantity of fuel used would actually increase, not decrease. If however, the demand for work is inelastic, the amount of work purchased would less than double, and the quantity of fuel used would decrease.

A full analysis would also have to take into account the fact that products (work) use more than one type of input (e.g. fuel, labor, machinery), and that other factors besides input cost (e.g. a non-competitive market structure) may also affect the price of work. These factors would tend to decrease the effect of fuel efficiency on the price of work, and hence reduce the rebound effect, making Jevons Paradox less likely to occur. Additionally, any change in the demand for fuel would also have an effect on the price of fuel, and also on the effective price of work.

Bottom line let commodity analysts keep worrying about the supply and demand of crude oil,we proletarians will keep using it anyway it is all about the degree of crib at the petrol bunk as they say.

Soyabean Crush

There was this very interesting question posted to me by a gentleman who had asked me a question based on one of my earlier posts on EFP.

I had an opportunity to work on a similar problem when I was in Indore,this was my answer,comments as usual welcome.

Dear Srinivasan,

The query is related to Soybeans Hedging.

The scenarios is:

Supplier "A" in Latin America wants to sell 65,000 MT of Soybean seeds. Processor "B" is into Crushing the Soybeans and selling principal by-products such as Soymeal and Soy Oil.

1. Supplier "A" is already short on CBOT with equivalent Future lots (say 475 Lots) at say 13.5 $ per bushel.
2. Procesor "B" negotiates with Supplier "A" to buy the Soybeans at say CBOT + 20 cents
3. Supplier "A" transfers these lots to Processor "B". Thereby, Supplier "A" selling the Soybeans at (13.5$ + 20 cents) per bushel.
4. Processor B, curshes the seeds and sells the Soymeal and Soy Oil at existing market prices.
5. Whenever a physical sale for the Soymeal is made, Processor buy equivalent number of Soybean lots, to close out the long positions.

My query here is to understand, how is the hedge working for the processor "B" when the underlying commodity bought is Soybean seeds, but the sale is of Soymeal and Soy Oil.

It would be of great help, if you could help me understand the above scenario.

Thank you Srinivasan.

Best regards,
Jinendra

Firstly i dont think there can be a 100% hedge,not wanting to sound pompous or philosophical in case of your question in such cases it is better that you track the BCX price rather than the soyabean price.

BCX is synthetic in nature meaning Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices.
The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.
Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices. The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.

The Synthetic Soybean crush is based on CBOT Soybean, Soybean Oil, and Soybean Meal futures prices; in order to calculate the crush, prices of Soybean Oil and Soybean Meal need to be converted into dollars and cents per bushel.

To convert prices:
Soybeans: No conversion required
Soybean Meal: 44 lbs. (48% protein meal) / 2,000 lbs (per ton) = 0.022 x price of meal
Soybean Oil: 11 lbs. (oil per bushel) x price of oil

To calculate the Crush:
[(Price of Soybean Meal ($/short ton) x .022) + Price of Soybean Oil (¢/lb) x 11] – Price of Soybeans ($/bu.)
For example, if August Soybean Meal, Soybean Oil and Soybean futures prices were at $297.20/ton, $.3340/pound and $9.565/bushel, respectively, the Crush would be calculated as (297.20 x .022) + (.3340 x 11) - 9.565 = $.6474/bushel.
The Synthetic Soybean crush values are rounded to the nearest $0.0025/bu and displayed in eighths, the same way as soybean futures quotes. Therefore, the sample crush value of $.6474 would be displayed as 64'6 (64 3/4).

Cheers

The Invisible Hand is a Falsifiable Proposition

Statistical equilibrium of commodity derivative markets is impossible, empirically-seen. Commodity Derivatives markets cannot be correctly described as stationary processes.

Adam Smith’s Invisible Hand, which is assumed by economists to be of general validity, is an assumption that markets are in or near stable equilibrium, requiring the implicit assumption of a stationary process. Consider any market anywhere in the world. With unfilled limit orders the excess demand

ε(p,t), defined by dp/dt= ε(p,t), cannot vanish.

Market stability would be represented by the state of statistical
equilibrium, or at least a stable steady state, where the price p(t)
would satisfy the condition for a stationary stochastic process.

Standard economic theory has it wrong: apparently, one cannot
have both unregulated/deregulated markets and stability
simultaneously.

One might at best have either stable equilibrium or total lack of regulations/constraints, but not both. In between lies a whole spectrum of other possibilities based on the regulation of otherwise free markets, from less to more unstable.

Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via corporate-owned facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

An Over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled . It is usually from an sophisticated broker to its clients directly. Forwards and Swaps are prime examples of such contracts. It is mostly done via the computer or the telephone.

