Stop Gambling On Hunger

Remember when gas was over $4 a gallon? Remember the global food crisis that resulted in dozens of food riots around the world and plunged over 100 million people around the world into hunger?

These crises where not caused by shortages of oil or food. Instead they were caused by massive bets made on Wall Street. A large portion of the higher prices were brought on by the same thing that caused the global economic crisis – market deregulation. While we had to pay more for our gas and food, fat cat investors made a bundle. Luckily, we already know how we can avoid future gas and food bubbles. The answer is proven and cheap – all we need to do is say yes to it.

Watch this video and explore the rest of the site to learn more about how speculators brought about last year’s food and oil bubbles. Most importantly, write to your members of Congress telling them to take action to avoid future bubbles. They need to know that this is important to you. Right now, they are only hearing from Wall Street.

Clearly, this seven minute video is a simplification of a complex issue, but it sums up the history behind and key problems brought on by the deregulation of commodity futures markets. Please explore the rest of the site for more details about this important issue.

Scroll down for updated posts on commodity speculation.

*if you wish to see the video in a higher resolution please try this version instead*

Congress is currently considering financial reforms to address this problem, but Wall Street is doing everything it can to stop those reforms. It is more important than ever to…

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Two recent pieces by Adam White at Seeking Alpha, a financial website, show the problems caused by investing in commodity indexes, both for individual investors and for the functioning of commodity markets.

In “Imagine Investing in Commodities from 2004-2008, and Losing Money,” White shows that, contrary to the famous Yale research paper that convinced many institutional investors to include commodities in their portfolios, investing in commodity index funds is not nearly as beneficial as the authors suggest.

“The diversification benefits of commodities have become increasingly tenuous as prices in the years following the report’s publication moved in tandem with other major asset classes, including shares and bonds,” writes White.

“As stock markets plummeted worldwide in 2008, commodities fared just as badly. And last year both bottomed in March, challenging the notion that they respond to different phases of the cycle.”

White goes further in explaining that the authors of the 2004 study were paid by AIG for their work. As White writes, “so let’s get this straight. AIG (AIG) paid these two professors to do this research which basically found that commodities were good investments – shocker! (AIG also reportedly paid Gorton $1 million to develop the risk models for CDS – how well did that work out?) This allowed Goldman Sachs (GS) and AIG to go out and hook a large number of pension funds and other dumb money investors into commodity indices promising ‘equity-like returns’ and ‘low correlation with stocks.’”

The problem is that when investors, heeding the report’s recommendations, poured money into the commodity markets it resulted in two things. First “the correlation between the S&P 500 and the S&P-GSCI index has risen to as high as 80% so that they provide no diversification benefit whatsoever… Anybody that invested in the S&P-GSCI TR Index from 2004-2008 is losing money as of today.”

The second problem caused by the influx of investment money into commodity markets is that they threw off those markets with their massive, one-sided investments.

White explores this problem more specifically by looking at the aluminum market in “A Slow Motion Cornering of Global Commodities Markets.” He writes, “between 75 and 90 per cent of the world’s physical aluminium stocks are tied up in financial arbitrage deals exploiting the difference between the spot and forward price, according to several industry insiders.”

“In aluminium, physical stock levels on the London Metal Exchange have quadruped in the past 18 months to about 4.5m tonnes. That amount, enough to build approximately 68,000 Boeing 747s, implies gross oversupply, especially as the pick-up in manufacturing remains slow in developed economies. Yet prices keep rising.”

“By this process synthetic hoarding in the futures markets becomes real-world hoarding of essential commodities. We have a slow-motion cornering of the markets occurring in most commodities.”

For these reasons and others, there is a growing campaign for investors to divest from the commodity markets. Those investments are not nearly as beneficial as initial studies suggested and they are very detrimental to the functioning of our commodity markets.

Pension funds and endowments have literally millions of investment options for their portfolios. There is no reason that we should allow them to destroy the commodity markets for producers and consumers, increasing price volatility and hampering possibilities for an economic recovery.

Please make sure that your investment portfolio does not include any commodities or commodity indexes. Divest now.

Market analysts are beginning to show that commodities may not be the boon for investor portfolios as originally thought. In addition to throwing off commodity markets and increasing the volatility of world food and energy prices, they do not offer investors a good return or serve as a way to counterbalance stock investments.

Morningstar ETF strategist Paul Justice recently wrote an article titled, ‘The Case Against Commodities’ questioning the mythology of commodities as acting contrary to the movements of stocks and equities. Since the mid-2000s, millions of investors have jumped on the band wagon of using commodities as an asset class. But it could be the very popularity of commodities that may be undermining their supposed use to investors.

In another article on the subject, Ian McGugan writes, “The new [commodity] ETFs got off to a roaring start as money poured into what appeared to be a sure bet. Then the stock market sank in mid-2008. This was when the Yale professors had predicted that commodities should shine.

Commodities did no such thing. They plunged in line with the stock market, then struggled to recover only part of their losses. So much for big gains and reducing risk. What went wrong? One theory blames the global recession. Another theory is that the flood of money into commodities changed the nature of the market.

Despite a mild recovery, broad commodity indexes are still below their levels of 2008. Rather than being a counterbalance to equities, commodities have bounced up and down in tandem with Wall Street.”

