Is Bitcoin A Tower Of Monetary Babel?

Authored by Antonius Aquinas,

The promoters of crypto currencies have gushingly touted them as the mechanism by which the present central banking cabal and the system of nation states which derive much of their power from will be brought down and replaced by digital money. 

Despite their meteoric rise as speculative “assets,” there are fundamental economic reasons why they will never act as a general medium of exchange despite the wild enthusiasm for them by the crypto-currency cultists.

Money – a general medium of exchange – is the most marketable (exchangeable) commodity in an economy.  As a good, money is not sought after for its direct use – to satisfy individual wants – but to satisfy wants indirectly through exchange for other goods.  Over time, one good becomes money since it possesses qualities superior to all other goods as a money.  When gold became demanded not for its “use value,” but for its “exchange value,” it became a general medium of exchange – money.

As a consumer good, gold possessed a value or a “price” prior to it becoming a money, as the eminent monetary theorist Murray Rothbard explains:

...embedded in the demand for money is knowledge of the money-prices of the immediate past; in contrast to directly-used consumers’ or producers’ goods, money must have pre-existing prices on which to ground a demand.

But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., for ornaments in the case of gold.)*

Thus, Bitcoin’s “price” is not in terms of its original commodity price, but its price is in terms of dollars, Euros, yuan, etc.  In the dollar’s case, it was at one time linked to gold, but has since been severed from it while Bitcoin has had no such relationship.

Once money is established, then prices are expressed in terms of it and thus economic calculation can rationally take place and the division of labor and specialization can be expanded.  Rothbard continues:

The establishment of money conveys another great benefit.  Since all exchanges are made in money, all the exchange-ratios are expressed in money, and so people can now compare the market worth of each good to that of every other good.**

Once gold became money, the price of goods became expressed in gold not in other elements – nickel, zinc, lead, etc.  With the proliferation of crypto currencies, there will be a myriad of different price ratios for each good.  There will be a Bitcoin price for a car, an Ethereum price for a car, a Dogecoin price of a car, and so on.  This is the antithesis of the purpose of money – one unit of account that reflect prices for all commodities as Rothbard shows:

Because gold is a general medium it is most marketable, it can be stored to serve as a medium in the future as well as the present, and all prices are expressed in its terms.

Because gold is a commodity medium for all exchanges, it can serve as a unit of account for present, and expected future, prices.  It is important to realize that money cannot be an abstract unit of account or claim, except insofar as it serves as a medium of exchange.***  [my emphasis]

Crypto currencies, therefore, directly violate one of the main principles of monetary theory.  The vast array of digital money, all with unique price ratios (to say the least of their volatility), would make economic calculation and rational planning next to impossible.  In this sense, the current world of fiat dollars would be preferable to a Tower of Monetary Babel that digital currencies would create.

Central banks and governments do not fear crypto currency challengers to their monetary hegemony.  They, of course, jealously monitor the crypto market worried that any gains accrued may not be subject to tax.  Central banksters do fear gold for it remains, despite being demonetized, the last check on profligate central bank monetary expansion.  And, because countries who wisely understand gold’s importance and seek to get out from under the yoke of King Dollar (most notably China and Russia), continue to voraciously accumulate the yellow metal.

The return of true prosperity will only come about when gold is once again at the center of the monetary order and fiat currencies such as the dollar, Euro, and now Bitcoin are forgettable memories of a misguided and corrupt age.

Hard Assets In An Age Of Negative Interest Rates

Time is the soul of money, the long-view - its immortality.

Hard assets are forever, even when destroyed by the cataclysms of history.

It is the outlook that perpetuated the most competent and powerful aristocracies in continental Europe, well up through World War I and, in certain prominent cases, beyond; it is the mindset that has sustained the most fiscally serious democratic republic in the Western world, that of Switzerland (as demonstrated in this article).

In this view, the stewardship of money, formerly known as “banking,” is a serious matter of serious wealth management and not a weird-science lab experiment of investment products ultimately designed for hedge fund managers’ tax arbitrage schemes.

More than ever the focus on hard assets is a dire call to arms given the deformed market culture of central banking monetary magic. Despite the early promise of the Trump presidency to reinvigorate the economy, the United States remains mired in economic stagnation built up over so many years of debt-driven policies, easy-money policies, and the ZIRP fiasco fostering a bizarre-world situation in which the actual economy is doing poorly while the market is soaring. In such an environment, the allure of the centuries’-old tried and true has never had more appeal.