For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.

This segment of the OTC market is occasionally referred to as the "Fourth Market."
OTC contracts world wide are unregulated or rather self regulated.

The NYMEX which has realised the importance of this instrument and acknowledged its overvehlming dominance over standard exchange contracts has created a clearing mechanism for a slate of commonly traded OTC derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.

This is what the Alan greenspan had to say about OTC Derivatives

Testimony of Chairman Alan Greenspan
The regulation of OTC derivatives
Before the Committee on Banking and Financial Services, U.S. House of Representatives


"I am pleased to be here today to present the Federal Reserve Board's views on the regulation of over-the-counter (OTC) derivatives. Under Secretary Hawke has already addressed the specific questions raised in your letter of invitation. The Board generally agrees with the Treasury Department's views on these issues. In particular, the Board supports a standstill of attempts by the Commodity Futures Trading Commission (CFTC) to impose new regulations on OTC derivatives as a minimalist approach to our longstanding concerns about CFTC assertions of authority in this area.

In my testimony I shall step back from these issues of immediate concern and address the fundamental underlying issue, that is, whether it is appropriate to apply the Commodity Exchange Act (CEA) to over-the-counter derivatives (and, indeed, to financial derivatives generally) in order to achieve the CEA's objectives--deterring market manipulation and protecting investors.

The CEA and Its Objectives
The Commodity Exchange Act of 1936 and its predecessor the Grain Futures Act of 1922 were a response to the perceived problems of manipulation of grain markets that were particularly evident in the latter part of the nineteenth and early part of the twentieth centuries.
For example, endeavors to corner markets in wheat, while rarely successful, often led to temporary, but sharp, increases in prices that engendered very large losses to those short sellers of futures contracts who had no alternative but to buy and deliver grain under their contractual obligations. Because quantities of grain following a harvest are generally known and limited, it is possible, at least in principle, to corner a market.

It is not possible to corner a market for financial futures where the underlying asset or its equivalent is in essentially unlimited supply. Financial derivative contracts are fundamentally different from agricultural futures owing to the nature of the underlying asset from which the derivative contract is "derived." Supplies of foreign exchange, government securities, and certain other financial instruments are being continuously replenished, and large inventories held throughout the world are immediately available to be offered in markets if traders endeavor to create an artificial shortage.

Thus, unlike commodities whose supply is limited to a particular growing season and finite carryover, the markets for financial instruments and their derivatives are deep and, as a consequence, are extremely difficult to manipulate. The type of regulation that is applied to crop futures appears wholly out of place and inappropriate for financial futures, whether traded on organized exchanges or over-the-counter, and accordingly, the Federal Reserve Board sees no need for it.

The early legislation on the trading of commodity futures was primarily designed to discourage forms of speculation that were seen as exacerbating price volatility and hurting farmers. In addition, it included provisions designed primarily to protect small investors in commodity futures, whose participation had been increasing and was viewed as beneficial.

The Commodity Futures Trading Commission Act of 1974 did not make any fundamental changes in the objectives of derivatives regulation. However, it expanded the scope of the CEA quite significantly. In addition to creating the CFTC as an independent agency and giving the CFTC exclusive jurisdiction over commodity futures and options, the 1974 Act expanded the CEA's definition of a "commodity" beyond a specific list of agricultural commodities to include "all other goods and articles, except onions,...and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in."

Given this broadened definition of a commodity and an equally broad interpretation of what constitutes a futures contract, a wide range of off-exchange transactions would have been brought potentially within the scope of the CEA.
The Treasury Department was particularly concerned about the prospect that the foreign exchange markets might be found to fall within the Act's scope. Aside from the difficulty of manipulating these markets, Treasury argued that participants in OTC markets, primarily banks and other financial institutions, and large corporations, did not need the consumer protections of the Commodity Exchange Act.
Consequently, Treasury proposed and Congress included a provision in the 1974 Act, the
"Treasury Amendment," which excluded off-exchange derivative transactions in foreign currency (as well as government securities, and certain other financial instruments) from the newly expanded CEA. What the Treasury did not envision, and the Treasury Amendment did not protect, was the subsequent development and spectacular growth of a much wider range of OTC derivative contracts--swaps on interest rates, exchange rates, and prices of commodities and securities.

Potential Application of the CEA to OTC Derivatives and the message for global watch dogs

The vast majority of privately negotiated OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply, for example, Crude oilt or the palladium price (where no price dissemeniation is availible in India as of date, however India is one of the largest importers thanks to its use in catalytic convertors in car etc, so what would chennai(the largest automotive manufacturing base in south asia do) based ancilliary units who want to hedge their price risk without losing out on valuable foreign exchange do ?.

