Paul Tudor Jones Commented on Oil Bubble

Paul Tudor Jones is one of many hedge fund legends who recently did a number of short interviews on July 16, in Alpha Magazine; his comments on the energy markets were noteworthy:

Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall Street driving it up?

It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products.

Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket.

I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.

While the rest of Wall Street counted its losses on Black Monday, 1987 market crash, Mr. Jones, at age 32, had predicted market will crash and returned 200 percent for his investors that year and drew a payday of an estimated $100 million for the year, an almost unheard-of sum at the time.

Bloomberg on June 3, wrote that Billionaire investor George Soros said the record oil prices weighing on the economy are the result of a "bubble" caused by speculation from index funds and a tight balance between supply and demand.


"The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,'' Soros said in testimony before the Senate Committee on Commerce, Science and Transportation. "The rise in oil prices aggravates the prospects for a recession."

According to Forbes on July 16, Soros finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline. In fact, the gold bug clique believes in a consistent 10-to-1 ratio for gold and oil. It holds that either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel–one-tenth the present market price of gold. Croesus was told Tuesday that statistics spanning many decades support, on average, this 10-to-1 ratio.


Related Posts :

1. Other Short Ideas are Petrochina(PTR) and Whirlpool Corporation(WHR)
2. Hedge Your Funds in Gold Stocks

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