In a word, the hard asset vision is about building wealth outside the stock market. It refers to three main strategies overall: 

1) land ownership and/or farmland, forestry and agriculture

2) gold, other precious metals, and certain base-metal commodities, and

3) The (Old Masters/Classic Modern) art market.

Where this last is concerned, we mean art as investment and not art-as-commerce, such as that which contaminates today’s insipid and overpriced world of ‘Balloon-Dog’ bad art. The auction world of Rembrandt and Picasso; of El Greco and Gerhardt Richter has been on a tear, is smashing records, and cannot be ignored as an excellent safe-haven vehicle, as outstanding works of art traditionally always have been.

To begin with, physical gold and precious metals remain an investment enigma despite being market-leading performers for the past seventeen years. Gold is a must-have portfolio asset amid the aggressive debt levels and monetary debasement that have so unhinged the market. Silver, for its part, in addition to its prestige status, also has innumerable industrial applications and throughout the precious-metal bull market since 2000.

Russia, in this context, is leading the charge in the long-view outlook. For the past three years, the Bank of Russia has been the world’s number one stacker of gold, and, thus far in 2017, has taken the lead position among international central banks in buying the commodity.

At its current pace, Moscow will unseat China for the number five spot of gold-holding nations by the first quarter of 2018.

Currently, the gold-to-GDP ratios of the world’s leading powers are: Russia 5.6%; the Euro Zone 3.6%; the U.S. 1.8% and China 1.5%.

Yet countries buying up gold versus investors who do so are two different worlds. Ninety-five percent of the world’s gold is held as a wealth store.

In other commodities, zinc and copper have been the big movers. Zinc, the key galvanizing agent, claimed the status of the best performing metal last year. Copper began its resurgence in 2017, and in late August of this year, a host of commodities broke out of multi-month consolidation patterns. Nickel and cobalt are also coming into the spotlight as metals essential to the rapidly growing lithium ion (Li-ion) battery sector.

The art world lags not too far behind that of precious metals in terms of history’s preferred storehouses of value as protection against uncertain times. Art as investment has long been a favored strategy of the European elite since, effectively, the High Middle Ages and has never gone out of style. In modern times, the phenomenon of an ever-growing collectors’ base and less supply of museum quality works has been accepted as a meaningful way to protect investors’ cash during economic difficulty. Though continually eclipsed in the media by the brasher contemporary art market, Old Masters (and Classic Modern—the great 20^th century works) have shown stable, often spectacular, results over the past ten years with both categories reaching record-breaking highs.

Art, to be a safe haven, must be an investment and not a whim - just as it was for the Liechtenstein family who acquired Leonardo da Vinci’s Ginevra de Benci so many centuries ago. In the wake of the World War II near-bankruptcy of that eponymous principality (whose monarchs were not and are not supported by taxes), that painting was the first of the major, big-ticket art sales of the 20^th century, when it was sold to Paul Mellon and The National Gallery of Art in Washington DC. Ginevra continues to hang there today (and to date, is the only Leonardo painting in possession of the United States).  While the average investor may not be in a position to store wealth in a Renaissance master or a Picasso, there are always the underrated gems or the new discoveries that can and will bring in the most unexpected of windfalls decades down the line.

Finally, farmland is seen by many as an excellent addition to a precious-metal portfolio. As Jim Rogers predicted in early September, fortunes will be made in agriculture “and when an industry breaks full faith, even mediocre people make a lot of money” in that sector. Hard asset investors continue to include farmland in their portfolios “for a combination of income generation, diversification and inflation-hedging”. Historically, farmland, like forestland in continental Europe or Latin America, has been a unique asset class demonstrating low-correlation to traditional asset classes, and which performs well as inflation rises.

Cash reserves, land as cash, the endless applications of Nature’s resources to industry; the prestige, privacy, and long-term value of beautiful art: such has been the outlook of the hard-asset philosophy.

Today, that cult of independently-minded investors will laugh all the way to the bank - precisely by avoiding the paths laid out, and so horribly deformed, by those very banks.

The Economist Claims: Sending 1.2 Billion Unskilled Africans To Europe Will Increase World GDP

Via GEFIRA,

The Economist ran a couple of articles promoting migration as good for the global economy.

