What distinguishes a speculator from a hedger? Here's the New York Times:
But that's not really right. Conceptually, a hedger is a party trying to shed risk, usually accepting some cost to do so, while a speculator willingly takes on risk, hoping to profit.Unlike hedgers — the farmers, miners, refineries and other commercial interests that actually make or use the commodities themselves — the speculators, like day traders in the stock market, are simply trying to profit from changing prices.
If we take nominal dollars as investors' unit-of-account, then all noncommercial interest in commodities is "speculation", as the Times implies. People are pouring money into commodities because they believe commodity prices will rise in US dollar terms. Since holding cash is risk-free (in nominal dollar terms), all investment is speculation unless it's offsetting some commercial risk.
But if we more realistically view investors' planned consumption bundles as their unit-of-account, the recent interest in commodities is better characterized as hedging than speculation. Investors perceive the value of currency to be more volatile than stored commodities, relative to the goods and services they hope to consume. It would be inefficient for investors to store commodities directly, so they hire professionals to store on their behalf by purchasing financial futures. (In properly functioning futures markets, when more money wants to go long than short, an invisible hand seeks out those capable of efficient storage, and compels them to fill warehouses in order to meet the excess demand.)
What Joe Lieberman proposes to do, then, is best understood not as barring speculation by institutional investors, but as barring hedging, as forcing investors to accept risks that they would prefer to shed.
Yves Smith writes that Senator Lieberman's proposal is "a Nixon-goes-to-China moment". I am wrong far more often than Yves Smith is, but I'm gonna go out on a limb here and say she's mistaken. The Senator fron Hedgefundistan is acting very much on behalf of his constituents. Smith writes:
Many investment funds may be prohibited by charter or regulation from participating in overseas commodity markets, but Senator Lieberman's hedge fund constituents and their wealthy accredited investors are not. The "wealth-holding class" would evade these restrictions quite easily, by funneling money through Connecticut businesses. This would be a growth-enhancing regulation for Stamford.
Opponents may argue that this will simply drive investing in commodities overseas. Perhaps, but funds regulated under the Investment Company Act of 1940 (most US fund managers) don't have that sort of latitude, and ERISA investments could similarly be reined in quite easily. And it's US investors, plagued by (until recently) an ever falling dollar who have had particularly strong reasons to look to a hedge like commodities.
As a move to drive any speculative froth out of commodities, this one isn't bad (but one wonders how all those commodities index funds get unwound). Although some have called for increases on margins at commodities exchanges, that hurts commercial actors as well as speculators. A move like this focuses on the underlying issue more directly.
Goldman in particular would suffer, since as the biggest manager of commodities funds based on its index, GSCI, it not only earns fees, but as we have discussed elsewhere, earns even more from an unsavory but hugely profitable practice called "date rape" around the monthly futures contract roll.
Now before the wealth-holding class howls that they've just been done a dirty by being deprived of inflation protection, there is an asset class that, unlike commodities, supports productive investment. and provides inflation protection, namely, infrastructure investments. The cash flow from infrastructure projects (toll roads, airports) goes up over time, as do the payouts, so they have fairly secure cash flow that increases over time. Although there is some debate about how to view them, they seem closest to an inflation-indexed bond (although any investor would need to study the ability of the enterprise to increase charges versus the drivers of operating expenses).
Meanwhile, retirement funds and retail ETF investors would be stuck with currency-denominated securities, and forced to bear any loss of purchasing power. Infrastructure as an asset class might or might not be a reasonable inflation hedge, as might stock (in the long run, equities are said to pass through inflation), TIPS, or any number of other assets. But that's fundamentally a decision for individuals to make. If infrastructure is a good choice, let the hedge funds buy it. But so long accredited investors (and savvy individuals with direct futures market accounts) have access to commodity exposure, it is inequitable to prevent the beneficiaries of ordinary investment funds from enjoying the same.
The United States economy is suffering the aftermath of poor aggregate investment decisions over a period of many years. Losses will have to be taken on those investments. The "wealth-holding class" responsible for the misdirection of capital will do what it can to shift losses to dispersed and relatively powerless little guys. I'd be glad to see the government take a more active role in addressing America's economic crisis. But most of the proposals out of Washington so far, including this idea from Senator Lieberman, give options to banks and wealthy investors while shoving costs and constraints onto everyone else. Trying to address the "commodity bubble" by restricting so-called speculation is a fool's game. If it's a bubble pop it, if it's a response to real risks, address those. Blaming speculators is like combating global warming by banning thermometers.
FD: I'm an evil speculator, but as an individual who trades futures directly, Senator Lieberman's proposal wouldn't prevent me from escaping the little people's inflation. That said, the only commodities I'm long are precious metals. I'm short Ag comodities via a retail ETF. I lose money all the time, so taking anything I say as investment advice is just dumb.
This article has 11 comments:
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bbzz24
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245 Comments
Jun 13 07:57 AM-
Loki
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3 Comments
Jun 13 08:25 AMThis is becoming a National crisis of soon-to-be immense proportions, and big problems require big solutions.
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elcopone
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15 Comments
Jun 13 08:57 AM-
blackbox
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8 Comments
Jun 13 09:43 AM-
User 179682
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1 Comment
Jun 13 10:00 AMLet's first explain "taxpayer." It's pretty simple, if you got back more money
after you filed you tax return, than you paid in, then you not a taxpayer, no, you
are a tax spender. So, if you are a tax spender, the following will be of little or no interest
to you. Thus, the following is addressed to the real and true taxpayers who might read this.
I think they may find it of interest.
