Commodity Speculation and Middle East Turmoil

Here is an excerpt about the subject

The short answer with regard to the role of speculation in the Middle East turmoil (and the spike in gas prices) is that speculation is obviously playing a large role. Everyone I’ve spoken to seems to think this is a virtual replay of 2008, only the larger spike here is in food commodity prices. Wheat and corn are both up more than 75% over the last 12 months; cotton is up over 125%; coffee up 85%. Meanwhile oil prices are soaring and there’s talk again of futures maybe hitting $200 a barrel – oil futures are trading at about three times what they were in February 2009. The blame for all of this is going to be laid at disruptions in the Middle East and other factors, but the inescapable fact is that commodity index speculation was up $80 billion last year, meaning that there was $80 billion of new money coming on the market betting on the rise of commodity prices. The total amount of commodity index speculation approached $400 billion last year, meaning the amount of speculative money on the market was roughly twenty times pre-2003 levels – and again, this is all “long-only” speculation, i.e. money betting on prices to go up. Obviously disasters and political unrest and other factors (a very weak harvest in Russia last year was a factor in the wheat price spike, for instance) play a part in all of this, but I think in the end what we’re going to find out is that index speculation was a huge factor in both the skyrocketing food prices that led to the Middle East crisis and this current oil-price situation.

Another Inside Story

Two films apart from the recently celebrated “Inside Job” show some glimpses how money is made in the Wall Street and these carry the same name Wall Street (1987) and Wall Street:Money Never Sleeps (2010).

Mario Puzo has rightly quoted at the start of his famous novel “The Godfather” that Behind every great fortune there is a crime. Great fortunes or huge wealth can not be achieved without usurpation.

Here is an excerpt from another such story

The vast investigation into insider trading on Wall Street that culminated this week in Raj Rajaratnam going on trial in New York accused of securities fraud was always likely to ensnare a large institution – perhaps a big hedge fund or a Wall Street bank. No one, however, expected the institution in question to be McKinsey & Co.

It was bad enough for the blue-chip management consultancy when Anil Kumar, one of its partners, admitted to supplying Mr Rajaratnam with inside information in return for bribes (Mr Rajaratnam denies all charges). But the Securities and Exchange Commission’s claim last week that Rajat Gupta, who was the head of McKinsey between 1994 and 2003, passed on tips as a board member of Goldman Sachs and Procter & Gamble, is a heavy blow.

It is hard to believe that trading on price-sensitive inside information from clients is rife inside the puritan, strait-laced firm – if evidence of that emerged, it would soon collapse, as Arthur Andersen did after Enron. But the accumulation and sharing of privileged knowledge is integral to how it works and it cannot afford its corporate and government clients to pull the shutters down.

Thomas Watson Jr, the former president of IBM, wrote in his autobiography Father, Son & Co of being asked by a company executive in 1956 whether he should share sensitive internal pricing information with a Booz Allen Hamilton consultant. “‘Sure,’ I said, ‘It’s like your doctor. You have to tell them everything.’”

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

EMH and Financial Bubbles

From the starting point of rational investors came the idea of the efficient market hypothesis, a theory first elucidated by my colleague and golfing buddy Gene Fama. The EMH has two components that I call “The Price is Right” and “No Free Lunch”. The price is right principle says asset prices will, to use Mr Fama’s words “fully reflect” available information, and thus “provide accurate signals for resource allocation”. The no free lunch principle is that market prices are impossible to predict and so it is hard for any investor to beat the market after taking risk into account.

In the world of the EMH, as it is known, bubbles are nothing to seriously worry about because prices cannot deviate from proper valuations for too long.

In economics, the invisible hand, also known as the invisible hand of the market, is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith in The Theory of Moral Sentiments, and used a total of three times in his writings. For Smith, the invisible hand was created by the conjunction of the forces of self-interest, competition, and supply and demand, which he noted as being capable of allocating resources in society. This is the founding justification for the laissez-faire economic philosophy.

But what if that invisible hand is working in its own interest rather than for the interest of all the participants in the market.

Can Goldman Sachs, the profit-seeking missile of high finance, really make money by investing $450 million in Facebook, at a vertigo-inducing price that values the social-networking company at $50 billion? Facebook’s shares were said to be trading on a private-market exchange at a valuation of $42.4 billion. Thanks to Goldman’s imprimatur, Facebook’s value increased 20 percent virtually overnight. Can Goldman really expect to squeeze more water from this stone? Sadly, yes. To understand why, we have to go to the heart of the many problems in the way the Wall Street cartel does business, despite the promised reforms of the Dodd-Frank law. With Goldman’s investment in Facebook, we have a front-row seat to the process by which Wall Street creates and inflates financial bubbles. Goldman has almost certainly locked up the role of lead manager of the inevitable Facebook initial public offering. Fees for underwriting public offerings are generally about 7 percent of the value of the stock sold. Facebook could easily sell $2 billion of stock or more, generating fees to Goldman and the other underwriters of at least $140 million. The other benefit for Goldman in leading the public offering — aside from major bragging rights — is that it can use its marketing, sales and distribution muscle to make sure the value of Facebook at the time of the offering exceeds the $50 billion valuation at which Goldman invested.

