Dr. David Kohl Answers Your Questions...

Todd Sharkey | Associated Bank | Red Wing, MN

• "As funds have flowed from tech stocks in the late 90's to residential real estate in the mid 2000's, do you see a speculation premium embedded in today's commodity prices and do you believe this run up in commodities is due to the flow of funds from the last bubble?"

Bubbles and “Funny Money”
By Dr. David M. Kohl

Money floats around the world attempting to find a place to get lost. This excess investor money is looking for a quick buck and now it is being parked in commodity markets for gold, platinum, wheat, corn, beans, etc. If you have ever observed bubbles and cycles, usually toward the end there is a run up in asset values created by speculation. Tulips in Holland in the 1600’s, the railroads in the 1800’s, oil in the 1970’s, and the stock market in the 1920’s and 1990’s in the U.S. are classic examples of irrational behavior created by “funny money.” By the way, my business partners in the dairy creamery coined this term.

A recent example of funny money and speculative behavior exists in the urban and suburban real estate market, now named the credit and subprime lending crisis. This money is now on the Chicago Board and other commodity markets creating an illusion of prosperity.

One must be extremely careful of developing long term investment plans and borrowing based upon these price spikes. When funny money or speculative money leaves a market, it creates a vacuum, which can result in a crash or correction. The new norm in commodity prices could be a false norm, which producers, lenders, and agribusiness people must put in the business planning equation.

Mark Your Calendar

We have scheduled a follow-up Webcast for July 9, 2008 at 12:30 (Central) to revisit the topics discussed and to evaluate the status of the economy and the Ag finance marketplace. We will be promoting the event in the coming weeks.

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