To be sure, there are a limited number of OTC derivative contracts that apply to nonfinancial underlying assets.
There is a significant business in oil-based derivatives or precious metals, for example.

But unlike farm crops, especially near the end of a crop season, private counterparties in oil or precious metals contracts have virtually no ability to restrict the worldwide supply of this commodity. (Even OPEC has been less than successful over the years.)

Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.

To be sure, a few, albeit growing, types of OTC contracts such as equity swaps and some credit derivatives have a limited deliverable supply. However, unlike crop futures, where failure to deliver has additional significant penalties, costs of failure to deliver in OTC derivatives are almost always limited to actual damages. There is no reason to believe either equity swaps or credit derivatives can influence the price of the underlying assets any more than conventional securities trading does. Thus, manipulators attempting to corner a market, even if successful, would have great difficulty in inducing sellers in privately negotiated transactions to pay significantly higher prices to offset their contracts or to purchase the underlying assets.


Finally, the prices established in privately negotiated transactions are not widely disseminated or used directly or indiscriminately as the basis for pricing other transactions. Counterparties in the OTC markets can easily recognize the risks to which they would be exposed by failing to make their own independent valuations of their transactions, whose economic and credit terms may differ in significant respects. Moreover, they usually have access to other, often more reliable or more relevant sources of information. Hence, any price distortions in particular transactions could not affect other buyers or sellers of the underlying asset.

Professional counterparties to privately negotiated contracts also have demonstrated their ability to protect themselves from losses from fraud and counterparty insolvencies. They have managed credit risks quite effectively through careful evaluation of counterparties, the setting of internal credit limits, and judicious use of netting and collateral agreements. In particular, they have insisted that dealers have financial strength sufficient to warrant a credit rating of A or higher. This, in turn, provides substantial protection against losses from fraud.

Dealers are established institutions with substantial assets and significant investments in their reputations. When they have been seen to engage in deceptive practices, the professional counterparties that have been victimized have been able to obtain redress under laws applicable to contracts generally. Moreover, the threat of legal damage awards provides dealers with strong incentives to avoid misconduct.

A far more powerful incentive, however, is the fear of loss of the dealer's good reputation, without which it cannot compete effectively, regardless of its financial strength or financial engineering capabilities. In these respects, derivatives dealers bear no resemblance to the "bucket shops" whose activities apparently motivate the exchange trading requirement.

I do not mean to suggest that counterparties will not in the future suffer significant losses on their OTC derivatives transactions. Since 1994 the effectiveness of their risk management skills has not been tested by widespread major declines in underlying asset prices. I have no doubt derivatives losses will mushroom at the next significant downturn as will losses on holdings of other risk assets, both on and off exchange. Nonetheless, I see no reason to question the underlying stability of the OTC markets, or the overall effectiveness of private market discipline, or the prudential supervision of the derivatives activities of banks and other regulated participants. The huge increase in the volume of OTC transactions reflects the judgments of counterparties that these instruments provide extensive protection against undue asset concentration risk. They are clearly perceived to add significant value to our financial structure, both here in the United States and internationally.

Accordingly the Federal Reserve Board sees no reason why these markets should be encumbered with a regulatory structure devised for a wholly different type of market process, where supplies of underlying assets are driven by the vagaries of weather and seasons. Inappropriate regulation distorts the efficiency of our market system and as a consequence impedes growth and improvement in standards of living.

Application of the CEA to Centralized Markets for Derivatives
Recently, some participants in the OTC markets have shown interest in utilizing centralized mechanisms for clearing or executing OTC derivatives transactions. For example, the London Clearing House plans to introduce clearing of interest rate swaps and forward rate agreements in the second half of 1999, and the Electronic Broking Service, a brokerage system for foreign exchange contracts, reportedly is planning to begin brokering forward rate agreements. The latter service may not be offered in the U.S., however, because of the threat of application of the CEA.

Even some who argue that privately negotiated and bilaterally settled derivatives transactions should be excluded from the CEA, nonetheless believe that such transactions should be subject to the CEA if they are centrally executed or cleared, for fear that such facilities can foster price manipulation. Leaving aside our concern about the regulatory regime of financial futures generally, the Federal Reserve Board is particularly concerned that the vast majority of the instruments currently traded in the OTC markets not be subject to the CEA, even if they become sufficiently standardized to be centrally executed or cleared. To be sure, OTC contracts between counterparties would then have many similarities to exchange-traded contracts. But, they would still retain distinct characteristics that would leave them economically far short of standardization. For example, participants in trade execution systems may seek to retain counterparty credit limits, and participants in clearing systems likely will resist constraints on their ability to customize the economic terms of contracts. To force full standardization would reduce the economic value of a bilateral contract to both parties, and to the marketplace as a whole. The 1992 Act as we read it authorized exemption of all OTC derivatives transactions between professional counterparties from the CEA, whether or not they are centrally executed or cleared. Even with centralized execution or clearing, the most relevant attributes of these markets would not resemble those of the agricultural futures markets and hence would not be susceptible to manipulation.