Justice explains why commodities no longer serve to counteract regular market movements, “the advent of commodity exchange traded funds (ETFs) expanded financial investment in commodities from the few foundations and pensions that invested in the early futures indexes to an enormous pool of individual and institutional investors worldwide, with substantial consequences.

As investment dollars reach critical mass within any asset class, the asset class itself begins acting like other financial instruments: Its return profile becomes correlated to the capital markets cycle.

Once financial investment outstrips the available inventories and storage capacity, arbitrageurs can no longer perfectly hedge out short positions in the futures contracts, allowing long-only pressures to take over and push prices above what the market fundamentals would predict.”

These facts will help the growing campaign for investors to divest from commodities due to their influence on world food and energy prices. Not only should investors pull out of commodity markets because of the moral consequences of contributing to world hunger, but they should divest because commodities do not help their portfolios as has been lauded by some academics.

Geert Rouwenhorst, the Yale professor who in 2004 co-wrote the original paper touting the benefits of commodity index funds (”Facts and Fantasies about Commodity Futures”), has a new idea. In that founding paper, Rouwenhorst helped created the passive, long-only commodity index funds that have been so detrimental to the functioning of the commodity futures markets (see “Dangers of Commodity Indexes“).

Now he is proposing a new financial instrument that could be even worse for food and energy market volatility – an actively managed commodity index fund called the SummerHaven Dynamic Commodity Index (SDCI). The danger of this fund is that, instead of betting long-only on a number of commodities, this fund will actively look for commodities that are experiencing lower than normal inventories and increase their bets on those commodities. The fund will select 14 commodities each month from a pool of 27 possible, including energy and agricultural commodities. An interview with Rouwenhorst about the fund is available here.

The increased danger from this fund is that the managers will be purposefully looking for commodities which are experiencing shortages and increase their bets on those commodities to take advantage of expected rises in prices. The result will be even higher price volatility as those bets drive up prices even further than they would have due to regular supply and demand conditions.

Passive commodity indexes are already problematic, but this actively managed fund will exaggerate price swings even more wildly. World food and energy prices will continue to be influenced by the whims of investors trying to balance out their portfolios.

Congress needs to take action to make sure these commodity index funds do not unduly affect world food and energy prices. Write to your Senators today to let them know that you want action to bring common sense rules back to our commodity markets.

Americans for Financial Reform are organizing Senate call-in days during the first week of March. The initiative is a crucial one as the Senate continues to consider a financial reform bill.

In meetings with members of the coalition, Senate staffers have said that they have received many calls and visits from Wall Street bankers and investors about the financial reform bill, but have few calls or letters on the issue from their constituents.

It is critical that Senators hear from more voters saying that they want strong financial reform.

From Monday, March 1^st – Thursday, March 4^th

Call your Senators

by calling Toll Free: 866-544-7573

Tell the Senator to: “make sure that the financial reform bill includes strong measures to make our commodity markets safe and transparent again, and that protect prices from being manipulated by speculators.”

Energy Secretary Steven Chu recently announced that his department plans to investigate how hedge funds and other speculators affect volatility in oil markets.

“We are going to be (undertaking) studies to try and find out how much has the volatility been increased by large financial institutions taking positions,” he said at a meeting in Riyadh, Saudi Arabia.

This is good news as Congressional reforms continue to struggle with Wall Street lobbying hard to thwart significant reforms.

An oil commodity expert estimates that, without manipulation or excessive speculation, a barrel of oil would cost closer to $30 instead of the current $80. Consuming 20 million barrels a day, the U.S., he says, is spending an estimated $1 billion extra per day on oil.

At a time when “the world is awash with oil and supply is beyond industry’s capability to store it readily (super tankers are being chartered to stockpile oil because land storage is at capacity) and consumption is diminishing to the point that a number of refineries have shut down” there is no reason that a barrel of oil should cost so much today.

The article shows why it is so essential to re-regulate the commodity markets. Imagine what an extra $365 billion per year could do to help the flailing U.S. economy. Instead, we hand that money over to oil-producing countries and speculators…

The Council of Institutional Investors, a nonprofit association of public, union and corporate pension funds with combined assets that exceed $3 trillion, sent a letter to the Senate today urging it to take strong measures to regulate the over-the-counter (OTC) derivatives markets that it says were “at the heart of the financial crisis.”

The letter states, “Although OTC derivatives have been justified as vehicles for managing financial risk, they also spread and multiplied risk throughout the economy during the crisis, causing great harm.”

“We urge you to pursue comprehensive derivatives regulation covering as much of the OTC market as possible.”

To read the full letter, click CII Senate Derivatives Letter

The blog Commodify Me! has a good summary of the problem of excessive speculation in commodities with links to primary sources. Definitely worth reading if you, like many, are new to the issue.

For background facts on issues addressed in the ad, click here – Casino ad back-up

Deficit hawks should be very concerned about excessive speculation in oil. This graph, created by calculatedriskblog.com, shows how significant the price of oil is in the U.S. trade deficit.

In a February 2009 report, hedge fund manager Michael Masters and financial researcher Adam White estimated that excessive speculation in crude oil and natural gas markets cost Americans at least $110 billion during the first half of 2008.

As the graph above shows, it also greatly increased the U.S. trade deficit at the same time. If Congress is interested in decreasing the deficit, reining in excessive speculation in energy commodities markets will be an important part of any strategy.