THE ATTACK ON PROSPERITY
How Speculators Are Causing the Cost of Living to Skyrocket
Spiegal ( Germany )
June 13, 2008
They are all back at the table, the hedge funds and the major investors, the ones who will place their bets on anything that promises to yield a profit. But they're not the only ones. American pension funds, such as the fund that manages the retirement pensions for Californian teachers, have also joined the fray. And then there are the countless small investors putting their money into commodities funds, into index funds that simulate commodities prices, or into certificates, that modern investment instrument that even allows the most ordinary of investors to get a tiny piece of the action.
They all speculate that commodities prices will continue to rise, partly because demand is growing
while supply is limited. Oil is a case in point. Without it, the world economy would come to a
standstill, and Asia 's emerging economies are constantly clamoring for more. And then there is food.
In China , for example, more people can now afford meat. But it takes three kilograms of feed to produce one kilo of pork. At the same time, many fields are now devoted to growing crops used to produce biofuel.
The trend is clear, and yet it offers only a partial explanation for the steep rise in prices. Living habits don't change that quickly and, as a result, neither does demand. The only thing that changes that quickly is expectations -- which keep on driving up prices.
Commodities: The Biggest Growth Industry of the 21st Century
No one knows how expensive oil would be if there were no speculation, but it would certainly be cheaper. And if it were cheaper, we would all be paying less for gasoline, heating fuel and hot water. The Germans, and everyone else, would have more left over to cover the cost of living and to consume products, and more and more billions would not be removed from the German economic cycle.
If oil were cheaper there would be less inflation, and the European Central Bank (ECB) would not be forced to keep interest rates as high as they are today. It could reduce rates instead of, as ECB President Jean-Claude Trichet announced last week, raising them in the near future. Lower interest rates would stimulate the economy and bring the soaring euro back down to earth, which in turn would benefit the economy and have a positive impact on the labor market.
Instead the recovery is in jeopardy, as are many jobs. Inflation, in addition to making goods more expensive, also redistributes wealth because it harms the poor more than the rich.
But because no one knows how much cheaper oil would be if there were less speculation, no one knows how
significant the impact of speculation is. That it exists is clear, as is the fact that it affects
everyone -- every citizen and every business.
But all of this is relatively harmless compared with the speculation over food products. Instead of
affecting only the cost of living, speculation in food commodities can be a matter of life and death. When food prices rise, the poor can no longer afford food and are forced to go hungry.
For this reason, there is also a side to speculation that many, especially those who stand to make a quick profit, choose to ignore. In doing so, they also ignore the results of their actions.
Globalization, a success story for many until now, has stalled. After initially helping hundreds of millions of people escape from poverty, it is now showing its ugly side. As profits grow on one side of the world, hunger is on the rise once again on the other.
It's a completely different story on the computer screens of Wall Street analysts, where commodities are
the biggest growth industry of the 21st century. Vast sums of money are being invested in the markets for food commodities and energy. These markets, which have been relatively straightforward until now and have operated in accordance with the same principles for decades, are suddenly being overrun by financial investors.
In late 2003, they invested only $13 billion (Eur 8.4 billion) in the food commodities business. By March 2008, that number had jumped to $260 billion (Eur 168 billion), an increase of 1,900 percent.
Last year, new investments in the commodities markets amounted to roughly $100 million (Eur 65 million) a day.
At the beginning of this year, what had been a steady flow turned into a torrent, with more than $1 billion (Eur 650 million) flooding the market every day. Hedge funds, banks, pension funds, investment funds – in other words, groups that represent millions of small investors -- are all involved. At first they invested their money in the dot-com market, then in real estate, and now agriculture and the energy markets are the hot new investment opportunity.
From the point of view of fundamental investment analysis, there are good reasons to continue to bet on
further increases in commodities prices. Resources are becoming scarcer, while global demand for energy,
mineral resources like copper and coal and crops like wheat and corn will continue to rise. Traders on the commodities exchanges call it a "supercycle" -- a trend that will continue for a long time.
The problem is that commodities don't behave like stocks or mortgages, the last two darlings of the
investment community. It is often the case that many fund managers cannot (or choose not to) understand the specific rules of their latest toy on more than a superficial level. They trade in pieces of information that mean nothing until they are in possession of one of them.
Sometimes all it takes is a heavy rainstorm in Iowa to trigger a rally on the corn market. A poor harvest could reduce supply. Less supply drives up prices -- and higher returns for commodities traders.
In the case of oil, a foggy day in Houston 's harbor is enough to trigger a panic in the market because it means that a few tankers will be unable to unload their cargos until the fog lifts. When a pipeline burst in Canada , "the price immediately jumped by $4," says Fadel Gheit, an oil analyst with Oppenheimer in New York with 20 years of experience in the industry. Gheit, also an engineer, knows how pipelines are repaired. "This isn't heart surgery. It's a plumber's job, child's play, finished in three days," he says. "The traders use every excuse in the book to drive up prices."
As a young man, Gheit was still analyzing oil prices at $4 a barrel. The ritualized relationship between
production volume and consumption, demand that has been growing for years in China, unrest in the Middle East or Nigeria, the threat of cold snaps -- none of this is enough to explain the current price explosion, says Gheit. In fact, he is convinced that speculators are completely responsible. "It's pure hysteria," he says.
Other analysts agree. "The market is reacting to the fact that we might not have enough oil in the market 13 years from now -- excuse me?," says Edward Morse, chief energy economist at the investment bank Lehman Brothers. "You never recognize it's a bubble until the bubble is over." he says.
Signs of unusual behavior abound across the commodities markets. Take cotton, for example. In late February, the price of cotton futures jumped by 50 percent within two weeks. But cotton farmers haven't even been able to sell half of their harvest from the previous year yet. Warehouses in the United States are fuller than they have been since 1966. Indeed, all signs point to a price decline.
In a statement to the US Congress, the American Cotton Shippers' Association blames this "irrational"
development on "speculators driving up prices." According to the trade group, cotton processors would
never pay the fantasy prices being quoted on the commodities futures exchanges.
To be continued
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"The master class has always declared the wars; the subject class has always fought the battles. The master class has had all to gain and nothing to lose, while the subject class has had nothing to gain and everything to lose--especially their lives." Eugene Victor Debs