Where’s the Money?

Does anyone remember the Horatio Alger, Jr. stories? The ones that stressed the work ethic. If you work hard enough and are dedicated enough, you can make it big in America. Isn’t that the philosophy this country was built on?

Now we are all chasing the next Gold Rush.

We have the dot-com millionaires and the real estate millionaires. People who happened to be in the right place at the right time. I’m not saying that some of these people don’t deserve the riches they received through stock options and smart investment timing. Instead, what I’m saying is that we have lost sight of the work ethic.

Before the dot-com bust, there were people who made millions by working for the right dot-com at the right time. Did all of these administrative assistants, managers, and officers know more than the ones in the companies that didn’t make a fortune? I would argue that they didn’t. Sometimes it was timing, sometimes it was the concept, sometimes it was getting the right investors, but much of the time it was luck.

So now, instead of working hard, we are chasing the money and hoping for luck. We are following the bouncing money from stocks to real estate to whatever comes next. (Personally, I think that’s commodity futures.) And in the process we are disrupting the free market and damaging society.

For example, the dot-com debacle created millionaires out of those who got in first, and got out at the right time. Where did the millions come from? From the venture capitalists who poured money into the dot-coms that failed and from those of us who got in too late.

The housing bubble demonstrates the same thing. Again, the people who’ve lost the most money are those who invested in the secondary market and purchased risky loans and homebuyers during the last several years who honestly invested their money thinking that the value was secure only to see the biggest decline in real estate values in recorded history. Who has this hurt? All of us. The boom took the affordability of homeownership away from a lot of people. The bust has taken away some of every homeowners’ equity.
And since a lot of us live off our credit cards and pay off our credit cards using the increase in equity of our homes, this loss of equity has cut spending and has pulled this country into a recession.

If I’m right, and commodity futures are the next investment on the block, everyone is going to get hurt and may already be getting hurt by increases in grocery costs, as well as other things.

In commodity futures, investors purchase future products for prices that they expect will benefit them. In other words, if an investor believes that there will be a rice shortage in the future, the investor will promise to buy rice at a future time for a price that is determined now. The investors are hoping that the price will increase even more than anticipated and provide the investor with a profit on his investment. This helps the farmer selling the rice because he knows how much he will get when he harvests his crop.

In the free market, the price of the current value of rice, or the commodity, tends to get closer to the future value as that future becomes closer.  Of course, the commodities market is very volatile. In any week there can be wide changes in future values.

Since investors are now looking for the next great investment, commodities are becoming more popular.  More popular means more money is invested into the commodities market, this means that more people are competing over the same quantity of futures, and the price is inclined to go up.  If the value of a future product increases dramatically, signaling a potential future shortfall, then the current price of the product also goes up.

In other words, if rice futures rise, then the current price of rice will go up. This sort of reminds me of the housing bubble. People continued to believe that the future value of homes would keep increasing at an amazing rate, so more people bought homes, and the price kept going up.

Could this be part of the run up on groceries? Yes. So now, the investors are hurting all of us, again.

What’s the solution? We need to quit chasing the quick gain and start working and planning for our future by saving. Something we Americans aren’t particularly good at.

Copyright 2008 by Judy Kane