Friday, June 13, 2008

Commodity Scapegoats

"In the political quest to place blame for high food and energy prices, a new scapegoat has been found: commodity index funds [CIF]. Politicians of both parties, energy company executives and farm lobbying organizations all agree these funds should be regulated or prohibited altogether. ... Nevertheless, it was reported over the weekened that the CFTC will likely bow to political pressure, and soon announce initiatives to crack down. ... [CIF] are especially vulnerable politically. ... [CIF] do what index managers like Vanguard have done for decades with stocks,--invest passively in a portfolio designed to track a published benchmark index. ... And such causation that can be shown to exist actually runs the other way: Rising commodites prices cause the dollar value of [CIF] to rise, just as rising stock prices would make a stock index fund more valuable. ... In the absence of rigorous evidence, are there theoretical reasons to expect that [CIF] should affect prices? Yes, if only that when new buyers enter a market they can be expected to drive prices higher, all else being equal. ... But of all investors, index funds should have the least power to move prices. ... With increasing demand from emerging economies, the dollar near all-time lows, and the [Fed] holding interest rates below the rate of inflation, surely we can come up with better explanations for high commodity prices than the growth of [CIF]. Sadly, those better explanations are more difficult to swallow politically", Donald Luskin (DL) at the WSJ, June 2008.

DL's got it!

1 comment:

Edgar Alpo said...

The politicos know their constituents are stupid, the pols know they just have to act concerned until after the election.