 Professor Bryan Caplan argued that labour is the world’s most valuable commodity and its value depends on location. If borders were open, a world of free movement would be $78 trillion richer. Mexican labourers can expect to earn 150% more in the West. Unskilled Nigerians make even 1,000% more in Germany than in Africa. The value of an unskilled worker is so much higher in Europe that a Nigerian can make 1000 times as much in Germany, adding 1000 times more to global GDP. Because Western societies are more structured and organised than the Mexican or Nigerian, the unskilled worker can be more productive in a factory in Germany or a farm in the USA than in Africa. A taxi ride in Berlin is much more expensive and thus valued much higher than a taxi ride in Lagos, while the amount of work, driving a car for a while, is the same.

If The Economist expounds Professor Bryan Caplan’s view correctly, then the argument is plain idiotic. The Economist confuses countries with companies that are profit-oriented, and where people are disposable resources. Yet, countries are communities, and citizens do not usually expect their governments to merely maximize GDP. History teaches us that migration causes social unrest, disrupts social cohesion and ultimately the stability of the recipient nation. And even if we set aside these social or national considerations, the Economist’s reasoning is still false.

The whole argument breaks down on social security and the massive world oversupply of unskilled labour. Social security determines the minimum price of labour .

If there is abundance of unskilled workers, governments step in and buy or take out of the market the oversupply of labourers for a minimum price called social welfare. Thus, social security does not differ from setting a minimum price for milk. The consequence of a minimum milk price is that farmers will produce more milk than can be consumed. The surplus is then bought by the authorities and ultimately destroyed, or a milk production quota is imposed.

Moroccans and Turks in the Netherlands are labour migrants.

The Netherlands has no historical relation with either Turkey or Morocco. There is no colonial relationship whatsoever between these two countries and the Netherlands or another shared history.

In the most productive group aged 30-35 more than 30% of the Moroccans and 22% of the Turks receive social security benefit, but only 11% native Dutch.

The labour participation for Moroccan men aged 25-35 is a shocking 60%, whereas for the native Dutch it is about 90%. In the age group 50-55, nearly 50% of Moroccans and Turks receive social security while only 16% Dutch.

Labour migrants are a drain on the indigenous population rather than a relief.

It is clear that the Dutch labour market has a massive oversupply of unskilled third-world workers. Apart from social security, there are also intangible costs such as an increase in crime, and especially terrorism, both related to North African migrants.

Africa has 1.2 billion people that will double in the next 25 years, of which huge numbers are about to join European labour force in the coming decades. At the same time the highly educated and skilled western populations will decline, reducing the demand for unskilled labour even further. There is no chance that Europe can afford to keep its social welfare without enforcing a quota on migrants. And even if social security is dropped altogether, the European labour market will reach a situation where there are so many labourers that they become as worthless as they are in Nigeria. For the unskilled European working class it is tantamount to suicide to vote open borders advocates into office.

Interestingly enough, The Economist implicitly stated that Africans are not able to utilise their labour force themselves. Bringing the African population under European supervision failed during the very brief period of colonisation of Africa, and now the Economist wants to bring the Africans under European supervision by using open borders policy and moving the African population to Europe.

Does the Economist really suggest that white Europeans are the only ones who can solve Africa’s problems?

Inside The "Wildest Commodity Trade" Ever... Just Don't Blink

Besides the hilariously fabricated economic data and the whole central planning bit - both of which are now everywhere these days - the one most notable feature about China"s economy and capital markets are the constantly rolling, bursting and resurrecting asset bubbles: from housing, to stocks, to bonds, to commodities, to cryptocurrencies, to pretty much anything that isn"t nailed down and can be traded, and back to housing again, the lifecycle of a Chinese assets is best expressed in terms of its "tulipness": how long before the swarming horde of Chinese bubble-chasers, armed with over $35 trillion in closed-capital account credit, latches on, bids it to the stratosphere, then sends it crashing only to repeat the cycle from scratch. And since these bubbles come ever faster and ever more furious, one has to be lightning fast to get in (and out) before it"s all over.

One such place where "if you blink, you missed it" is China’s Zhengzhou Commodity Exchange, the location of what Bloomberg has called China"s "wildest commodity trade" du jour: the buying, and selling, but mostly buying (for now) of ferrosilicon contracts. Trading in futures of the little known commodity - an alloy used to harden steel - exploded this week, as humans became veritable HFT vacuum tubes, with the average contract on Wednesday held for an estimated 39 minutes, according to Bloomberg calculations, as "investors" scrambled to buy just so they could immediately flip it to another greater fool.

And as the chart below shows, a whole lot of greater fools suddenly emerged at the start of the month.