Harmonizing Regulation of the OTC Markets and Futures Exchanges

Beyond question, the centralized execution and clearing of what to date have been privately negotiated and bilaterally cleared transactions would narrow the existing differences between exchange-traded and OTC derivatives transactions. However, that is not a reason to extend the CEA to cover OTC transactions. As we have argued, doing so is unnecessary to achieve the public policy objectives of the CEA. Moreover, as the economic differences between OTC and exchange-traded contracts are narrowing, it is becoming more apparent that OTC market participants share this conclusion; their decision to trade outside the regulated environment implies they do not see the benefits of the CEA as outweighing its costs.

Instead, the Federal Reserve believes that the fact that OTC markets function so effectively without the benefits of the CEA provides a strong argument for development of a less burdensome regulatory regime for financial derivatives traded on futures exchanges. To reiterate, the existing regulatory framework for futures trading was designed in the 1920s and 1930s for the trading of grain futures by the general public. Like OTC derivatives, exchange-traded financial derivatives generally are not as susceptible to manipulation and are traded predominantly by professional counterparties.

Indeed, Congress has rejected the notion of a "one-size-fits-all" approach to regulation of exchange trading. The exemptive authority that Congress gave the CFTC in 1992 permitted it to create a less restrictive regulatory regime for professional trading of financial futures. However, the pilot program proposed by the CFTC evidently has not met the competitive and business requirements of the futures exchanges--no contracts are currently trading under the program. Last year, the Agriculture Committees of the House and the Senate both attempted to craft legislation that would spur development of such a new regulatory framework but were unable to achieve consensus on the best approach. In any event, if progress toward a more appropriate regime is not forthcoming soon, Congress should seriously consider passage of legislation that would mandate progress.

Conclusion

In conclusion, the Board continues to believe that, aside from safety and soundness regulation of derivatives dealers under the banking or securities laws, regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. Moreover, the Board questions whether the CEA as currently implemented is an appropriate framework for professional trading of financial futures on exchanges. The key elements of the CEA were put in place in the 1920s and 1930s to regulate the trading of agricultural futures by the general public.

The vast majority of financial futures traded simply are not as susceptible to manipulation as agricultural and other commodity futures where supplies are more limited.

And participants in futures markets are predominantly professionals that simply do not require the customer protections that may be needed by the general public. Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living. In choosing a particular regulatory regime it is important to remember that no system will fully eliminate inappropriate or illegal activities.

Banking examiners, for example, find it difficult to unearth fraud and embezzlement in their early stages. Securities regulators have difficulty ferreting out malfeasance. Even trading on exchanges does not in itself eliminate all endeavors at manipulation, as the Hunt brothers' 1979-80 fiasco in silver demonstrated. The primary source of regulatory effectiveness has always been private traders being knowledgeable of their counterparties. Government regulation can only act as a backup. It should be careful to create net benefits to markets.


We assumed in the paragraph above that examples of stable
markets are not likely to be found. It is necessary to pose this
assertion as a scientific challenge: Is it possible to find examples of
stability in nonfinancial markets especially commodity derivatives?

One could search for market stability by using the following method: choose any nonfinancial market with data adequate for determining the time development of the empircal price distribution (we can study the timedevelopment of the finance distribution accurately because we have accurate data over the last twelve or so years).
If the distribution is stationary or approaches stationarity asymptotically, then The Invisible Hand stabilizes the market.
With a stationary process the variance approaches a constant as initial correlations die out, equilibrium markets are not volatile.
For diffusive markets like commodity derivatives ones, in contrast, the variance is always increasing with time Δt.
The question of the existence of Adam Smith’s Invisible Hand can be removed from politics and ideology, it can be decided scientifically.


We expect that empirical evidence for stationary markets cannot be found anywhere on the globe. This provides a direct challenge to economists, who advise and direct national and international agencies on the basis of the neo-classical model of equilibria, and where stability is assumed without having been demonstrated.


P.S: as of date there is no formal definition of the word commodity derivatives as per any act of the Government of India.

ADI

Altos derivatives Institute (ADI, http://altosadi.com ) has launched two courses to cover commodity and currency derivatives markets.
One is a 8 week weekend course and the other one is an intensive 2 month weekday course.The aim of the course is to create top class commodity analysts.

