Cutting through commodities trading jargon
Cutting through commodities trading jargon –
Taking control of financial language
By Brett Scott
The language used by the financial sector is really off-putting to many people. This has two key effects. Firstly, it obscures the way the financial sector works. Secondly, it makes those who work in the sector and use those complicated words appear to be the legitimate controllers of the financial sector. The financial sector is a system of power. And like many systems of power, it has a way of keeping outsiders at bay, and the use of language is a very effective way of achieving this.
A classic example of this is in the area of agricultural trading (aka. food speculation) – which WDM has taken the lead in campaigning on. Browse the language used by the top 5 commodity trading banks – Barclays Capital, Goldman Sachs, J.P. Morgan, Morgan Stanley and Deutsche Bank– on their commodity division webpages. They take great pains to ensure that the act of speculation – which they facilitate when they offer services to hedge funds and other investors to bet on food prices – is presented in the same light as hedging, which is when they help companies protect themselves from commodity price fluctuations.
Here’s an example of using financial language to describe hedging, from Deutsche Bank’s webpage: “When volatility is a persistent threat, risk management needs to be nimble and dynamic… Using tailored diversified strategies, we can mitigate price risk to all individual requirements.” This basically means “if commodity prices are fluctuating up and down, and you’re worried about that, we can arrange for you to protect yourself by entering into derivatives contracts.”
Let’s now take a look at J.P. Morgan’s webpage. It’s going to look similar, but I’m going to italicise the sections that are actually referring to speculation:
“J.P. Morgan’s Global Agricultural Commodities business provides clients with an extensive range of hedging, financing and investment products that include price risk management services, customized investment strategies, and investment solutions based on agricultural futures and commodity indices… Services covered include trade ideas, pricing and execution of structured agriculture investments and risk management transactions… [and] development of index-based agriculture trading strategies“
And here’s Barclays Capital:
“Barclays offers an extensive platform of commodity risk management and financial services solutions across a broad spectrum of agricultural products. We provide competitive pricing and liquidity to corporations,funds and investors, along with innovative hedging strategies and market insight… The firm has strong product and structuring expertise, which allows us to offer original, bespoke risk management structures to a broad range of producers, consumers & investors…”
It takes a while to get your eyes accustomed to this kind of nuance. Otherwise it all looks like generic finance-speak. In my new book The Heretic’s Guide to Global Finance I go through some of this language to help decode it.
Misuse of language is equally important though. What I find particularly dubious about the Barclays Capital paragraph is how they misuse the concept of ‘risk management’ in the last sentence to actually refer to speculation. Imagine you’re a big investor, and all your money is currently invested in shares and bonds. If you were to take some of your money out of shares, and put it into commodities, you would be speculating on commodities, but you would also be spreading out the risk of your overall portfolio (i.e. you wouldn’t have ‘all your eggs in one basket’). Barclays has taken that last meaning, and highlighted it, basically saying “you can speculate on commodities as a way to spread your risk into different areas, and in doing so you are engaging in overall risk management”.
Even labelling these commodity products as ‘investments’ is misleading, making it sound prudent and respectable. There’s a simple rule of thumb to cut through this crap though. True investment is the process of buying something that will generate more resources over time. For example, I invest in a factory, because I think I can use it to make something that in turn can be sold and return income to me.
Speculation on the other hand, is the process of buying something that won’t generate more resources over time, but that you’re hoping will appreciate in value so that you can then sell that thing later for a higher price. Thus, when people say “we are investing in a residential property”, they are actually speculating on the house price, hoping that it will gain value in the future.
Unfortunately, in much modern financial terminology ‘investment’ is used as a catch-all term to describe many unproductive uses of money, like buying gold, which has zero productive utility, or buying food commodity investment products. So next time someone says this, call their crap, and tell them to do something useful with their money, like investing in new technology that can help the world grow more food, rather than betting on the inability of the world to produce enough food.
Brett Scott is a campaigner and writer.