Why everybody needs access to the futures market

I wrote in one of my early blog entries back in 2005 that I thought everyone should be holding some gold, because I anticipated the disintegration (at least in the short/medium term) of the US economy. Holding gold is a hedge against declines in the US dollar and woes in the stock market.

These woes have materialized, and I think they are not over, and I still think gold will outperform the stock market and cash savings for at least another two years.

As I started to see evidence that we were in for some tough economic times, I started looking around for investments that would do well in a bad economy. Some of these are:

• Buying gold
• Short selling stocks or stock indexes
• Investing in the futures markets

The good news is that it is very possible for a reasonably small investor with just a couple thousand dollars to invest to benefit in a bad economy. Initially I thought the only opportunities would be for the rich, but I was pleased to find that is no longer the case. Through discount brokers, everyone can have access to these investments. This democratization of finance is a very good thing, because of course economies go up and down all the time. And people should not be forced to suffer because of bad decisions made by their government (e.g. extreme deficit spending, encouraging market bubbles, devaluing the currency, allowing inflation). There are ways to anticipate problems in the market and benefit, or at least hold on to what you have worked so hard to achieve.

It pains me to see that so many people are going to suffer around the world as a result of the global stagflation that is occuring. The scope of the problem is huge and there is no way to "save" people from their situations. The cost at this point is going to be very high. (If we could rewind history and do things differently over the past 20 years, I believe the pain could have been avoided at a low cost.) I believe there is little at this point in time at the policy or aid level that can prevent the impeding suffering.

BUT, it might be possible for individuals, communities and maybe even nations to hedge against the impending problems and perhaps come out on the other side a little better off.

Consumer and producers of commodities have done this for a long time via the futures markets. A wheat grower can lock in a reasonable price by hedging for their wheat and sleep easy even if prices fluctuate wildly after that. A company that makes bread can lock in a price to buy that wheat in the same way.

Why don't more people, institutions and countries seek to hedge their bets against their own economies? By being a part of an economy, we are all heavily "invested" in that economy. It's like having all of your savings tied up in the stock of the company you work for: this is generally acknowledge in the post Enron world to be a very bad idea. Don't put all of your eggs in the same basket.

Likewise, it is dangerous to be overly invested or dependent on your economy. There are ways, via the futures market, to hedge these bets (by buying or selling various financial and other futures). This could help to balance out downturns and return the global economy to stability sooner.

Of course as currently structured, futures are risky and people need to be careful not to lose their shirt. That is why perhaps pensions funds, endowments, and perhaps even federal governments should seek to make prudent hedging (not speculating) investments in these futures markets on behalf of their constituents. I'm not talking about crazy leveraged speculation that has occurred in the past, I'm talking about wisely balanced hedging. I'm not sure if there is enough liquidity in the markets to support investors of these sizes, but if this idea caught on liquidity would be added naturally.

Hedging and the futures market are not a new concepts, but perhaps we need to extend how we use them. Instead of governments always trying to put a happy face on and say everything will be fine while the economy tumbles, perhaps we should be more honest about natural economic fluctations and proactively hedge against them to lessen the negative impacts.

People should demand this of their governments. We need these checks and balances in the global economy to help smooth out the booms and bust that only serve to further enrich the rich and cause suffering for the poor.