Sign in
Become a MarketWatch member today
Paul B. Farrell Archives | Email alerts
Aug. 2, 2011, 12:01 a.m. EDT
By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) "” You betting on inflation? On commodities? China? Shorting America? Warning, "the signs of a speculative top are everywhere," says economist Gary Shilling in "Will China Burst Its Own Bubble?" his latest Forbes column.
Yes, commodities are hot, also volatile, a time bomb ready blow up your portfolio. Time to short commodities? China? Go long America? Confusing?
August isn't always the becalmed month we think it is and this year could be downright volatile. Our top commentators show you how to navigate through the dog-day doldrums.
In fact, earlier this year more than one peaked, crashed: Cotton was well under a buck for a few years before mid-2010 when speculators began gambling big, pushing cotton above $2 a pound. Then in the last four months the cotton casino crashed, back under a buck.
Shilling captured the irrational exuberance of the speculator, asking rhetorically: "Did you hear about the cotton farmer in China who banished his family to the barn so he could stuff his house with cotton in anticipation of still higher prices?"
That Chinese farmer probably got his bizarre advice from Jim Rogers' best- sellers, "The Bull in China: Investing Profitably in the World's Greatest Market," and "Hot Commodities: How Anyone Can Invest Profitably in the World Best Market," which both hit the shelves in the years just prior to the 2008 meltdown that almost tanked the global economy. Rogers even moved to China to get really closer to that action.
Back then Rogers was ahead of the game, exclaiming, "Commodities get no respect." He ran around, nudging naive investors like the Chinese cotton hoarder with happy talk: "What about that relative of yours who got wiped out? He was inexperienced. You can learn." That joke's better than Shilling's. Why? In the commodities-future casino, the house always wins, no matter how much you think you've learned. It's a loser's game.
But addicts never stop. Till they lose everything. They double down, betting the market's hot and getting hotter, like the cotton farmer. Betting inflation will push prices up, make millions, like Florida condo flippers in 2007.
Yes you can win. If you're a professional trader, spending full-time gambling on commodity futures. But for the average working stiff on Main Street, those naïve amateurs with portfolios under $100,000, betting their retirement money, it's a total crapshoot for you out there. The house always wins Always.
This lesson was learned back in the "?90s. I was writing a newsletter for commodities and futures brokers and traders. After speaking at a conference one evening, a large group of us were in the bar. The "pros" were bragging. I pressed. To the man they agreed. Their clients invariably disappeared within a year or so. After losing everything.
Naïve investors get sucked into this game, chasing the illusion of bigger returns. At first they love the thrill of the casino. Eventually, they'd lose all their risk capital "” maybe 5% to 10% of their portfolio set aside for high-risk gambling. Yes, lose all of it. And yes, you guessed it right, the professional brokers pocket that money as commissions.
Shilling doesn't just see a speculative peak in cotton. It's across the board. "Another sign: Barrick Gold's $7.7 billion deal to buy copper producer Equinox Minerals to gain share outside its area of specialty. Few have recognized this commodities peak. It's like Wile E. Coyote in the "?Road Runner' cartoons, who runs off the cliff and stands suspended in air until he drops like a rock to the valley floor far below. A similar drop started in May, when silver nose-dived "¦ dragged down almost every other commodity."
Still, few listen. Why? "Commodity bulls "¦ believe recent price declines are short-lived. They say China, which consumes 40% of the world's copper and zinc, will continue its double-digit economic growth. They also contend that grain demand will outrun supply even if global weather improves, because Chinese consumers will eat more beef and chicken. Don't count on it," warns Shilling.
But America won't get it "” till it's too late. China's massive 2009 stimuli was 12% of GDP, twice the size of the U.S. bailout, pushed their "GDP growth from a recessionary 6% in early 2009 to double digits "¦ created serious inflation "¦ Food prices leaped 14.4% "¦ Speculation by multiple-home owners has pushed new apartment prices in Beijing from 32 times average after-tax income in 2006 to a ridiculous 57 times." Now, China's desperately trying to "slow its overheating economy" to avoid "a hard landing."
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The... Expand
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The Millionaire Code," "The Winning Portfolio," "The Lazy Person's Guide to Investing." Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner. He has a Juris Doctor and a Doctorate in Psychology. Collapse
Vital Signs
Heart tests are overprescribed
Writing on the Wall
How Apple would solve the debt crisis
The Technical Indicator
S&P 500 challenging longer-term support
Al's Emporium
An ethical economist? Don't laugh
The Economist's Corner
Trading one uncertainty for another
Behavioral Economics
Commodities casino makes losers of us all
Marder on Markets
Large investors nervous
On the Markets
A contrarian take on the debt deal
ETF Edge
Silver should stay white hot
Ways and Means
Keep your bank deposits safe
Read Full Article »