Our national debt is $9,414,421,975,812.33, i.e., 9.4 trillion dollars. That's money
already spent or obligated by Congress, and there's no way of getting it back --
down the maw of Congress. Congress, you see, has an insatiable appetite for solving (?)
all our problems. To Congress there are no problems, so called, which can't be fixed,
if only more money is spent on them. And, of course, it helps them get re-elected,
and that's their measure of success. But, hey, they're just doing what their tax-spending
constituents ask of them, right?
The estimated population of the United States is 304,162,367
so each person's share of this debt is $30,951.96. Let's be clear,
that's $30,951.96 for every man woman and child in the US.
But even if you are a taxpayer, you can't get off that easy, because,
if you are, say, a family of four and you, man or woman, are the taxpaying
main source of support for your family, your ratable share of the national debt is
not the paltry sum of $30,951.96, no dear ones, it's four times $30,951.96,
that is, $123,807.84 -- send it in. Or would you rather, which heretofore
has been the case, leave it to your children, grandchildren and great
grandchildren to pay?
Years ago, when I was a Page in the US House of Representatives and an
appropriation bill was before the House, Representative Dirkson (later a Senator)
would make a production of ticking off various line items in the pending
appropriation bill and observe that they were all worthy, but then he would
take one of his dramatic pauses and say, "Well, it's just a million here and a million
there, but the first thing you know, we're talking about real money." (If he
were alive today he would have to change his act and express his concern
in billions, not mere millions.) He would often be preceded or followed by
Congressman Rich from Pennsylvania who would do a similar act, he too
acknowledging the worthiness of each and every proposed expenditure,
but then he would pause and yell at the top of his lungs,
"But where we gonna (sic.) to get the money."
Here's the answer to Congressman Rich's question.
"We're going to make our children, grandchildren and great grandchildren pay,
and pay dearly."
Our blessings upon you dear little ones, but it'll cost you, and here's the bill, $9,414,421,975,812.33.
Respectfully submitted,
Ed Funston
Mason City, IA
(641) 423-3812
The figures which follow will be of no interest to you if you are not a taxpayer.
Let's first explain "taxpayer." It's pretty simple, if you got back more money
after you filed you tax return, than you paid in, then you not a taxpayer, no, you
are a tax spender. So, if you are a tax spender, the following will be of little or no interest
to you. Thus, the following is addressed to the real and true taxpayers who might read this.
I think they may find it of interest.
Our national debt is $9,414,421,975,812.33, i.e., 9.4 trillion dollars. That's money
already spent or obligated by Congress, and there's no way of getting it back --
down the maw of Congress. Congress, you see, has an insatiable appetite for solving (?)
all our problems. To Congress there are no problems, so called, which can't be fixed,
if only more money is spent on them. And, of course, it helps them get re-elected,
and that's their measure of success. But, hey, they're just doing what their tax-spending
constituents ask of them, right?
The estimated population of the United States is 304,162,367
so each person's share of this debt is $30,951.96. Let's be clear,
that's $30,951.96 for every man woman and child in the US.
But even if you are a taxpayer, you can't get off that easy, because,
if you are, say, a family of four and you, man or woman, are the taxpaying
main source of support for your family, your ratable share of the national debt is
not the paltry sum of $30,951.96, no dear ones, it's four times $30,951.96,
that is, $123,807.84 -- send it in. Or would you rather, which heretofore
has been the case, leave it to your children, grandchildren and great
grandchildren to pay?
Years ago, when I was a Page in the US House of Representatives and an
appropriation bill was before the House, Representative Dirkson (later a Senator)
would make a production of ticking off various line items in the pending
appropriation bill and observe that they were all worthy, but then he would
take one of his dramatic pauses and say, "Well, it's just a million here and a million
there, but the first thing you know, we're talking about real money." (If he
were alive today he would have to change his act and express his concern
in billions, not mere millions.) He would often be preceded or followed by
Congressman Rich from Pennsylvania who would do a similar act, he too
acknowledging the worthiness of each and every proposed expenditure,
but then he would pause and yell at the top of his lungs,
"But where we gonna (sic.) to get the money."
Here's the answer to Congressman Rich's question.
"We're going to make our children, grandchildren and great grandchildren pay,
and pay dearly."
Our blessings upon you dear little ones, but it'll cost you, and here's the bill, $9,414,421,975,812.33.
Respectfully submitted,
But so long accredited investors (and savvy individuals with direct futures market accounts) have access to commodity exposure, it is inequitable to prevent the beneficiaries of ordinary investment funds from enjoying the same.
Don't you need an as, "But so long 'as' . . . ?
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zenalgorithm
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158 Comments
Jun 13 10:02 AMRunning up commodities such as food and energy will. People will start to riot and the poorest will start dying.
Commodities traders aren't going to run overseas to trade in unsafe markets. Up until the investment banks screwed the rest of the world with their CDOs, the U.S. had the world's most trusted markets. The U.S. must re-establish integrity in their markets by stopping the corruption and manipulation - eliminate those investment banks which are causing all the problems.
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Martin Lowenthal
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42 Comments
My Website
Jun 13 11:23 AM-
Farmer448
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46 Comments
Jun 13 12:12 PM-
ValueInvestor
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89 Comments
Jun 13 01:36 PMI would bet that the large Oil companies like Exxon, BP, Shell and the others are manipulating prices themselves, just like Enron did with their markets. If you think about it the oil companies have an invested interest in higher prices, they also have the capital and inside knowledge of the markets to do so as well as the ability to take delivery or not. They can basically do what ever they want.
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D Johnson
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6 Comments
Jun 13 04:51 PM-
ebear
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1 Comment
Jun 16 04:06 AMebear