The world has just discovered that folks in finance cheat whenever they can (always): now that the LIBOR cat is out of the bag manipulation is to be seen everywhere including the metals and crude oil (ZeroHedge):

Forget Libor-gate, Oil Market Manipulation Is Far Worse

By EconMatters

Since the Global Community all the sudden seems to be preoccupied with Market manipulation even though the authorities knew it was a problem for over 5 years with Libor Rate Fixing. It is high time authorities look at the Crude Oil market which has been manipulated for the last decade and all the sophisticated participants know it is rigged or artificially higher than the fundamentals of the economy dictate. Consumers are paying an easy $35 dollars per barrel over what they would otherwise dole out for a barrel of oil if fund managers didn`t use the benchmark futures contracts as their own personal ATMs.

Everyone needs to get their stories straight. The crude boys accuse market participants of pushing prices up, metal girls accuse the same players of manipulating prices down. Since the aim is to profit from volatility or its absence, both sides of this argument are half-right. Here is another take from Chris Cook by way of Naked Capitalism:

The Dying of the Light

By Chris Cook, former compliance and market supervision director of the International Petroleum Exchange

A generation of markets is dying and the era of the Middleman is coming to an end. The ‘Bezzle’ – as J K Galbraith described financial misbehavior in a boom, revealed by a bust – is now coming to light.

We now see a wave of popular rage against the freshly revealed manipulation by banks of LIBOR, the London Interbank Offered Rate benchmark for interest rates which is the cornerstone of the money market.

This manipulation in the financial world is being augmented by a groundswell of protest against manipulation taking place in the real world. Here, the allegation is that the Brent/BFOE (Brent, Forties, Oseberg, Ekofisk) crude oil benchmark price, against which global crude oil prices are set, is the subject of routine manipulation by market participants, particularly investment banks and traders of physical oil.

In both cases, the popular outcry is based upon misconceptions as to what has actually been going on. The good news in the oil market at least is that the manipulation which is being revealed is nowhere near as serious in its effects on the general public as is believed. The bad news is that the true manipulation, as yet still concealed, is far more serious than anyone has yet conceived.

The arguments exclude everything that is underway outside of the finance markets. Middlemen trading in crude are not that important because they cannot hold more than the smallest fraction of daily output (from well head). World crude production per day = 75 million barrels per day. There are only so many spare tankers, oil storage facilities and underground salt formations within which to store petroleum. Once these are at capacity the middlemen can only sell or promise to sell.

What traders can do is earn a volatility premium by being virtual swing producers. This occurs when there is an excess of spare capacity and the well-head producers are not paying attention. The virtuals offer their stored crude in the place of that of the sleeping producers’: they gain a ‘volatility premium’ when their sales iron out price swings.

This sort of thing only effects the marginal barrel price over very short time-frames. If more than a few hundred thousand barrels per day are at issue, the producers make the necessary adjustment(s) hanging the middlemen and everyone else out to dry.

Producers can store crude at zero-cost by simply leaving it in the ground. In so doing they easily outmaneuver middlemen, who can only sell what they have (until they sell out) or sell what they don’t (until they have to cover). Meanwhile, the producers or their agents can buy/sell crude- or crude derivatives into the future at prices that remove middleman profits altogether.

Right now, spare capacity is vanishing into the gas tanks of the producers themselves. Once that capacity is gone the volatility will increase. At that point a few thousand barrels-per-day might make a great deal of difference yet these barrels may also be ‘Unobtainium’.

This dynamic explains the drilling interest in otherwise marginal- or borderline plays. If a small field can produce ten thousand barrels-per-day each barrel could conceivably command a steep premium … that would still be far less than the price that would result without the added crude. The assumption is that fuel constraints will always and everywhere produce increased real returns, that there will be industrial demand.

The real manipulation is the fuel-as-subsidy as well as subsidies for use of the fuel. This takes place everywhere both in consumer- and producer countries.

Manipulations include free/cut rate gas (in Venezuela, Nigeria, Saudia, Iran), free highways, cheap credit, home mortgage guarantees/tax advantages, restrictive zoning, free police/ambulance services, mandatory insurance (which spreads casualty costs), depletion allowances, depreciation and write-offs for drillers, capital-loss provisions and direct bailouts for manufacturers (GM, Chrysler) and indirect bailouts (Ford, Fiat, BMW, Daimler, Honda, etc.); the opening of commons to discount leasing/price collusion, military overreach, credit embargoes (PIIGS, France, Germany, China, Japan), invasion threats, irregular warfare, labor arbitrage, etc.

