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Pension Funds Blamed For Commodities Spike


Institutional investors may have skirted regulations to speculate on oil, food.


Yesterday we witnessed farmers taking heat for expensive oil and food. Today we add pension funds to the growing list of scapegoats for the parabolic rise in commodity prices.

Our friends at Marketwatch report that a new research paper links huge influxes of money from pension funds and other institutional investors to the recent spike in the price of oil and food. The authors of the report will appear before a Senate panel to discuss their findings, which allege that pension funds and their ilk have not only moved markets, but cleverly avoided regulatory hurdles designed to limit precisely this type of speculation.

The report traces recent market gyrations to trades made by large investors seeking to capitalize on the movement of baskets of commodities. These bets are "unidirectional and indiscriminate on price," creating upward inertia that overwhelms traditional market forces. Pension funds use Wall Street banks like Lehman Brothers (LEH) and Goldman Sachs (GS) as intermediaries, allowing them to gamble outside their regulatory bandwidth.

Commodity prices are effected by a host of factors, speculation being one of them. And while it's somewhat alarmist to blame the recent run-up on speculation alone, to claim the two are unrelated -- as did the Commodities and Futures Trading Commission -- is irresponsible. The CTFC, like the Federal Reserve and Securities and Exchange Commission before it, is burying its head in the sand and hoping the public buys public relations spin.

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Record gas prices stare consumers in the face and food riots are igniting around the world with worrisome frequency. As the world tries to cope with higher prices for the goods it needs most, inflation debates are no longer reserved for economists and fixed income traders. Professor Depew, on the other hand, wonders if the hysteria over inflation might be misguided.

Pension funds are charged with safeguarding the nest egg many Americans depend on to retire. Their actions in the past few months have been anything but commensurate with this responsibility. These quasi-public institutions, like Fannie Mae (FNM) and Freddie Mac (FRE), are the last ones we should see bypassing their regulatory boundaries. Taxpayers will be on the hook if their bets go sour.

Pension funds are throwing money at the hot trade, not unlike retail investors during the dot-com boom, or self-made real estate tycoons during the housing bubble. This is a concerning trend - and one that's indicative of a market that's ahead of itself.

Regulators have a chance to, at the very least, close loopholes that allow these funds to sidestep rules aimed at protecting investments. Vote-hungry bureaucrats are eager to show their "post-subprime" crisis mettle in handling turbulent financial markets. It remains to be seen whether they'll have the gall to intervene before the next bubble bursts.

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