Kent Moors writes:  Oil prices are struggling to stabilize.  Some think it is a black swan, a theory popularized by Nassim Nicholas Taleb.  According to Taleb, a black swan event has three characteristics:

1. It is a surprise. Nothing in the past can convincingly point to its possibility.
2. It has a major impact.
3. People contend that they expected the event to take place (in hindsight).

Almost 15 years ago, Taleb applied this approach to the stock market.  As a consequence, the black swan is being used as an “explanation” for all kinds of things. It’s the obverse of the mantra “this time is different.” And that leads us back to the true nature of the 40% drop in oil prices.  Is the stunning fall of crude is a black swan event?

It isn’t. But calling it one may be a good way of clouding up what really is happening.

First off, there were always indications on both the supply and demand side that matters were softening. Second, the OPEC non-decision on Thanksgiving to keep production levels unchanged was both predictable (from the Saudi perspective) and telegraphed in advance. Then, the orchestration of the talking heads commentary on the tube made the whole move “legitimate.”

Unless, of course, there is another motive at work and the black swan becomes a convenient cover. Instead, this is what is really happening when it comes to oil prices.

Yes, there are traditional pressures driving down the price of crude. Rapidly increasing supplies and slower demand would have created a correction in oil prices in any event.  But dropping over $40 a barrel has required something else entirely.

When it comes to oil we are in a new age of massive short plays and swaps. The coordination of these moves is staggering, creating an impact that is immediate. Especially if there is a segue to important policy makers.

For instance, a Kuwaiti official tells the world oil can fall to $60 and… presto, within 48 hours, that’s where oil lands.

Of course, the targets of all of this are well known and have been discussed here at length: Russia, recalcitrant members of OPEC, and U.S. shale producers.

But we should look also at the positioning of sovereign wealth funds (SWFs).These funds have been designed to invest the proceeds from national revenues. Usually, the better a country’s balance of payments, the stronger the SWF. This is always a result of a trade surplus – as more is exported out of a country (being paid for by somebody else) than is being imported (requiring payment).  China, for example, is in this category.

But most of the SWFs of consequence involve investing the proceeds of oil sales. In the case of oil producers, that has usually meant the success of an SWF was perceived as dependent on the price of crude. The higher the price, the greater the leverage for an SWF.

Now these funds are almost always conservative, preferring guaranteed or long-term gains over a higher but riskier return. That explains SWF investments in Rockefeller Plaza and hotels on the one hand, or dull but secure 1.5% annualized return from somebody else’s sovereign low-interest bond on the other.

There is also the problem of limiting the financial downside from introducing the proceeds directly into a domestic economy. Given that oil revenues are in U.S. dollars, a direct flow into the economy ends up inflating the local currency rather quickly.

So the proceeds from export sales are largely segregated from domestic trade, kept outside the country, with the profits from investing introduced in ways to minimize the inflationary impact.

All of which has triggered a new development. SWFs have now become a player in the market, shorting the very product responsible for the funds to begin with. In other words, some OPEC members are making money on both sides of the crude pricing curve.

Transacting the deals outside their own borders via SWFs, these countries are hedging the product in both directions. That means they are currently pushing the lower cost of crude forward by pairing shorts to actual oil consignments.

Plain and simple: This is manipulating the market. It’s equivalent to being a poker dealer who is able to read everybody’s hand while taking a seat at the table.

What impact do primary dealers have on the economics of any country, the EU, or the world economy for that matter, Lee Adler asks.  Here is a table of primrary dealers he has prepared.  World Primary Dealers

Adler looks around at the central banks: The PBoC (China) is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a small player.

Adler aruges that Central Banks’ policy doesn’t mean much. With Quantitative Easing, the central banks bring the money into existence by making deposits in the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions in excess cash.

Certainly the US is making the break up of Big Banks a big issue, and this may be why it is important to simplify and clarify their role and divide up their functions.

Sen. Al Franken (D-Minn.) on Sunday called on supporters to reject one of President Obama’s nominees to the Treasury Department.  Franken criticized nominee Antonio Weiss in no uncertain terms, arguing Obama had nominated the wrong person for the job of Treasury undersecretary for domestic finance.

He argued Weiss would not put the middle class first, and that he was too close to Wall Street.  Franken wrote that Weiss has worked on manuevers called “inversions,” which are mergers that seek to lower a company’s tax burden in the United States.

“More than six years after the crash, the American economy is still recovering,” Franken writes. “We got into that mess because we were willing to let Wall Street police itself. Foxes make poor guards of henhouses. We know that through bitter experience, and I’m not willing to let it happen again.”

Franken is joining Sen. Elizabeth Warren (D-Mass.) and others in opposing Weiss, setting up an internal Democratic Party fight with Obama. Weiss is an executive at the investment banking firm Lazard.

When Gary Gensler direct from Goldlman Sachs was nominated to head the Commodities Futures Tradiing Commission, Carl Levin spoke to him early on. Cutting to the chase, levin asked, “Does speculation affect prices?”  “Yes,” said Gensler.  There was long silence.  The answer had come with astonishing ease,  Here was someone ‘tainted’ by Wall Street who was clearly capable of being honest.  Has anyone asked Weiss tough questions?  Asnwers could surprise?