This being our pet project we are all excited about this.

Meanwhile, What is the difference between asif the Pakistani Pace bowlers and the
commodity regulators FMC ?

One has consumed banned substances and the other has banned the substances we consume!

Cheers

Commodity Limericks

A limerick is a five-line poem with a strict form, originally popularized in English by Edward Lear. Limericks are frequently witty or humorous, and sometimes obscene with humorous intent.

The following example of a limerick is of anonymous origin.

The limerick packs laughs anatomical
In space that is quite economical,
But the good ones I've seen
So seldom are clean,
And the clean ones so seldom are comical.

Here are some commodity limericks ,I did it in a hurry when i get the time will compile and write more.possibly better ones than this
Meanwhile if you do get creative and can think of some commodity limericks feel free to write to me will publish it here.

-------------------------

After engineering got to become a commodity trader,
started well, made money and in just a month became a team leader,
Met with a lot of women who liked young guns,
Wild time all weekend nights not with nuns,
Got up one day to find out that markets have made me badder,

Those days with em chicks went to china to see the great wall,
tried impressing em by dancing on it and avoiding the fall,
at hangzhou for breakfast and shanghai for lunch,
at Guangzhou for supper and Hong Kong for Brunch,
Till the broker said "buddy pay up" , you got a variation margin call.



Exotic OTC options and a new pitch , make a million with just a cent,
Wow lot of business and now without the regulators scent,
so ran the model on commodities like guar gum, soya and cereal,
Had clients and agrements signed in continous seriels,
Screamed the regulator"inducement try it once more to tihar you will be sent"

Decide to bet bear on Sydney wollen futures,heard that this time real horny ewes,
Running around the meadows and fields like bollywood heroines behind Yews,
Waited for bloombergs aussie consensus estimate census,
The number came out and blew me out of my senses,
Unlike bollywood heroines, if not mated during "season" for ewes it is of no use!

Went for a holiday to the beautiful south american country of Chile,
Let me bet that up it will go the price of Guntur Chili,
Prayed that with me will be the Roman Goddess Ceres,
on lower freeze on NCDEX and as usual for me a losing series,
Oh the thought of not having put a stop loss yet again makes me feel silly!


This time on the Sheiks oil I bet waiting for the EIA to give me a cue,
I get it right this time near Richmond i will build my house facing the lovely Kew,
A golf course and a beautiful lake with a natural dam,
Listened to the data and cursed yet again "Damn",
This time with my lawyer I got to face a bigger queue.

So with no more clients left met uncle and asked him to cite,
he thought deeply and then said with a bit of foresight,
I know you are now broke and have to pay your credit card dues,
with my reference for your client you have some donts and dos,
Be honest with him and dont lie because he is the owner of the krishnampettai site,

Looked at the account statement and almost got a flu,
Took out the marlboro lights and smoked it like a flue,
Oh god as a commodity trader my career is done.
When the mafia client sees he is going to dun.
Oh god like that eagle i wish I Flew.


Once at 253 analysed and said I will buy coffee,
El nino is coming ,winning trade so pass me the toffee.
The technical analyst checked the chart called me on phone and said,
Looks to be over bought, rsi 85 so get off the bed,
At 1845 when new york opened the margin account that was a 100k gone in a jiffy.

Nothing to worry just a few more days afterall there is a santa claus,
and what else can the mafiose do the agreement has all the safety clause,
said his aide, take enough food so that you will not be weak,
and definetly be safe away from him atleast for a week,
The long ones in his hands are not nails but claws.

Front seats at the Cricket match thanks to that reuters relationship Belle,
Thought will go back to trading just before the opening bell.
After seeing sachins knock thought will get in some beer,
Forgot that mafia client who sends his clients to the bier,
Called him and said coffee sorry,for which he said "SOB going to hang uou down that Indian Thorn Bel".



Cheers

The unnoticed booming oil economy !

Can you guess which is the country with the worlds second largest reserve of Oil ?

If you had said a Gulf country or Russia or Venezuella you got it wrong!

It Is CANADA!

Saudi Arabia with 260 billion barrels as reserves produces about 8.8 million barrels a day having a total reserve life of about 81 years compared to Canada which has a reserve of 179 billion barrels a day and produces 2.7 million barrels of Oil a day with a reserve life of about 182 years.