It seems that Goldman has set up a "special purpose vehicle" and alerted top clients that through this SPV they will have the opportunity to invest in an as-yet-unnamed company, which reportedly is Facebook. The way this looks to Felix Salmon over at Reuters, and his explanation makes a lot of sense to me, is that this SPV is potentially a way around SEC reporting requirements for publicly-traded companies. But to me this just looks like a funky retro take on many of the IPO scams of the late nineties and early 2000s, where the investment bank sucks in herds of overstimulated investors, hides the true value of the firm in question from everyone, and then roasts the whole cattle-crowd of wealth-seekers to a crisp through fees and commissions and hidden markups. Back then the carrot was a wave of excited news-media coverage about the "new paradigm" that was going to make financial behemoths out of every online university for dogs or web-based dental floss warehouse that came up the IPO pipeline. This time around it's fantasies like the notion that Facebook is somehow worth fifty billion dollars (it's been interesting to watch which news outlets credulously report that figure).

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates. The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals. They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s — and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet.If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year's strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn't one of them.

Financial institutions that are large in absolute size may have deep and well-filled with which they can among other things hire lobbyists, support individual political parties and election candidates, and, under the recent Supreme Court reinterpretation of the U.S. Constitution's first amendment, mount advertising campaigns in direct support of or opposition to election candidates.  In Federalist Paper No. 10, James Medison warned against the political power of factions resulting from "the verious and unequal distribution of property" ... " who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community."

Here I offer only one additional strand of historical evidence ‐‐ Figure 1, drawn by artist Joseph Keppler for Puck magazine, January 23, 1889 ‐ a year before the Sherman Act was passed. 

One cannot view it without recognizing that the U.S. public was alarmed at the time about the political power of the great trusts, for which we might now substitute bloated figures for JP Morgan Chase, Bank of America, and Goldman Sachs.  It would be hard to deny that public concerns over the trusts' power in federal and state legislatures were an important stimulus to the Sherman Act's passage.   And now, 120 years later, there is abundant reason to fear the enormous political power of the financial institutions, said by one writer to own Washington "lock, stock, and barrel."   In 2008, for example, the finance lobby is said to have contributed $475 million to political candidates and their supporting party organizations ‐ more than twice the level of contributions from the second largest lobby, the health care industry.

Sharia Compliant Investment

Islam is "According to dictionary, the word Islam, from the tri literal root s-l-m, is derived from the Arabic verb Aslama, which means "to accept, surrender or submit. “ A Muslim (Arabic: مسلم ) an adherent of the religion of Islam. The feminine form of 'Muslim' is Muslimah (Arabic: مسلمة ). Literally, the word means "one who submits to God"."

Hence, it can be said that Islamic Finance is conducting financial and business matters according to the commandments of Allah(SWT) expressed or implied.

Muath quoted Zaineb Sefiani at BMB Islamic that It is permitted for Muslims to invest in companies whose share of income from Haraam activities is less than or equal to 5%.

The question before us is can we mix Halal with Haraam ? If yes, then what should be the ratio of Haram to Halal or ratio of Haram in a given total quantity or value and what are the conditions or circumstances under which this is allowed? Before we go further, it is pertinent to clearly define what is understood as Haram.

Haraam (Arabic: حرام‎) (often Haram) is an Arabic term meaning "forbidden". In Islam it is used to refer to anything that is prohibited by the faith. Itsantonym is halaal.

The religious term haraam can be applied to:

• certain behaviours, such as adultery or abuse, abstention in the general elections (e.g. in Indonesia) and profane language.
• certain objects and sacrelige.
• certain foodstuffs or food ingredients, such as alcohol or pork.
• and also to foods, objects and people that would normally be halaal but which were tarnished in some or other way, for example meat slaughtered in a non-permitted way or people with certain sexual preferences.

Haraam has, over the years, accumulated additional non-traditional uses to it. In Arabic-speaking countries, such as Lebanon, saying "haraam" can mean, "what a shame" or "what a pity" (this meaning has been adopted by Modern Hebrew slang as well). This can be used formally or between friends. Children are commonly told not to mistreat other children or animals because it is 'haraam'.

