THE ATTACK ON PROSPERITY
How Speculators Are Causing the Cost of Living to Skyrocket
Spiegal ( Germany )
June 13, 2008
Powerful investment fund companies are also jumping on the bandwagon. In the last 12 months, they introduced 52 index funds specializing in commodities in the United States alone. These instruments mirror the industry indices issued by Standard & Poor's and Goldman Sachs, in the expectation that prices will continue to rise.
Germany's booming certificate industry operates in a very similar way. With more than 300,000 securities
being traded daily on the world's exchanges, any ordinary investor can bet on changes in the price of
Super Unleaded gasoline, zinc or soybean meal. The price of these debentures issued by banks also follows the fever charts of international quotations, such as those on the Chicago Board of Trade and the London Metal Exchange. German private investors have already bought shares worth more than Eur 130 billion ($202 billion). The banks are hedging their investments by buying the corresponding futures, thereby driving up prices.
Because the stock markets are no longer as attractive an investment as they once were, many banks are also betting on commodities. Ethical qualms are generally not mentioned in their promotional literature, nor do they note that private investors pay for their investments elsewhere, at the supermarket or when
filling up their gas tanks, for example. And hardly a banker is likely to point out that lucrative fund
prices translate into rising food prices in places like Burkina Faso .
Be a part of the rally in oil prices but at little risk, the US bank JP Morgan tells its customers.
Merrill Lynch even offers an investment product called the "Emerging Markets Fertilizer Basket."
Speculators pricked up their ears a few weeks ago, when leading agricultural experts warned officials at the United Nations Educational, Scientific and Cultural Organization (UNESCO) that they could expect to see more and more people going hungry in the future. Rice, once a niche product on commodities futures exchanges that attracted little notice, had caught their attention. Before long, figures were being circulated and the speculators realized that rice is the main staple food for more than half of mankind, especially in Asia and West Africa .
The Dutch bank ABN Amro was the quickest to react, issuing a certificate that made it "possible, for the first time, to participate in the top food product in Asia ." Now that India has imposed a ban on rice exports, "worldwide reserves will decline to minimum levels," writes the bank, implying that rice is a hot investment opportunity.
The certificate has been so successful among small investors that other banks are now considering issuing rice certificates, as well. However, the rice price has since dropped significantly again. Ironically DWS, German bank Deutsche Bank's fund subsidiary, advertised a new global agricultural fund on the bags German bakeries use to wrap bread and other products.
The commodities issue comes just at the right time for the certificates industry, providing it with a new and effective tool to attract customers. Until June 29, investors in Germany will not be liable to pay taxes on profits from speculative investments. Those who invest after the cutoff date, though, will have to pay a 25-percent speculation tax on capital gains, which, before the new rules come into effect, are tax-free if held for at least a year.
The mood is heated and opportunities abound, bringing back memories of the best of times in the New Economy (shortly before the worst of times began). Some analysts at investment banks have acquired cult status once again -- just like Henry Blodget and Mary Meeker, analysts at Merrill Lynch and Morgan Stanley, respectively, who fueled the dot-com boom for years with their optimistic prognoses.
Arjun Murti at Goldman Sachs plays a similar role today. The oil analyst is famous in his industry. His
bold predictions have almost always been correct, at least until now -- to the point that his latest reports always trigger minor shock waves in the markets. In the spring of 2005, he predicted that the oil price – at about $50 (Eur 32) at the time -- would approach $105 (Eur 68) by 2009.
On May 6, Murti said that a price of up to $200 (Eur 129) a barrel was "increasingly likely" within the next 24 months. Prices promptly shot up. "The Goldman report gives fund managers an excuse to push prices up even further," says Michael Fitzpatrick of MF Global, the world's leading brokerage house for futures transactions.
Financial programs on television have also clicked into high gear. Business channels, like CNBC and Bloomberg in the United States , are doing their best to fire up the mood. Where past reports focused on the latest numbers of hits on Amazon's and Netscape's websites, tickers now scroll across the screen, showing the current prices of gold, silver, gas and oil. Talk show hosts, investors and analysts are constantly embroiled in heated discussions of " America 's oil crisis" and the "housing bubble." Of course, part of their discussions revolve around the best ways to turn a profit from these calamities.