Incidentally, the tenure of oil contracts on the NYMEX is an ancient 47 hours.

As Bloomberg"s Alfred Cang reports, "Ferrosilicon is just the latest commodity contract pounced on by China’s hordes of speculators with an intensity that makes the world’s most liquid markets look leisurely. In repeated bouts of manic trading over the past year, they’ve piled in and out of everything from cotton to zinc, eventually prompting regulators to step in and calm the frenzy."

Of course, the second regulators "step in" to  burst one bubble, the same hordes of speculators immediately shift to another, similar asset, which then becomes the next bubble du jour, and in recent days the choice has been a "hot potato" between the alloy, rebar, iron ore, siliconmanganese, and various other commodities, all of which are traded not with the intention of actually holding on to the asset, but selling it as soon as possible at a higher price, before the whole house of cards comes crashing down.

“There are large volumes of short-term investment in steel and related products such as rebar, iron ore and ferroalloy futures with investors trading momentum and sentiment,” Wei Lai, an analyst at COFCO Futures in Shanghai, said by phone.

For regular followers of China"s "investing" habits, none of the above should come as a surprise. What is surprising, is that this particular bubble hasn"t burst just yet: trading in ferrosilicon peaked on Wednesday with more than 705,000 contracts changing hands. Prices surged to a record $7,726 yuan a metric ton the previous day, up 25% this month (a move which in all honesty is tame when compared what ethereum and bitcoin have done this year).

What is also surprising, is the viciousness with which the bubble hunters swarmed this particular asset: until August, it was one of the quieter contracts on the exchange, with 22,000 contracts trading daily on average in July. Then China"s trading hordes arrived...

A spokeswoman for the exchange declined to comment to Bloomberg on the market movements: after all what can they possible say - "we keep getting overrun by an army of momo housewives"?

Overall, trading in steel and iron ore is the heaviest on China’s three commodity bourses, with volumes that dwarf contracts such as ferrosilicon. An average 7.9 million steel reinforcement bar futures traded on the Shanghai Commodity Exchange in July. Earlier this month, the bourse hiked fees and margins to calm trade in rebar after prices ran up to the highest in four years on speculation that China’s supply-side reforms are creating a shortage, and to cool the latest bubble mania. It failed.

For those curious how to calculate this particular metric, which for lack of a better phrase, we dub "bubble momentum" and bloomberg calls "commodity churnover", here is the answer:

Analysis of aggregate open interest, volumes and trading hours illustrates the extraordinary pace at which Chinese investors are trading commodities futures.

Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract. While Wednesday’s ferrosilicon contracts were held for less than an hour, the average for the month is 3.6 hours. Futures in Siliconmanganese, another alloy used in steel production, change hands at the fastest pace, with an average tenure in August of 2.7 hours. Iron ore is about 3.8 hours on average and rebar is 4.3 hours.

The best thing about China"s bubble factory: once the locals tire of high-frequency trading ferrosilicon, or whatever is the high speed bubble du jour, they can just move on to the next one and do it all over again.

"Shrinkflation" - How Food Companies Implement Massive Price Hikes Without You Ever Noticing

Do you ever get the sense that your favorite steak at that Quick Service Restaurant of your choice keeps getting thinner and thinner all while your check size at the end of the night continues getting larger and larger.  Well, it is.  How else are publicly traded chains going to continue to deliver margin growth to wall street in the midst of rising labor costs, rising commodity costs and shrinking customer traffic?

As a new study in the U.K. just revealed, shrinking portion sizes among food manufacturers is actually way more common than you might think and you probably never even noticed it.  In fact, according to data from the Office for National Statistics, over 2,500 consumer products in the U.K. shrunk in size over the past five years despite being sold for the same price.

But it"s not just food manufacturers that are shrinking portions while maintaining price as many consumers goods items from chocolate to coffee to toilet paper are all experiencing the same trends.  Known in grocery circles as "liar packs", shrinking portion sizes became an attractive alternative to simply raising prices back during the great recession when consumers became particularly sensitive to price.  Of course, the net effect is exactly the same but it"s much more difficult to notice that fine print on the bottom corner of the packaging than it is the price tag at check out.  Per The Telegraph:

Mark Jones, a food and drink solicitor at Gordons law firm, said: “Shrinkflation was borne out of the recession and has gathered staggering pace since 2009. The ONS’s report confirms this. Against the back drop of a weak economy, commodity prices have been rising over the last five years.