Including the portion of oil sands reserves considered by government regulators to be producible at current prices using current technology, Canada's proven oil reserves were estimated at 179 billion barrels (28×109 m3) as of 2007, placing it second only to Saudi Arabia. Over 95% of these reserves are in the oil sands deposits in the province of Alberta. Although Alberta contains nearly all of Canada's oil sands and about 75% of its conventional oil reserves, several other provinces and territories, especially Saskatchewan and offshore Newfoundland, have substantial oil production and reserves. Total Canadian oil production was about 1.2 billion barrels (190×106 m3) in 2006, giving Canada about 182 years of reserves at current production rates.

Over 99% of Canadian oil exports are sent to the United States, making Canada, not Saudi Arabia, the United States' largest supplier of oil.The picture is complicated somewhat by the fact that Canada has a highly sophisticated energy industry and is both an importer and exporter of oil and refined products. In 2006, in addition to producing 1.2 billion barrels (190×106 m3), Canada imported 440 million barrels (70×106 m3), consumed 800 million barrels (130×106 m3) itself, and exported 840 million barrels (134×106 m3) to the U.S. The excess of exports over imports was 400 million barrels (64×106 m3).

The addition of 174 billion barrels (28×109 m3) of the vast Alberta oil sands deposits, mostly in the Athabasca Oil Sands, to proven reserves by the Alberta Energy and Utilities Board (AEUB), was controversial at the time because oil sands contain a semisolid form of oil referred to as bitumen by Canadian government authorities, rather than conventional crude oil.
The existence of the deposits (historically referred to as "tar sands") has been known for centuries since major rivers cut through the sands to reveal the bitumen in the river banks, but their development had to wait for high prices and the invention of new technology. In recent years technological breakthroughs have overcome the challenges of producing it and most Alberta oil is now non-conventional production from oil sands rather than conventional oil fields. The AEUB estimates that by 2016 Alberta oil sands production will triple to amount to 86% of the province's total oil production, and Alberta will by then be one of the largest oil producers in the world.

The difference between crude bitumen and crude oil is somewhat arbitrary since bitumen is really just an unusually thick and viscous grade of crude oil, and many U.S. oil refineries have been modified to handle it in recent years as domestic U.S. oil production declines. The main problem is that it must be heated or diluted with solvents before it will flow through pipelines.

A problem for companies trading on U.S. stock markets is that U.S. Securities and Exchange Commission (SEC) rules do not allow them to report oil sands production as an oil and gas activity, so they cannot report their oil sands reserves as oil reserves. Companies such as Petro-Canada with large oil-sands operations claim this can seriously underestimate the value of their assets. As of 2008 the SEC was reported to be looking at putting oil sands reserves on the same footing as conventional crude oil.


The West(and our very own Finance Minister PC) has been pressurising OPEC to raise its production , Why is it that the US or other western countries not pressurize canada to increase its production? Is it because Canada has the worlds largest undefended border with the United States or is this typical western hypocrisy?

A market maker friend of mine who trades the fx markets , believes that there is a very high degree of correlation between Crude Oil Contract and the Canadian Dollar contract (CAD).And by tracking the crude oil contract one can do good intraday(especially on wednesdays/EIA data release days) as well as long term trades on the CAD, for the long term play on structural crude oil bull market,Buy the Canadian Dollar he says!

Due to the price boom in crude oil, the Canadian economy is a direct benefactor and would be witnessing a huge boom and an exponential expansion of its own economy, thus indirectly benefiting the U.S,experts go on to say that , the energy crisis induced soft landing in the US might end up being rescued by the Kind Act of Canada afterall!


Cartoon thanks to the Sheer Brilliance of John Trever,Albuquerque, E-mail John ©John Trever and the Albuquerque Journal. .

P.chidambaram at the OPEC

India has said it will follow up its suggestion on having a price band for crude oil once the producing nations reflect on the idea, even as it asked them to step up oil output.
"It (price band) is an idea that I have mooted in the earlier IMF meetings and it is the first time I am addressing an oil ministerial meeting. So let them reflect on that, we will follow it up," Finance Minister Chidambaram told news channel NDTV before leaving for India.

Explaining his proposal mooted at the Energy Ministers' meeting here, the finance minister said the suggestion is that producing countries will assure the world that prices will not rise above a level and consuming countries will assure the world that prices will not fall below a level, between which prices can be determined by the market forces.

Crude oil prices are not under India's control, the Finance Minister said, adding that the prices will cool down only if producing countries increase supply and the countries concerned regulate over-the-counter trade or futures trading in oil.

"In August, 2007, it (crude prices) was 70 dollars a barrel and a few days ago it has touched 140 dollars a barrel... Those are not under India's control... So we have urged producing countries to increase supply. We have urged countries where these financial transactions are taking place to step in and regulate these transactions," he said.

MCX Platinum,Kuselan Commodity Markets and Rajnikanth!

