Wikinvest Wire

The "commodity speculators" - what's everyone worrying about?

Wednesday, May 28, 2008

Aside from the remarkable surety with which many analysts are now able to identify a "commodities bubble" in real-time, a feat that seemed impossible for both the stock market bubble and the housing bubble just a few year ago, the one part of the "commodities bubble" discussion that seems most ill-reasoned these days is the eagerness to pop it.

Most "popping " proponents cite the burden imposed on Americans, blaming "speculators" for the recent price increases of food and energy.

But, Americans have endured pain before - this is not the first time that gasoline and grocery prices have surged and we've all survived.

And besides, the government says inflation is only four percent - we've had much worse inflation in the past.

Some say a little adversity makes you stronger and if there's one thing we American's haven't had over the last ten years or so, it's adversity.

Where else could nearly half the country grow wealthy beyond their wildest dreams simply by owning a house? (Of course, that seems to be changing now.)

And at what other time could a nation fight a war abroad while its leaders at home slashed taxes and encouraged the masses to support the effort by spending more money?

Because of the soaring cost of food and energy, we've all had to cut back a little bit on a temporary basis but, like every other time in the past, prices should moderate in a little while and things should pretty much return to normal.

Those evil "pension fund speculators"

As for the commodity "speculators" - pension funds, hedge funds, endowment funds, and retail investors who purportedly just seek to maximize their investment gains during a time of meager returns for both stocks and bonds - why is there such concern to stop them from bidding prices higher?

Surely oil at $130 a barrel and gasoline at $4 a gallon can't last.

If oil at $130 is largely the result of a speculative frenzy, with the "fundamental value" of the black goo not much more than half that amount, when prices take their inevitable nose-dive, speculators will get their comeuppance and the entire nation can go back to driving gas-guzzling SUVs.

The nascent "commodities bubble popping" mania seems almost as if it's an attempt to "protect" the speculators from doing any more potential harm to themselves.

In recent decades, it has not been the role of the U.S. government to step in and protect speculators from doing harm to themselves.

Quite the opposite, actually.

Besides, think of all the teachers in California, Pennsylvania, and elsewhere whose pensions are more sound as a result of their fund managers diversifying their investment portfolios to better withstand the ups and downs from year to year.

Think of how the income stream of retired teachers may suffer as a result of heavy-handed action by the government to stop these "pension fund speculators" in their tracks.

If this "speculative bubble in commodities" is just like every other bubble over the last few decades, it will meet its pin and those who dabbled in natural resource investments will get their fingers burned just like those who bought in 1999 and Miami condos in 2005.

What's everyone worrying about with these "commodity speculators" anyway.

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Tim said...

More well-reasoned discussion on the subject from Matthew Lynn at Bloomberg: Commodities, Oil Bubbles Are Reason to Celebrate.
Well, maybe celebrate isn't the right word.

jesse said...

The difference with this bubble is that the past 2 bubbles were in discretionary items: tech stocks and housing (rents did not bubble, right?). This bubble directly affects everyone and is why it is so much more in danger of leading to general inflation.

This type of laissez fair policy towards bubbles just does not work. Politicians eventually must give in to populism and ensure price stability and we are starting to see this. They are not idiots -- they are working within confines of democracy. The commodity derivatives market was brought in to prevent bubbles in commodity prices but it appears this has been subverted.

Unless of course the "speculative bubble" is just lack of supply and too much demand; i.e. not speculation at all?

Jerry said...

tim - i hope your newer readers appreciate all your subtle jabs at the government, financial markets, mainstream thinking, etc. - this is one of your better pieces of writing in a while - kudos!

Tim said...

thanks Jerry

Dan said...

"(rents did not bubble, right?)"

As a renter who's had to move around the country quite a bit due to work ( from 2002 - 2007 I moved 5 times ), I feel confident in writing that rents absolutely bubbled. I left a prime apartment in LA in 2002 where I was paying $900/m for a 2 bd/2ba - this place was very nice - I had lived there for five years. I moved back into SoCal (San Diego) in 2005 to find that most apartments had become condo conversions and in turn, rent had become astronomic in scale as speculators were having renters pay for their mortgages and HOA - of course you now had stainless appliances (all the same cheap Home Depot junk) and granite counter tops, but you had a fourth of the square footage and about three times the rental price. In my opinion, the value had greatly decreased, but you were now paying much higher prices for it. I moved back into the same neighborhood in LA, about a block from my previous apartment and was absolutely blown away by how much rent they were getting for the place ($2,800/m) - Rent is so high that many people are living with far more tenants in a place than they should, putting up curtains to divide the living room and splitting a one-bedroom apartment 3 ways - it's probably not legal. I, however, noticed that rents were exactly the same price right next to the ocean as they were 10 miles, even 60 miles inland, so I now live within a block from the beach and pay $2,500/mo for a 2bd/2ba - it's expensive, but I could be paying that or more living in a dump east of the 405. So did rents bubble? Oh yeah.

Anonymous said...

Commodities bubble = BAD
Stock bubble = GOOD

Anonymous said...

I hope that commodities bubbles continue for quite longer. Most of my income goes for rent, education etc, and gas expense is quite tiny. Bubbling commodities will restrain (I hope) the Fed and governments from unleasing next liquidity wave.

staghounds said...

I do not recall a single comment during the housing bubble griping about high prices, demanding government action, or anything like that.

anup said...

tim, do you still get goosebumps after seeing your name in wsj/blogs?

Tim said...

Yes, but they're much smaller now. Almost imperceptible. Actually, it's been awhile for WSJ Marketbeat - a few months at least.

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