Should Speculators Determine the Price of Goods Everyone Needs?
Growing up, my parents always emphasized the importance of working hard, saving money, and investing wisely.
Neither of my parents worked in finance so the only investments I grew up learning about was investing in the stock market and being able to pick certain stocks that were fundamentally undervalued.
The storyline sounds familiar to everyone, you search through a number of stocks, find and research more about a company that you understand decently well, purchase shares of the company. If the company does well, everyone is happy, the company's share price goes up, you reap capital gains on your investment, and management of the company is happy as well.
It wasn't until I started working in finance that I realized that stocks weren't the only place that I could invest. Suddenly I realized that you could invest in bonds, currencies, commodities, and real estate as well.
But unlike stocks, your investments rising to infinity isn't exactly beneficial to everyone anymore… the storyline changes a bit….
At least when it comes to equity investments, investing in particular stocks or the equity ETFs are at the end of the day still optional.
But the 1990s saw the rise of speculation on two particular asset classes: commodities and real estate.
Unlike equities, the rise to infinity does not come benefit everyone.
Equities only affects the people who have investments directly in the stock market or through their 401K/pension funds, but everyone needs to eat and everyone needs a place to live.
And the 1990s saw the rise of players in the market whose sole interest was to make capital gains on the underlying price, with no interest in the delivery or possession of the good itself. These are your REITS (Real Estate Investment Trusts), Commodity Index funds (DJ UBS and GSCI are the main ones), and the enormous growth of funds investing in both commodities and real estate.
Eddie posted this link previously in one of his posts and it's definitely worth posting again
Inherently, none of the buyers of the commodities indices have any intention of ever taking physical delivery of oil, gold, silver, wheat, soybeans, or cattle unlike the refiners and farmers in the market, as the index will continue to roll its future exposure from month to month. Yet, people who have no actual physical stake in the market are able to determine the prices that consumers around the world will have to pay for them.
This is similar to an example where I convince thousands of people that cheese is a great future investment because of consumer's shifting tastes globally. If all of us begin to start speculating on cheese futures based on those notions, it doesn't matter that some of us don't even like cheese or that some members of the group are actually lactose intolerant. At the end of the day, my corner pizza shop's margins will drop or have to raise prices due to higher cheese prices.
In the same way, anyone living in New York can vouch for the absurdity of the real estate market here. The concept of paying almost $1500 (which anywhere else in the country gets you a castle comparatively) for a shoebox with no air conditioning makes no sense, but each year thousands upon thousands of young graduates will pay that money because they have no choice. And yes I know that people will argue living in cheaper more remote areas, but comparatively you still spend a decent amount. (I don't even want to get into trying to buy a place in Manhattan)
I watched with shock during the late 90s as houses that went for $300,000 in 1999 were suddenly selling for $1.1million in 2006. This never made any sense to me for the reason that for a 3.5x increase in home prices, people's incomes were definitely not increasing 3.5x in that time span. The rise certainly benefits the homeowners pre 1999 and "investors" who bought condos/houses for "storage of value" and "promising future returns".
Just look at how Chinese investors can affect the livelihood of Vancouver and it's residents. Sucks if you're a young couple living out there that wants to buy a nice house to raise a family in right now….
So what do you guys think, on things that every person needs to get by, should companies and individuals with no physical interest or stake in the underlying be able to speculate on them and influence their prices?