" You must be mad" manju said, "totally gone case, just because you had written one blog connecting commodity markets and kamal and just because your schoolday sweetheart called and said choo chweet to the blog, what are you trying to do ? , dont you realise what your institutional clients will think about you" , she continued and as usual with the left indicator on and hand showing right from the window continued to zip straight towards adyar signal.

"Wont they find out that invariably all friday afternoons that your phone is switched off not because you are sick as you claim but because you are just crazy about all this stupid bollywood kollywood molly wood pictures, you either need medical help or a detox", she continued.....

Kuselan the Rajnikanth starrer movie is complete, directed by P.Vasu, it is a remake of the Malayalam Film Katha Parayambol(produced by srinivasan and mukesh) is an adaption of the hindu mythology the story of Lord Krishna and his poor friend Kusela.

Kusela, a childhood friend of Lord Krishna went to see the Almighty with a pouch of puffed rice and he was in a dilemma whether to offer it or not.After all puffed rice was a food meant for the poor not a king or a king of kingss, But the Lord snatched the pouch from him and gulped some pieces and said `Akshayam'.This magic word transformed Kusela's simple house to a magnificent palace and the Lord's poor friend became as rich as Kubera. To this date this important event is signified by what people refer to as Akshay Trithi.

Akshaya Tritiya, variously spelt as Akshya Thiritiya,Akshaya Trutheeya, Akshaya Tritiiya and also called Akshaya Trithi, falling on the third day of the bright half of the lunar month of Vaisakha of the traditional Hindu calendar, is one of the four most auspicious days of the year for Hindus. The word Akshaya, a Sanskrit word, literally means one that never diminishes, and the day is believed to bring good luck and success. It is widely celebrated in all parts of India by different sections of the society irrespective of their religious faith and social grouping. The day is particularly considered auspicious for buying long term assets like gold,platinum and silver, including ornaments made of the same; diamond and other precious stones; and the real estate.

The legend states that any venture initiated on the auspicious day of Akshaya Tritiya shall continue to grow and bring prosperity. Hence, it is normal to see many of the new ventures, like starting a business, ground breaking for construction etc on the Akshaya Tritiya Day.

With the mass media and marketing, this day has been taken over by marketeers to promote sales and bookings for precious metal jewellery, houses, consumer electronics(btw consumer electronics is one of the largest users of precious metals, take any pcb or what is reffered to as printed circuit boards,turn it around, the yellow and white lines that you see there are alloys of gold,silver and platinum chosen for their high conductivity low resistance properties).

Today is coincidentally the day when the Platinum contract is being launched on MCX(along with the tamil movies Kuselans publicity stills),

"We will be launching the July and October contracts in platinum for trading," my good friend,mentor,south india mcx's all in all azhgu raja and asst vice president MCX,T.G.SenthilVelan confirmed.

"The contract will have market lot size of 500 gm and the price quote will be in rupees per 10 gm ex-Mumbai," he added.

Although there is no developed platinum spot market in India, consumption in industrial purposes as well as the jewellery industry is rising.

Platinum is also used by pharmaceutical industries for making anti-cancer drugs(Nano Medicane) and by auto industry to create catalysts.

At these high prices of crude oil and the world betting on alternative energy such as fuel cells, platinum finds great application in the form of electro catalysis as well as in emission control catalysis.

Well coming back to my topic, Guess Rajni says for Kuselan I dont need Chaos and any time 1=10 (or should we say 1 =100, Na oru dirva sonna nooru dirva sonna madhiri meaning ,if I tell once it is the same as telling a hundred times)??

Ok so US regulators CFTC shocked me ! Limits on overseas trading

Fundamentally any exchange or market place or ecn' business model is designed to be such that it is a monopoly or atleast never loses a dime doing its business, since all the cost (impact cost) is passed on to the end participants.
And thanks to the network effect at economy of scales it is a win win to all.
Good business to be in , cause by default you become quasi regulatory since you have the power to make rules.

So when I read this bbc report which Said that US Regulators believe that Speculators(whom they call as manipulators) are the reason for the high price of Oil my eyes popped out and prayed that prakash karat never ever reads this, This contract accounts for almost a quarter to a third of my firms volumes and even by mistake if any of these cpi/cpi m read this then as far as the Crude Oil Contracts are concerned in India it is curtains or QED or worse still differential margining for hedgers and speculators (like Bursa Malayasia).

This is the news for sake of some

US regulators have announced plans to impose limits on oil trades overseas.
The US Commodity Futures Trading Commission said the London-based electronic exchange would have to comply with US rules.

The move comes as oil prices notch up record highs, amid fears that speculators are distorting the market.