Each barrel of oil really costs +$300: payment is smeared into other categories or kicked into the future.

The intent of the establishment has always been to flood markets with cheap crude (UK selling its North Sea crude for -$20/bbl) to lever auto, house, office tower, highway construction, finance and other related industries. This is manipulation that has taken place since John D. Rockefeller created the modern integrated energy company and built the world’s largest fortune for himself — by forcing prices lower. This took place in the 19th century, which is why analysts ignore it.

Rockefeller was as important to the auto industry as Henry Ford. Standard Oil guaranteed fuel for pennies which in turn guaranteed a market for automobiles.

More manipulations, here from Bruce Krasting and the Washington Examiner:

Sen. Schumer tells Bernanke to stimulate economy before November

Joel Gehrke (Washington Examiner)

Sen. Chuck Schumer, D-N.Y., exhorted Federal Reserve Chairman Ben Bernanke to stimulate the economy before November through some form of quantitative easing or other monetary policy, which Bernanke said could create jobs.

“Despite two false starts, we’re having a much rougher time than we ever imagined getting unemployment down,” Schumer told the Senate Banking Committee. “So get to work, Mr. Chairman.” Schumer said Bernanke needed to stimulate the economy because Congress refuses — “maybe after November we will,” he opined.

Krasting:

Schumer is a political hack. He wants the Fed to do ‘something’ today that would give the economy a lift heading into the election. Chuck knows that the Legislative side can’t/won’t do a thing before November, so he begs Ben to light another monetary fire to help the Democratic cause.

I doubt that Bernanke listens to the noise from Senators very often, but Chuck’s words got a lot of press. I’m wondering what Ben is thinking. Schumer has brought politics into the outcome of the August 1st Fed meeting. Whatever Ben decides to do, he will be accused of partisan politics.

Cut to the chase:

(The Fed can make) A cut in the deposit rate (banks’ accounts at the Fed) from a 1/4% to a 1/8%.

Arguments For:

a) This appears to be a modest step. As such, it would be less susceptible to criticism.

b) The small change in the deposit rate would achieve something that Bernanke has been shooting for a long time. Returns on short-term money would go negative. Three and Six month Bills would certainly be negative. One-year paper would trade around flat.

c) Germany and Switzerland are already in negative territory. Other, smaller bond markets like Finland and Sweden are also in the red. For the US to follow suit would not be that big a surprise. Bernanke could blunt critics by saying he had done less than Europe – an 1/8th in the US versus 0% for the ECB.

d) The change to negative yields, (regardless of how small), will force money to move around. There are trillions in money market funds, Trillions in short term Treasury paper, and trillions more on corporate balance sheets. All of this is now going to be looking at negative returns.

e) With the first rungs of the yield curve in the bucket, the longer maturities would be dragged down. The Ten-year would move toward 1%. This result would be similar to the (hoped for) outcome of a large LSAP.

f) Bernanke could still say, “The Fed has more it could do”, as the deposit rate could be cut again (to zero) at some point.

Of these options, I believe that #V has the greatest probability of occurring.

I hope that the Fed sits tight, and does nothing. But that seems unlikely. Bernanke knows that the economy is now decelerating, and that his hands get tied after the August meeting. So “something” is more likely than “nothing”.

It’s hard to predict what might happen if Ben pushes rates into negative territory. It could end up resulting in an orderly market transition from cash, to high-risk securities like stocks and junk bonds. The virtuous cycle of higher stocks leading to higher spending and more jobs might be the result. But I doubt it.

Arguments Against:

a) The knee jerk reaction to negative rates might be positive, but in a short period of time the market will come to realize that negative rates are not going to force people (more) into dividend stocks. Quite the opposite, it will scare the crap out of them.

b) This is not good for the banks (who cares); but the financials are still a big chunk of the S&P.

c) This move will likely cause more “unwanted inflation”. If China or India is faced with negative returns on their reserves, they might be inclined to just buy commodities with the billions of cash they are sitting on. Prices of grains, beans, copper, coal and oil come to mind. Gold would be on the list as well.

d) If three-month bills went from +8bp to -7bp you might think that it wouldn’t matter. The change is so small on a relative basis. I think of it as stepping off the edge of a cliff.

