Nervous Investors Searching for New Asset Classes, July 2008

by
Hazel Henderson, President
Ethical Markets Media, USA
www.EthicalMarkets.com

We all know the story of the tulip mania, a favorite but short-lived asset of Europeans in the 1700s. Gold has always been a favorite safe haven in spite of its volatility and recent efforts of central banks to devalue the yellow metal by leasing it and selling off their reserves. We have lived through bubbles in art, antiques, jewelry, junk bonds, dot.coms and housing, as investors continually search for safety and diversification.

Today, it’s commodities – oil, corn, wheat, rice – that are in the news as ETFs (exchange-traded funds), hedge funds and even our pension funds pour billions into futures contracts. Most of these institutional investors don’t ever want to take delivery of the barrels of oil or bushels of grain. They just roll over the contracts and buy and sell them, betting on higher prices.

Meanwhile, hedgers in these vital commodities exchanges buy these future contracts to save money and keep their businesses, from airlines and truckers who need oil, to bakers and pasta-makers who want to keep their cakes, bread and pasta affordable. Sure, demand is growing worldwide while supply may be peaking. The world is transitioning from the fossil-fueled Industrial Age to the emerging Solar Age as I predicted in my The Politics of the Solar Age (1981). But, the current price spike is also due to the $200 billion from speculators.

The industries harmed by these new waves of speculation in commodities have now formed a protest group at www.StopOilSpeculation.com and have garnered millions of signatures. They support many of the bills being debated in the US Congress to curb speculators – by raising margins to 50% on their contract purchases; limiting the amount of the contracts they can buy and to add staff and backbone to the “asleep-at-the-switch” regulator, the Commodity Futures Trading Commission(CFTC), to increase transparency, oversight and enforcement.

Senator Ted Stevens of Alaska in his bill has even called for criminal prosecution of speculators in oil. His state is heavily dependent on airlines that bring tourists and ship freight through Anchorage, many now facing bankruptcy. A survey of Americans in July 2008 found that 65% want more regulation of oil futures and 80% believe prices are being manipulated. No one wants to limit legitimate hedgers who need to use these commodities in their businesses. The transition from the fossil fuel addiction to the Solar Age will take time . It can be speeded up with good political leadership and a new Manhattan Project , that Al Gore has challenged as achievable in ten years.

With piles of cash in pension funds, ETFs, hedge funds and university endowments, are all competing for higher returns and looking for alternative asset classes. Where will all this money go if speculating in oil futures is put off-limits? Will corn, wheat, rice and other food crop futures also be targeted as “immoral” and off-limits to speculators? How will pension fund beneficiaries react when they find their pension plan funds are bet on future price rises in oil and food – adding to those prices? Will socially responsible mutual funds add speculating in oil and food as new “no-nos,” along with polluting, using child labor and carbon emissions in their investment screens?

So, what are pension fund managers and other big institutional players as well as individual investors to do? They see the US dollar having lost about one third of its value since 2002 , while global currency trading is over $2 trillion per day – over 90% as speculation. So, even currencies themselves are less safe as assets, with inflation rising worldwide. Indeed, the flight to commodities was caused by the volatility and speculation in currencies, as well as the US Federal Reserve’s interest rate cuts which weakened the dollar.

Investors and the public are now seeing that governments can print money to pump up GDP figures and reduce their debts by inflating with easy credit. Indeed, the US Fed created the easy credit that fed the housing bubble. As the Fed went on to cut interest rates further, bail out Bear Stearns and plan similar support for Fannie Mae and Freddie Mac, the US dollar keeps falling, and more money flows into oil and other commodity futures. We are all learning that “fiat” money (created and backed only by government promises to pay) and the money created by banks as loans are really no more than colored pieces of paper or blips on traders’ computer screens.

Even if you were lucky and got your money out of a failed bank – like the US-based IndyMac or the UK’s Northern Rock – what are you to do with it? Find another bank? Most offer interest below the rate of inflation. Even the US Treasury’s TIP-bonds which are “inflation-protected” are tied to suspect measures of inflation: the “headline” CPI (Consumer Price Index) at 5% and the “core” rate (stripped of food and energy) are both unrealistic (see www.shadowstats.com for more accurate indicators). Will individual investors resort to ”putting their cash in their mattresses”? What will be the next “asset class” beyond gold, for all that nervous money to find?

My prognosis is that additional searches will find a group of new assets that will provide a long-term return. These are shares of companies geared to the ecological and social sustainability of human societies and providing a healthier planet for our children. These equity assets are all available but hidden in plain sight due to obsolete economic models. Many are too small to qualify for big pension portfolios and are traded over the counter or on NASDAQ and other smaller exchanges. Obsolete accounting methods used by traders, asset managers and security analysts keep their minds hypnotized by the indicators of the dying, fossil-fueled Industrial Era.

The asset-allocation models still used on Wall Street, in London and other stock markets label sectors as :”Energy,” “Retail,” “Military,” “Health,” “Pharmaceuticals,” etc. These still focus on the old sector. Even “Technology“ is still dominated by dot.coms, even as Silicon Valley has rushed into “green” energy. Another example is “Energy” which is still dominated by oil, coal, gas and nuclear, all heavily subsidized by taxpayers and in decline, while wind power (which added 35% of newly installed electricity in the US in 2007); solar (growing at 35% per year); geothermal (which is gearing up to power millions of homes in the US) are overlooked and have been largely ignored by mainstream financial media. Similarly, Whole Foods Markets and the growth of organics are buried under Wal-Mart, Target and Costco in “Retail” and holistic, preventive health care, fitness clubs, etc., are buried in “Health” under the weight of the medical-industrial complex and “big pharma.”

Thankfully, all this is changing rapidly with the birth of new indexes for clean technology, renewable energy and other “green” and “ethical” mutual funds as well as new ETFs in wind energy, the fastest growing, cheapest new electricity source (one third the cost of building equivalent nuclear power plants). You can find all the best new newsletters and indexes at www.ethicalmarkets.com.

So, my candidate for the best new asset class is all the entrepreneurial companies that make up the Sustainability Sector. Many of these have quietly out-performed the Dow and S&P indexes. For full disclosure I admit I am invested in this new sector. The financial media can make this new “green economy” visible by also reporting daily on the growth and profitability of this Sustainability Sector. Then all that cash, declining in value daily, could find a home in building the energy independent future we need in the USA and to grow the green economy worldwide.

*****

Hazel Henderson is author of Ethical Markets: Growing the Green Economy (2007) and co-creator with the Calvert group of the Calvert-Henderson-Quality of Life Indicators regularly updated at www.Calvert-Henderson.com. She can be reached at www.EthicalMarkets.com and her TV shows are at www.EthicalMarkets.tv.