Jim Cramer is the new mini-speculators' shrillest media personality. The former hedge fund manager has remade himself into an entertainer of sorts for American financial television. On his chaotic show, "Mad Money," he occasionally throws chairs through the bright red studio. He is constantly pressing various red buttons to trigger sound effects -- a Hallelujah chorus, machine gun fire or the sounds of bulls, bears or pigs -- to correspond to his shouted investment tips. Wind turbines are in short supply: drum roll! The container shipping industry is about to experience a major comeback: applause! The oil boom could see an occasional mini-crash: machine gun fire!
There is hardly a better backdrop for the rampant global capitalism of speculators large and small. No wonder even the occasional insider is starting to feel queasy, while more and more people are wondering how the out-of-control markets can be subdued once again.
A lack of regulation has allowed the financial industry "to become far too profitable and much too big," says George Soros. The legendary investment guru has been warning for years of the dangers of the global money business. In a hearing before the US Congress last week, Soros even spoke of a "super-bubble" that he believes has been building over the last 25 years.
The record high oil prices are also the result of a bubble, according to Soros. "Speculators and index funds that follow the trend are only increasing the pressure on prices," he says. For this reason, Soros proposes making it more difficult for pension funds and index funds to trade in futures contracts on the commodities markets. One method would be to impose higher minimum investment requirements for speculative capital.
Kenneth Griffin is also one of the major players in the market. His hedge fund, the Citadel Investment Group, is worth $20 billion (Eur 13 billion) and is one of the most successful in the industry. Nevertheless, he sometimes gets a queasy feeling when he thinks about the business. "Walk across any of the trading floors -- they are full of 29-year-old kids," Griffin recently complained to the New York Times. 'The capital markets of America are controlled by a bunch of right-out-of-business-school young guys who haven't really seen that much. You have a real lack of wisdom.' According to Griffin , bank executives now understand only "part of their business." He believes that the industry needs better regulation.
"We must create a financial system in which there are no perverse incentives, the risks are properly
recognized and managed, and there is less borrowing," says Mario Draghi, the head of Banca d'Italia and
president of the Financial Stability Forum, a group founded by the seven leading industrialized countries 10 years ago, in the wake of the Asian financial crisis. In April, Draghi presented a 70-page document detailing proposed measures to strengthen the stability of markets.
For instance, Draghi writes, banks should be urged to use far more of their own capital to invest in complex financial products. Hedge funds and other major speculators, he adds, should be forced to finally disclose their activities and risks.
"The proposals are efficient, but they also have to be implemented at some point," says Hans Tietmeyer, the former president of Germany 's central bank, the Bundesbank, and a co-founder of the forum. According to Tietmeyer, Americans and Britons are constantly demanding exceptions for their companies the minute acute crises are over.
In addition to tighter regulations, economists are also calling for stricter monetary policy. This means higher interest rates, less inflation and, ultimately, a stronger dollar. "Investors worldwide see commodities as a hedge against inflation," says Ben Steil of the American Council on Foreign Relations. This means that as long as the dollar remains weak, oil prices will not decline. For starters, oil is the world's new reserve currency.
Meanwhile, in the offices of hedge funds, pension funds and investment firms, a feverish search for the next big thing is already underway. Conservative investments -- concrete things that cannot go up in smoke as easily as a futures contract on the Chicago and New York exchanges -- are suddenly back in vogue.
In keeping with the new trend, hedge funds and investment banks have started buying up farms
worldwide. Morgan Stanley, for example, already owns several thousands of hectares of agricultural land in Ukraine . An agriculture fund operated by Blackrock, a New York investment group, acquired more than 1,100 hectares (2,717 acres) in Britain 's Norfolk County . Others are combing the world, from Russia to South America , for investment opportunities. In Argentina , prices for the most productive fields have increased by 80 percent in recent years.
The British hedge fund Emergent Asset Management is currently collecting Eur 1 billion ($1.55 billion) to buy up African farmland south of the Sahara Desert .
"Hedge fund managers may not be good farmers," says Paul Christie, Emergent's marketing chief, "but with
the right partners they can be good farm managers."
Markus Dettmer, Frank Hornig, Armin Mahler, Christoph Pauly, Wolfgang Reuter, Janko Tietz
Translated from the German by Christopher Sultan
Donations can be sent to the Baltimore Nonviolence Center , 325 E. 25th St. , Baltimore , MD 21218 . Ph: 410-366-1637; Email: mobuszewski [at] verizon.net
"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