The entire global financial system is based on fiat money and the presumption that the money has “value” as a store of wealth. Nearly every action by the Fed over the past few years has led to the debasement of money. In the final stage, the issuers of money debase it to the point where it is no longer desirable to hold. I see the move to negative rates across the globe as a tipping point, one that will be damn hard to reverse once undertaken.

If the politicians weren’t inept they would not have these money problems. However, they all belong to the ‘prosperous past’, like the character in the Springsteen song, they long for the glory days of high school.

Better leadership by the current (brain dead) bunch would have made it unnecessary to prod the central banker. There really is nothing for Mr Bernanke to do, he cannot ‘print money’, he cannot pull rabbits out of a hat, he’s already lost too much credibility (get it? Credit = credibility?) and does not have any effect on the cost of money.

– Deflation sets the price of (so-called) risk-free ‘assets’ to zero (or less which is Krasting’s concern). This is well known, Fisher described it in 1933. The manipulation by way of reserve rates or whatever has the same limited effect as does the manipulation of crude oil prices by middlemen. The same is true for all of the other finance products’ prices. What sets prices — now as always — are fundamentals, which have now turned against market participants.

– Fuel prices money. Right now money represents fuel-using-activities which have been promoted as highly fashionable by the marketing industry. Coming soon is money representing the fuel itself. We are almost there. The outcome is nasty. Whether Bernanke understands this is uncertain. He is a very smart dude but says little about energy, the rest of the establishment lies through its teeth about energy.

– When money represents energy the various currencies will sort themselves out (or the reverse will happen as with the euro) and the winner will fall out of circulation (hoarded). The other currencies will simply vanish or will buy goods OTHER THAN fuel. Energy availability will plummet, to meet the small amount of ‘good currency’ in circulation available at any given time for fuel purchase.

Think about how much cash is in circulation right now (not e-money) and you get the idea how much fuel will be available. Access to circulating money will be the way fuel is rationed (if not directly by way of fuel cards) the same way access to credit rations fuel now. Needless to say there will be no credit at all.

This is the straitjacket that central banks and treasuries face and there is almost nothing they can do about it. If they ‘adjust’ (depreciate) their currencies they won’t be able to swap them for fuel. The producers will absolutely dominate: instead of accepting false-promises of ‘growth’ in trade for their valuable resources they will demand resources in return. Having a crude tradeable currency means having one that is as hard to find as a one-armed violin player.

The usual response is to insist that the US can trade agricultural goods for fuel. The difficulty with that thesis is that agriculture is itself a petroleum dependency. With insufficient funds agriculture will be less productive, there will be less surpluses to trade. Diminished fuel inputs would constrain output further effecting the fuel trade in a vicious cycle. Soon enough there would be insufficient agricultural goods to trade and less fuel available for agriculture itself.

Another response is that the US and others would seize fuel resources by military- and other related means. Indeed such efforts have been- and are underway. It remains to be seen after ten years of trial that the desired outcome of more fuel output at lower cost can be had. There is also the chance of paralyzing shortages which would be counterproductive.

US produces 1/3d of its current fuel consumption but a cash regime would cut availability to less than 1/3d of of that or 10% (roughly) of current (assuming the government puts some additional currency into circulation). With near- 100% dependency on petroleum fuels for agriculture there is a very real threat of crop failures and famines in the US due to the sector’s shrinking ability to fuel itself. The last time there was non-petroleum agriculture in this country there was 1/4th the current population and almost 6x as many farmers, most of whom were highly experienced.

Cash-currency limitations are not confined to the United States. If other countries cannot gain a tradeable currency they must do without. The worldwide ‘Green Revolution’ is very much petroleum dependent for transport, tillage, irrigation, chemicals and fertilizers.

There is a far better chance of crop failures and starvation in countries that depend on external credit, imported fuel and F/X flows. Vulnerable Pakistan could see its population completely wiped out and India could lose half of its 1.4 billion in a matter of weeks or months, particularly if coupled with a diminished- or failed monsoon. There are simply no food stocks available to shift to needy areas in sufficient quantities … to feed billions. Fuel poverty would restrict the ability of nations to replenish food stocks or create new ones. We are near- or at a food/fuel limit.

Central banks are simply not equipped to handle problems like this. Manipulation can fool investors but have zero- effect on resources which are either available or not.

The real problem with manipulation is the idea that everything having to do with markets is false: that anything the markets might indicate can be safely ignored. Here is the boy who cries ‘sheep’: comes now the wolf and there is no idea how to deal with it or even that it exists.