"The recession made people very price sensitive and you can see the evidence of that by looking at the impressive growth of discount retailers in the last five years, no retail sector has grown faster.

“Suppliers and retailers do not want to raise the ‘on the shelf’ price, but both have had to adapt to increasing commodity prices.

"Shrinking the size of the products being sold, whether that is toilet paper, chocolate or cleaning products, is just another way of pushing through a price increase, but in a more subtle way. How many of us noticed Andrex reduce the number of sheets on a toilet roll from 240 to 221?”

And here is the breakdown by month over the past 5 years:

But it"s not just British consumers getting duped by "shrinkflation" as all the same games are played in the U.S. markets as well.  For example, who is actually going to notice that 10 sheets of paper are missing from the Bounty rolls on the right versus those on the left?  Yet, assuming that both packages are sold at the same price this small reduction in size equates to a substantial 9% price hike on a per sheet basis.

Meanwhile, these containers are completely identical aside from some tiny print in the bottom right hand corner.

Conclusion: Caveat emptor...there is a whole army of Harvard MBAs working in consumer goods companies all around the world whose sole mission in life is to get you to pay more for less without ever noticing.

We Need A 'Third' Economy For The Future

Authored by Charles Hugh Smith via OfTwoMinds blog,

The existing platforms of for-profit cartels/monopolies and the central state are no longer able to provide enough paid work and high-touch services for everyone.

We all know that automation is eating its way up the human-labor food chain at an increasing clip. Yet there is remarkably little insight into this process.

Let"s see if we can"t connect two insightful essays on this topic, one from musician-essayist David Byrne and the second on the business model of Amazon.com:

Eliminating the Human (via GFB). Here is an excerpt:

"We’re a social species--we benefit from passing discoveries on, and we benefit from our tendency to cooperate to achieve what we cannot alone. In his book, Sapiens, Yuval Harari claims this is what allowed us to be so successful. He also claims that this cooperation was often facilitated by a possibility to believe in "fictions" such as nations, money, religions and legal institutions.

Machines don’t believe in fictions, or not yet anyway. That’s not to say they won’t surpass us, but if machines are designed to be mainly self-interested, they may hit a roadblock. If less human interaction enables us to forget how to cooperate, then we lose our advantage.

I’m wondering what we’re left with when there are fewer and fewer human interactions. Remove humans from the equation and we are less complete as people or as a society. "We" do not exist as isolated individuals--we as individuals are inhabitants of networks, we are relationships. That is how we prosper and thrive."

Why Amazon is eating the world. Here is an excerpt:

"I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

...each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition."

There is much more of interest in each piece, but these short excerpts offer a taste of each.

Byrne is commenting on our built-in need for human connection and cooperation, not just for emotional-social reasons but as a competitive, adaptive advantage.

Zack Kanter (author of the essay on Amazon) explains how Amazon"s model avoids the flaws of vertical integration (i.e. each division becoming bloated, inefficient and ineffective due to lack of outside competition).

Correspondent GFB observed that Kanter did not describe a major component of Amazon"s success: the consumer"s willingness to buy commodity-goods without actually seeing the product on the shelves, trying it on, etc.

The unifying thread here is high-touch, low-touch, a concept I covered in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. I was endeavoring to explain why certain kinds of labor are easily automated and other kinds are more immune to automation.

Low-touch transactions / interactions don"t offer much value, connectedness or cooperation. A common example is ordering a fast-food meal or checking out at a market. Our interaction with the human being behind the counter is brief and not something valuable enough that the company can charge extra for being served by a human rather than a machine.

The vast majority of consumers would be OK with (or actually prefer) having a low-touch transaction served by a robot or automated system. Rather than wait in line, many of us prefer to use the self-checkout or airport ticket kiosk. Most of us would be delighted to bypass the entire time-wasting hassle of renewing our licenses at the Dept. of Motor Vehicles and many other low-touch interactions.

In effect, Amazon is automating many ordinary low-touch transactions, and few consumers miss what"s been lost in the move to home/office delivery of commodity (i.e. basically interchangeable) goods and services.

The kinds of connections Byrne is referencing are high-touch: transactions and connections that require communication, sharing, cooperation, and all the other bonds of human relationships.

If ordering a fast-food meal is low-touch, dining at a swank bistro is high-touch. Most people would hesitate to pay a lot of money for food delivered by a robot to a bland sound-proof booth. In other words, we"re paying not just for the food but for a high-touch environment: a knowledgeable wait-person, a sommelier, an atmosphere of conversation, people-watching, etc.

