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Rethinking Risk: Proprietary Trading, Speculation, & Personal Responsibility

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01/25/2010

It’s fun times these days to be a commodity trader / blogger. There is no mid-range to the comments. Most of the criticism or descending comments I get on anything I write about the role of commodity traders usually has the undertone of populist anger around TARP. I try to present a balanced argument to the anger that is misplaced on managers of commodity hedge funds and CTAs who get lumped in with the big banks who benefited from the bailout.

Wall St. is divided by partisan lines. But in the United States, Republican and Democrat politicians are Corporatists. The terms Democrat and Republican refer to how individuals are registered to vote, or who takes a certain side of an argument. The recent SCOTUS ruling means that China Investment Corporation can sway elections here in the US. Trends persist.

I do not have a political agenda, unless of course you think that being a proponent of preserving individual liberty and personal sovereignty is an agenda, then I have one. In my paradigm, I am responsible for everything that happens in my life…good and bad. I cannot blame anyone for my failures or the times when I’ve had bad luck. That is so foreign to me anymore, I don’t think blaming others for my failures would even feel good.

When Refco went under, I lost my one and only client at the time. And we were dealing with their Indian subsidiary…we were shot by friendly corporate fire. But, no one held a gun to my head and said “bank on one large client.” That was my doing. I admit to having visions of putting a 38-ounce Louisville Slugger to the forehead of Phillip Bennett, the now imprisoned Refco CEO, but that was just a mask for my fear of losing everything. There was no TARP money for me. There wasn’t an SBA loan either. There were friends and family, and my sense of persistence and determination.

I’m not a fan of any politician on either side of the aisle. For the life of me, I don’t know how anyone can idolize a politician. Nor do I idolize my mentors Ed Seykota, Victor Sperandeo, and Jim Rogers, for example. They continue to be kind and generous with me. I celebrate their mentoring and teaching and I pay it forward by sharing as much of it as I can with the readers on my blog for free.

My debate is not with those who criticize me or the commodity futures industry – I don’t think they fully understand how risk transfer markets work. It is with arrogant members of the academic community and especially those in the self-interest groups who believe in abolishing individual freedom and free markets to exert power or control over others.

Economically speaking, academics think in terms of pay-grades and tenure. I think because of that, it seems, they decree a sense of what is fair and what is not. They have no choice but to accept that there is only so much they can earn for all their teaching skills. Frankly, I believe that teachers, instructors, and professors are underpaid, but they do not stand on a higher moral ground because of the choices they’ve made professionally.

Special-interest groups are myopic at best. Whereas Wall St. benefited handsomely from the Greenspan and Bernanke Puts (Put Options), special interest groups want Legislative and regulatory Call options: they want all the upside, but don’t want to pay for the option.

Professional investors earning huge sums of money each year, while the rest of the country is hurting is not an injustice. It’s progress. And trying to cap one’s income or legislate one’s behavior takes the United States backwards, not forwards. Education is the answer – especially in financial literacy. Education is what will close the gap, and IMHO it’s far better to encourage individuals to progress, than to truncate or retard their growth.

The whiners who blather about “what is fair” have already surrendered their power. They are in the camp that the government or a regulator should decide an individual or a group’s fate. I suggest that they learn to trade to better manage their risk or to enhance their compensation. It might also give them a new found sense of liberty. Fairness is a form of reality.

Americans are hurting now, and I genuinely feel for those who are out of work or have suffered through the real estate crash, have been laid off, or downsized. My father was in a labor union and spent months out of work in the late 70s. It was very painful financially and emotionally. I don’t blame President Carter: he made some very stupid decisions, but so did Presidents Nixon and Ford.

I teach anyone who wants to learn and I love when students argue because I know I’m challenging their set-in stone beliefs. My classes have a wide-array of students from various backgrounds and ability levels. Essentially, I teach Risk Management in the form of commodity trading to all types of traders, investors, and hedgers:

Investors

  • CFA Charter holders who want to go beyond their professional studies of their charter
  • Equity Mutual Fund managers who want to learn more about the cyclical markets of commodities
  • MBAs, CMTs, Ph.D’s, and CFA’s who manage Equity or Fixed Income portfolios who want to manage basis risk
  • Forex dealers
  • Individuals who want to become CTAs or commodity investors
  • Individuals who are looking for a change in career

Hedgers

My classes are very heavily represented by the hedging community.

  • Energy companies
  • Energy wholesalers
  • Agriculture firms
  • Electric Utilities
  • Airlines
  • Refineries
  • Firms that use crude oil distillates to produce their products
  • Individuals and firms who want to hedge an adverse move in a currency their dealing with

I am no apologist for a trader’s bad behavior on either side of the transaction. If a large trader can dominate the market, it hurts me, so naturally I’m against it.

If a commodity user or producer does not engage in hedging, and the commodity in question is an integral part of the business, then they are at the same time, foolish, gamblers, and irresponsible.

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