Tuesday, June 10, 2008

"Speculators"

The American media, rarely known for in-depth investigative reporting, has jumped on the popular bandwagon by crucifying an esoteric group of demonized investors: speculators. Speculators have been blamed for the housing bubble, the rise in oil prices, the collapse of the mortgage market, and other market calamities without much clarity on just how this vaguely defined group has single handedly caused such pain. CNBC, while recently indicting speculators for the volatility and spikes in the oil market, defined “speculators” as institutional and pension fund investors. Lets further elucidate the parties that comprise these investor classes.

Institutional investor is a broad term used to generally classify mutual funds, exchange traded funds (ETFs), endowments, and hedge funds. While some of these groups are private investors with broad investment authority, the majority can be classified as conduits for individual investors to participate in global markets. It seems hardly sensible to castigate individuals for attempting to diversify their portfolios and participate in one of the best performing asset classes of this decade through mutual funds and ETFs. The dramatic growth in natural resources and commodity funds has been a result of their strong recent performance and the endless promotion of these asset classes by the “seers” on CNBC and other media outlets.

Pension funds are a dying breed in America with the dominant trend towards self directed retirement plans such as 401(k) accounts and IRAs. Many of the remaining pension plans cover unionized workers in the airline or automotive industries along with public service employees such as teachers, fire fighters, and police. I challenge any politician to inform these highly mobilized groups that they are going to impair their retirement security by prohibiting the pension trustees from diversifying into alternative asset classes. Without obfuscating the truth, these bureaucrats will suffer a short and unheralded career as their constituents swiftly removed them from their post.

It appears much more expedient to cast negative aspersions on “speculators”, which is as ill conceived in the public psyche as the more favorably cast “middle class”, rather than identify the market participants that transact in these markets. The sacred middle class, the object of affection of all political aspirants, can seldom be divorced from the demonized speculators as they benefit directly from the speculators’ actions as their investment agent. Without a scapegoat, however, the politicos and pundits would have to introspectively reflect on their own actions (e.g. excessive expansionary monetary policy, failure to develop a comprehensive energy policy, tax advantaged treatment of housing speculation, etc) and their role in the current "crisis".

In my next post, I will discuss how speculators cannot possibly have the influence on oil and gasoline prices that the media suggests. Check back soon!

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