I've slugged this the plague of locusts (equating locusts here to hedge funds and private equity). This plague has been the primary, if not sole,
reason we've seen one asset bubble after another for well more than a decade -- beginning with technology then leading to real estate.
The Queen, God save her, is just asking the wrong question. It should be, how could all of your blokes be so drunk on credit that you failed to
remember economics 101.
Investors -- particularly high net worth families, pension funds and other institutional investors -- became hooked on fast rising returns during the
dotcom bubble. When enough of this private capital came in, it created a situation where valuation of most internet companies and stocks was beyond
any reasonable expectation that the money put in would ever be returned -- even if the tech company's wildest dreams were met. This drove up the
price/earnings ratio of all of Wall Street, as charted here.
Once the bubble burst, billions of dollars were lost. The private capital percipitated this move-out and barely got out of the faltering market
before 9/11 when the ground fell from beneath technology. Enter the second bubble. To prop up the ailing economy, brilliantly near-sighted and
huberistic Alan Greenspan decided to slash interest rates to historic lows (right at 1%; sound familiar?). This had the net effect of making money --
and by extension, the dollar -- very cheap. The locusts now could leverage their vast reserves of capital using essentially free money. So, say a
hedge fund with $10 million on its balance sheets could now realistically borrow another 100X that amount for little expense.
Oh, and 100X is actually extremely conservative, as one analyst pointed out
the average hedge fund leverage was 3,000%!
In other words, for every dollar a hedge held, it got a loan for $3,000.
Suddenly, private funds were cash rich, and desperate for a place to spend. Along comes the real estate lie. History had shown, until today, that
real estate was able to show a steady, conservative return on the dollar over time, both commercial and residential properties. And what was better,
unlike stocks, real estate is a limited commodity (you can't make more land, after all). Once banks got into the subprime game, the flood gates
opened, and the locusts swarmed into real estate en masse, driving up values and prices to unprecedented proportions. This chugged along for nearly a
decade, especially since hedge funds had an appetitie not for just owning the housing note of one single resident, but a pool of millions of
residents, a commercial backed mortgage instument that promised to be like a bond -- returning a fixed amount because the risk was spread across
millions of dollars worth of many properties instead of one.
This is a very long-winded explanation to get to your question: Why oil?
When the crash started late 2007, hedges and private equity saw the writing on the wall. And the locusts needed to get out and go elsewhere to get
those short-term strong returns. Suddenly, commodities -- everything from oil and gas to lumber, corn, peas and freakin' carrots -- looked great.
And their money dumped into that market in droves, driving up commodity prices to -- again -- unprecedented spikes. This is the reason we had $140
per barrel oil and corn and rice shortages. A story two
years ago talking about hedge money moving into oil...
The reason commodity prices have crumbled is two-fold -- demand has significantly weakened as everyone in the world has become poorer (fueled by our
depression). And second, hedge funds, facing an deluge of demand by account holders to cash out, have to liquidate to pay. So they attempted to
drive up commodity prices, and then sell at the peak. And the overall depreciation of all assets is forcing even more selling by private equity funds
as they struggle to drum up cash to pay back all those banks calling on their loans.