Attack on Prosperity

Phil has written about speculators quite often, especially with regards to oil, and this article elaborates and ties pieces together. It’s from Spiegel Online. (According to the website, Der Spiegel is Europe’s leading newsmagazine and Spiegel Online is the most-visited news site in Germany.)

THE ATTACK ON PROSPERITY

How Speculators Are Causing the Cost of Living to Skyrocket

Excerpts (it’s a long, very interesting article, lots of excerpts)

After investing in high-tech stocks and real estate loans for years, legions of speculators have now discovered commodities like oil and gas, wheat and rice. Their billions are pushing prices up to astronomical levels — with serious consequences for ordinary people’s quality of life and the global economy.
For decades, oil was too cheap. Until 1999, a barrel went for less than $10 (€6.40)," says Jaeggi. Of course, rising economies like China, India, Russia and Brazil have stimulated demand, driving up the price of oil. But what really changed the market were the big pension and investment funds.
Searching for secure and long-term returns, major investors turned their attention to the commodities indexes, investments that promised substantially higher returns than investing in the stock market. The more the funds invested, the higher the prices went, especially since the market for speculative commodities securities is very small. Even minor shifts in the portfolios of large mutual funds can quickly drive up the price of oil." * "Last August, the price of oil was $70 (€45) a barrel, in early March it surpassed the $100 (€64) mark, and then the new record high on June 6. What’s next?
The question is whether price rises are inevitable, because demand exceeds supply, or whether other, less obvious forces are at work: speculators who are taking advantage of the growing scarcity of resources to make a lot of money fast. This is about more than just economics. It is also an ethical and highly moral question. Much depends on the answer, including the credibility of our economic system.
Regardless of whether prices go up or down, speculation results in preposterous exaggerations, with real consequences for the economy."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 (€8.4 billion) in the food commodities business. By March 2008, that number had jumped to $260 billion (€168 billion), an increase of 1,900 percent. Last year, new investments in the commodities markets amounted to roughly $100 million (€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 (€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.
Two worlds have developed. One is the world of the traders at hedge funds and investment companies, and the other is that of farmers, grain dealers and mine operators. They may be dealing in the same commodities — barrels of oil or bales of cotton, for example — but for some these are nothing but abstract concepts while others see them as down-to-earth products.
But for some time now, the massive gambles being taken by new financial investors have allowed the commodities futures exchanges, especially in Chicago and New York, to function like a perfect casino. Traditionally the exchanges enable farmers and grain wholesalers to sell harvests early using so-called futures. In a futures contract, the volume, price and delivery date of a given commodity are stipulated in advance, even when the grain is still billowing in the wind on farmers’ fields.
Speculation is mentioned for the first time in the Old Testament. The ruler of Egypt, who had dreamed that seven abundant harvests would be followed by seven poor harvests, encouraged the practice. To avert this disaster, he created what might be seen as the first government fund in world history, with which he stockpiled grain on a large scale, thereby driving up prices. Failed speculation, followed by hardship and suffering, has been around since human beings first engaged in commerce. And it has always been the fatal combination of excessive liquidity and the herd instinct of speculators that has caused markets to climb and then explode and ultimately collapse.
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 (€32) at the time — would approach $105 (€68) by 2009. On May 6, Murti said that a price of up to $200 (€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.
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.