Paul B. Farrell: Commodities casino makes losers of us all

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SAN LUIS OBISPO, Calif. (MarketWatch) ?€" You betting on inflation? On commodities? China? Shorting America? Warning, ?€œthe signs of a speculative top are everywhere,?€ says economist Gary Shilling in ?€œWill 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?

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: ?€œDid 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, ?€œThe Bull in China: Investing Profitably in the World?€™s Greatest Market,?€ and ?€œHot 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, ?€œCommodities get no respect.?€ He ran around, nudging naive investors like the Chinese cotton hoarder with happy talk: ?€œWhat 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.

Commodities, China, casinos, coyotes and cartoons

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 ?€œpros?€ 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.

Reuters

Laborers work in a cotton field in the outskirts of the town of Thebes, Greece.

Shilling doesn?€™t just see a speculative peak in cotton. It?€™s across the board. ?€œAnother 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? ?€œCommodity 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.

Politicians, Wall Street and traders are killing the economy

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 ?€œGDP 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 ?€œslow its overheating economy?€ to avoid ?€œa hard landing.?€

Authors: Commodities - Yahoo! News Search Results

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