Haraam also applies to ill-gotten wealth obtained through sin. Examples include money earned through cheating, stealing, corruption, murder or any means that involves harm to another human being. It is prohibited in Islam for a true Muslim to profit from such Haraam actions. Any believer who benefits from or lives off wealth obtained through Haraam is not a Muslim.

The word also appears in Amharic, the national language of Ethiopia. It connotes the same idea of prohibition on religious grounds, however it is used by Christians in the Ethiopian Orthodox Tewahedo Church, including bans on pork (more out of Jewish dietary laws, not Islamic).

Haraam is best known to non-Arabs by means of the related word harem, referring to the forbidden area of the palace where the women were quartered.

The Hebrew cognate Herem referes to the highest ecclesiastical censure in the Jewish community.

The use of the term varies between Arabic-speaking communities and non-Arabic-speaking ones.

In Arabic-speaking countries, the term is used to describe anything permissible under Islamic law, in contrast to haraam, that which is forbidden. This includes human behavior, speech communication, clothing, conduct, manner and dietary laws.

In non-Arabic-speaking countries, the term is most commonly used in the narrower context of just Muslim dietary laws, especially where meat and poultry are concerned, though it can be used for the more general meaning, as well.

I am failed to come up with anything in Quran that suggests mixing of Halal with Haraam. All I get is following Hadith

"Narrated An Numan bin Bashir

I heard Allah's Apostle saying, 'Both legal and illegal things are evident but in between them there are doubtful (suspicious) things and most of the people have no knowledge about them. So whoever saves himself from these suspicious things saves his religion and his honor. And whoever indulges in these suspicious things is like a shepherd who grazes (his animals) near the Hima (private pasture) of someone else and at any moment he is liable to get in it. (O people!) Beware! Every king has a Hima and the Hima of Allah on the earth is His illegal (forbidden) things. Beware! There is a piece of flesh in the body if it becomes good (reformed) the whole body becomes good but if it gets spoilt the whole body gets spoilt and that is the heart." (Sahih Al-Bukhari 1:49)

According to The Lawful and Prohibited in Islam by Yusuf al-Qaradawi "Another Islamic principle is that if something is prohibited, anything which leads to it is likewise prohibited. By this means Islam intends to block all avenues leading to what is haram. For example, as Islam has prohibited sex outside marriage, it has also prohibited anything which leads to it or makes it attractive, such as seductive clothing, private meetings and casual mixing between men and women, the depiction of nudity, pornographic literature, obscene songs, and so on.

Accordingly, Muslim jurists have established the criterion that whatever is conducive to or leads toward the haram is itself haram. A similar principle is that the sin of the haram is not limited only to the person who engages in it but extends to others who have supported him in this, materially or morally; each is held accountable according to his share. For example, in the case of intoxicating drinks, the Prophet (peace be on him) cursed not only the one who drinks them but also the one who produces them, the one who serves them, the one to whom they are served, the one to whom the price of them is paid, etc. This point will be discussed again later. Again, in the matter of usury, the Prophet (peace be on him) cursed the one who pays it, the one to whom it is paid, the one who writes the contract, and the one who acts as a witness thereto. Accordingly, we derive the rule that anything which assists in the doing of what is haram is itself haram, and anyone who helps another person to do it shares in the sin of it."

"whenever any permissible action of the believer is accompanied by a good intention, his action becomes an act of worship. But the case of the haram is entirely different; it remains haram no matter how good the intention, how honorable the purpose, or how lofty the aim may be."

"While Islam has narrowed the range of what is prohibited, it is, at the same time, very strict in seeing that its prohibitions are observed. Accordingly, it has blocked the ways, apparent or hidden, leading to what is prohibited. Thus, what is conducive to the haram is itself haram, what assists in committing the haram is haram, any rationalization for engaging in the haram is haram, and so on, to the last of the principles which we have elucidated. At the same time, Islam is not oblivious to the exigencies of life, to their magnitude, nor to human weakness and capacity to face them. It permits the Muslim, under the compulsion of necessity to eat a prohibited food in quantities sufficient to remove the necessity and save himself from death. On the basis of these and similar verse of the Qur'an, Islamic jurists formulated an important principle, namely, that "necessity removes restrictions." However, it is to be noted that the individual experiencing the necessity is permitted to eat the haram food with the stipulation that he is "neither craving it nor transgressing." This is interpreted to mean that he should not desire to relish it nor transgress by eating more than the bare amount needed to satisfy his hunger. From this stipulation, jurists have derived another principle, that "The quantity permitted is determined by the (magnitude) of the necessity." Here the underlying idea is that, even though compelled by necessity, a person need not surrender to it or embrace it with eagerness; rather he must live with what is essentially halal and seek a way to return to it so that he may not become accustomed to the haram or begin enjoying it under the pretext of necessity."