The Der Spiegel would like to educate you about the nuts and bolts of speculation, having been through this before a couple of times last century:
...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.
Perhaps this is why there are so many voices seeking to defuse the issue and calm things down, those who admit that speculators are at work in the commodities markets, but who also insist that they have little influence over prices. And if they do have an influence, these people say, it can only be a good thing, because it will force humanity to prepare itself more quickly for the unavoidable: the growing scarcity of resources.
"This is not about blame," US Treasury Secretary Hank Paulson recently said. "It's about supply and demand." According to Paulson, "speculators have had very little impact."
That's the Bu$hCo story, and hence a transparent lie.
...the people who are affected by rising commodity prices see it differently. "The flood of money from Wall Street and hedge funds is driving up prices -- and the effects are potentially destructive," says Tom Buis, president of the US National Farmers Union.
As prices become further removed from reality, another risk begins to grow: the development of another bubble similar to the one fueled by overinflated stock prices in the so-called New Economy. A crash would be unavoidable.
It would be good news for drivers in Germany and the people starving in Africa. But it would also send the financial markets into turmoil once again, causing problems for hedge funds and perhaps a few banks...
"The financial industry," says Heinrich Haasis, president of the German Federation of Savings Banks, "has disconnected itself from the real economy."
This is both correct and incorrect.
It's correct because the transactions concluded in this sector no longer have anything to do with real goods. The industry deals in expectations, and in expectations of expectations, often on borrowed money. And it's also correct because it is an industry in which obscene amounts of money are being earned.
But Haasis's statement is wrong because these transactions can in fact end up affecting the real economy. They can fire it up, as in the years of the recent boom, or they can slow it down, as is the case today. They could also drag it into an abyss, as many still believe is possible in the wake of the most recent credit crisis.
This crisis has shaken the financial markets for months. The central banks were forced to pump hundreds of billions into the global economy to provide it with liquidity and prevent a collapse. The otherwise unpopular state-owned sovereign wealth funds from the Middle East and Asia jumped in, using their money to prop up venerable institutions (more...) like Citigroup or Switzerland's UBS.
...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 (€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.
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...
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...
Prices for wheat, rice or pork have always been negotiated among farmers, dealers and their customers. The same thing normally holds true on the commodities exchanges. In the end, futures transactions eventually lead to the actual delivery of a product. In industry parlance, this is called real trading.
But those days are gone. Real trading, says Hubert Gabrisch of the Institute for Economic Research in the eastern German city of Halle, has "become the exception on the exchanges." In the case of wheat, for example, only three percent of traded volume actually changes hands. Prices are now determined by speculators, financial jugglers with no interest whatsoever in having any contact with or physically delivering the vast amounts of grain they own...
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...
Out of fear that the markets could collapse, US central bankers have made money cheaper and cheaper, but in doing so they are fighting fire with gasoline instead of water. As capital grows, it seeks increasingly rigorous new sources of return.
Hedge funds are the most aggressive, collecting vast sums of money and investing them in an extremely speculative manner. If all goes well, they can earn extremely high returns for their investors and, for their managers, salaries that would have seemed inconceivable until not too long ago.
John Paulson is a case in point. A former investment banker, he has managed his own group of hedge funds, largely unnoticed, since 1994. In 2006, he was earning an estimated annual income of $100-150 million (€65-97 million). Though certainly a vast sum by ordinary standards, Paulson's income was relatively modest within the industry, and not enough to merit any media attention.
That changed in 2006 when Paulson, 52, decided to place his bets on a crash in the US real estate market, especially in the subprime sector, while the overwhelming majority of speculators were still betting on unbridled growth. Last year one of Paulson's funds, Credit Opportunities II, climbed in value from $130 million (€84 million) to $3.2 billion (€2.1 billion), a 2,362-percent increase. Paulson himself made it to the top of the industry publication Trader Monthly's ranking of the top 100 earners in the industry -- with an estimated annual income of more than $3 billion (€1.9 billion)...
Recent data generated by the US market analysis firm Barclay Hedge point to the massive influx of hedge fund money into the commodities futures markets in the past few years. Since 2003, these investments have increased by 372 percent, to the most recent figure of roughly $190 billion (€123 billion)...
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...
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...
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...
Conservative investments, suddenly turned into Chicago School Free Market ventures.
If someone wanted to drive a society into economic ruin, this is the way they'd do it and make some big bucks on the side.
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