As a result, fuel costs have shot up hitting the global economy. Airlines have been hit badly, with near record losses expected for 2008 in the US.

US airlines were forecast to report $10bn (£5bn) of losses this financial year as sky-high fuel costs erode profits, according to the industry group Air Transport Association (ATA).

Oil prices slipped from their record highs near $140 a barrel reached during Monday trade as investors were cautious ahead of plans by Saudi Arabia to increase production in July.

US sweet, light crude finished down 60 cents at $134.01, while London Brent settled 99 cents lower at $133.72.

Speculators to blame?

But, oil prices are still almost 40% higher than they were at the beginning of the year and, increasingly, this surge is being blamed on speculation by large investors, including hedge funds and banking giants.

They are being accused of pushing commodity prices way above the level they would trade at to satisfy supply and demand trends.

Representing US airlines, the ATA is one group pressing for tighter regulation and increased transparency in the energy markets.

Its head James May told a joint US Senate hearing on speculative oil trading that up to 200 US communities could lose airline service as a result of capacity cuts to save money.

"This nation's economy is inextricably linked to the viability of its air transportation system. If the airlines continue to spiral downward, so will the economy," he said.

Earlier, Air Canada announced that it would have to shed 2,000 jobs - a 7% reduction in its workforce - and ground 7% of its services to survive the rising fuel charges.

More disclosure

Under the plan announced by the US Commodity Futures Trading Commission (CFTC), trading of the West Texas Intermediate oil contract on the ICE Futures Europe - which hosts up to 30% of total trades - will by October be subject to stricter limits on individual positions.

It is hoped this will prevent the ability of a single entity to move oil prices.

Under the measures, European authorities will also share trading data with their US counterparts to improve transparency and crack down on market manipulation.

The ICE exchange said it would comply with US regulatory requirements subject to approval by the Financial Services Authority.

The acting head of the CFTC Walter Lukken said in testimony at a Senate hearing committee: "During these turbulent market conditions for crude oil, the environment is ripe for those wanting to illegally manipulate the markets," he said.

about ICE
IntercontinentalExchange (NYSE: ICE) is an American financial company that operates Internet-based marketplaces which trade futures and over-the-counter (OTC) energy and commodity contracts as well as derivative financial products. While the company's original focus was energy products (crude and refined oil, natural gas, power, and emissions), recent acquisitions have expanded its activity into the "soft" commodities (e.g. sugar, cotton and coffee), foreign exchange and equity index futures.

Currently ICE is organized into three business lines:
ICE Markets - futures, options, and OTC markets. Energy futures are traded via ICE Futures Europe; soft commodity futures/options are handled by ICE Futures U.S.
ICE Services - electronic trade confirmations and education.
ICE Data - electronic delivery of market data, including real-time trades, historical prices and daily indices. Contracts sold through ICE Futures U.S. are processed through a subsidiary, ICE Clear U.S. Energy futures and OTC contracts are currently cleared externally, through LCH.Clearnet, Ltd., but ICE has announced plans to transition these operations to a new subsidiary, ICE Clear Europe, by mid-2008.

Headquartered in Atlanta, ICE also has offices in Calgary, Chicago, Houston, London, New York and Singapore, with regional telecommunications hubs in Chicago, New York, London and Singapore.

In the late 1990s, Jeffrey Sprecher, ICE’s founder, chairman, and Chief Executive Officer, acquired Continental Power Exchange, Inc. with the objective of developing an Internet-based platform to provide a more transparent and efficient market structure for OTC energy commodity trading. In May 2000, IntercontinentalExchange (ICE) was established, with its founding shareholders representing some of the world’s largest energy traders. The company’s stated mission was to transform OTC trading by providing an open, accessible, multi-dealer, around-the-clock electronic energy exchange. The new exchange offered the trading community better price transparency, more efficiency, greater liquidity and lower costs than manual trading.

In June of 2001, ICE expanded its business into futures trading by acquiring the International Petroleum Exchange (IPE), now ICE Futures Europe, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE portfolio of energy futures became fully electronic.

ICE became a publicly traded company on November 16, 2005, and was added to the Russell 1000 Index on June 30, 2006. The company expanded rapidly in 2007, acquiring the New York Board of Trade (NYBOT), ChemConnect (a chemical commodity market), and the Winnipeg Commodity Exchange. In March of 2007 ICE made an unsuccessful $9.9 billion bid for the Chicago Board of Trade, which was instead acquired by the Chicago Mercantile Exchange.
In January 2008 ICE partnered with TSX Group's Natural Gas Exchange, expanding their offering to clearing and settlement services for physical OTC natural gas contracts