...And I Could Do Better Than Lieberman

By Jim Wiandt

Banning institutional investors from investing in commodities? The U.S. is an odd country - all for free market until we don't like the cycle.

First of all, I guess I should stand and applaud the Senate for getting back to focusing on the U.S. Half the world has been approaching starvation levels as rice prices have tripled, and the Senate only steps in when then gas is hitting 4 bucks a gallon. That should restore some sense of normalcy after all this talk of spreading freedom, liberating people from oppression and all of that other gibberish.

And it's a return to normalcy also in that it's hardly ever a good idea when the legislative branch gets involved in the gears of finance. Because policy is made by people who have no idea what they're looking at in a way that is tilted wildly toward where they are being lobbied from, as well as poll results, so that it often regulation leaves us worse off than we were before. And this latest Senate foray into commodities investing (or speculation, or manipulation depending on how it's being spun) is no exception.

Thank goodness, the New York Times has actually written a relatively reasoned and thoughtful story on the topic, and has put it on their front page. You can read the article here (free registration to www.nytimes.com is required).

The thing people generally don't get (though I think sophisticated index investors do) is that greed and speculation is what makes the financial system WORK. Without speculators, who is going to be on the other side of the trade that no one wants to make? Without speculation, where is the money going to come from that keeps markets liquid and easily accessible? So frankly, even if it's pure speculation, I'm not with the anti-market people looking to legislate.

Even worse, though - even worse, is the fact that most of the institutional money going into commodities is actually being invested - asset class invested to provide a better risk/return profile for those funds. I'm not going to say that none of the flow has been pursue of fast returns, because it has been, it always is, and it always will be. But the day we start trying to restrain markets from finding the logical equilibrium in big run-ups is the day we need to just start going back to a subsistence barter economy.

In a nutshell, you may not like it when the economy heads into recession or lots of people are jobless, but without that open market (AND that speculation), we would never have the access to cash to finance all the homes we've bought and all the goods we've built. I'm by no means a big materialist, but if you take the "free market" out of our economy, and you could be looking at a much worse scenario than we have now. Already the world is MUCH less efficient and productive than it ought to be because of all the trade barriers and tariffs clogging up the global economy. So let's not make it worse.

Effectively these are lobbies for price control. And that is not a road we want to go down. Have a look at the (ahem) dynamism of Venezuelan economy, and the economy of the ex-Soviet Union and I should have made my point.

On Matt Hougan beating Warren Buffet - Matt - why don't you make him a bet - that your 13 basis point portfolio (13.65 actually) will beat his S&P 500 portfolio over 10 years? I'm sure you could scare up a million bucks for a bet that's such a sure thing (unless they ban the fund that makes up the commodities part of your portfolio). Seriously though, the S&P 500 is about as good a bet as anything. What are you liking better over 10 years? Small? EM? EAFE? Commodities?! Maybe all of them. Maybe none of them. Looking at historical returns and where we are in the cycle of all of them, I wouldn't want to make that bet myself.

I couldn't think of any good way to work in Friday the 13^th. Lucky 13 basis point portfolio? But I thought I'd at least mention it. I won't be making any investments today - just to be safe.

Comments

[bbzz24:]

In effect when pension funds run up commodities they fund their future obligations to the public by taxing present consumption less the bonuses and operational costs, the latter of which is a bit mitigated by the higher returns.

2008 Jun 13 08:06 AM

[zenalgorithm:]

We need a lot of criminals or else police would be out of work...

We need a lot of heroin addicts otherwise methadone clinics would be out of business...

The commodities market is broken - it wasn't built to handle this many speculative investors, nor this much influx of cash. It's unfairly balanced and will topple economies across the world. It just needs to be rebalanced.
A human can't survive very long eating only twinkies...

2008 Jun 13 12:14 PM

[ValueInvestor:]

Why does everyone immediately think its the speculators that are causing the price of oil to rise?

I 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.

Take a look at the corn in 1996. It got up to approx. $7.50/bushel in real dollars when speculators in the market were minimal. Now that its at $7.00 is speculators fault?

The entire market has risen, but everyone focuses on Oil. Its pretty riduculous.

2008 Jun 13 02:08 PM

[floorboard:]

We should not let them get away with diverting attention from the real reason for the rise in oil. The blocking by congress of drilling for oil and building nuclear power plants.

2008 Jun 14 09:35 AM

[floorboard:]

Mr. Wiandt: "spreading freedom, liberating people from oppression..." is "gibberish." Not to people who are not free and are oppressed.
In that context you referred to an article by the New York Times where on this subject they were the reasoned ones. WOW. How turned around you are. Leading up to the Iraq war the New York Times wrote 16 editorials telling us to go to war.

2008 Jun 14 09:46 AM

[searcher:]

All this ground regarding 'speculation' in the markets, including commodities, has been plowed so many times before with no 'solution' because 'outlier' prices are models for true 'outlier' events or the prospect of same. Let's not let discovery of price provided by markets turn into the dictation of price coutesy of your politi/crat. Such dictation has always resulted in shortage and rationing to degrees unimagined by the problem 'solvers'.

2008 Jun 14 01:24 PM

[Humblemaster:]

You know what? All this high and mighty talk about letting free markets be free is lovely, but as soon as the heavy losses come down, it's "Oh help us!" from everyone. Everyone involved in the S&L meltdown surely decried regulation - "There's a boom, you see!" And Enron and Worldcom, and Bear Stearns? "There's money to be made, get out of our way!" But once it all goes south, who pays? Uh uh. Taxpayers. Shareholders. Employees.
What the free-free-free for all marketers forget is that there is social compact involved. People suffer as a result of their greed. And other people pay for their mistakes. Innocent people. People who will never even know why they are suffering and dying. (And with food on the block, it WILL be dying, now).
But anyone with a real concience should know. Uncontrolled greed has consequences, and it's rarely good for anyone.

HM

2008 Jun 15 01:24 AM