As goods and services become commoditized, the cost of low-touch interactions declines and the cost of high-touch interactions rises.

For example, it"s easy to order a commodity set of house plans for $150 off the Internet. Hiring an architect with whom you establish a professional relationship will cost 10 times more for some consulting and 100 times more for a customized set of architectural plans and specs.

There are many other examples of the difference. Consider the future of medical care. Many observers expect robots to perform many routine care tasks such as visiting patients and making sure they are taking their prescribed medications. This is a low-touch interaction.

While ill people won"t mind interacting with a helpful robot, what they really want is a human being to stop in and express some interest and concern for their condition. This is the high-touch connection we all want as a human birthright.

A great many of the current jobs in our economies are low-touch, and these will relentlessly be automated, as the value of the human interaction is not worth enough to consumers to pay extra for. If consumers will pay significantly extra for a human taxi driver rather than an automated taxi, then human-driven taxis will be available. But if consumers aren"t willing to shoulder the higher costs of humans performing low-touch tasks, human labor in low-touch environments will disappear as a financial necessity.

One of my concerns is that high-touch interactions and connections may well become too costly for many people to afford.

This may not matter much, as most high-touch connections are not monetary--we communicate, share, and cooperate with friends, family members, neighbors, etc., and there is no direct financial facet to these transactions.

It seems obvious to me that we need a new organizational structure to enable high-touch transactions and connections that aren"t necessarily for-profit or personal (friends/family). This is the foundation of my proposed CLIME system: community labor integrated money economy-- that I outline in my book A Radically Beneficial World: Automation, Technology & Creating Jobs for All.

CLIME is a non-corporate, non-state platform for a high-touch, high-value-creating community economy.

Within the high-low-touch spectrum, clearly there is much middle ground between for-profit commoditized home delivery of goods (low-touch) and personal relationships (high-touch). This middle is what appears to be at risk of disappearing as automation eats up all the low-touch human labor.

This is not a recent trend. Labor"s share of the nation"s output (GDP) has been declining for decades:

The existing platforms of for-profit cartels/monopolies and the central state (government) are no longer able to provide enough paid work and high-touch services for everyone. We need a Third Economy-- what I call The Community Economy, with its own platform, network and non-state, non-central-bank-controlled currency.

"Arbitrage Is Dead" - Commodity Traders Lament A World "Where Everyone Knows Everything"

For commodity traders operating in the Information Age, Bloomberg reports that just good old trading doesn’t cut it anymore... "Everything is transparent, everybody knows everything and has access to information."

Unlike the stock market in which transactions are typically based on information that’s public, firms that buy and sell raw materials thrived for decades in an opaque world where their metier relied on knowledge privy only to a few. Now, technological development, expanding sources of data, more sophisticated producers and consumers as well as transparency surrounding deals are eroding their advantage.

Just ask Noble Group...

At a panel discussing ‘What’s Next for Commodity Trading: Drivers, Disruptors and Opportunities’, Bloomberg reports that Sunny Verghese, the chief executive officer of food trader Olam International Ltd., lamented declining margins.

“The consumers and producers are trying to eat our lunch. So we got to be smart about differentiating ourselves,” he said.

As market participants’ access to information increases, the traders highlighted the need to more than simply buy and sell commodities as profits from arbitrage -- or gains made from a differential in prices -- shrinks. That means getting involved in the supply chain by potentially buying into infrastructure that’s key to the production and distribution of raw materials, and also providing financing for the development of such assets.

“The most valuable commodity out there is information, and the most useful information is the proprietary, critical information that you obtain from your own supply chain,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years in the petroleum trading industry in Singapore.

“You have to have skin in the game. You have to have access to assets, whether it’s infrastructure, terminals, vessels or refineries.”

It’s critical for commodity traders to evolve as margins have declined because of more transparency and “price arbitrage has disappeared,” said Olam’s Verghese. For example, the number of price quotes published by agencies such as S&P Global Platts and Argus, which assess the value of commodities globally, have increased about 15 times since 1990, according to Verghese.

While “arbitrage is dead,” traders will “continue to have substantial opportunity and disruption but the way of capturing that opportunity becomes more sophisticated,” Mercuria’s Jaeggi said.

Trader Warns: Fed Rate Hike Will Be The "Death Knell" For Reflation Trades

Thanks to commodities, Bloomberg"s Mark Cudmore warns that the Fed meeting is more likely to be the death knell for reflation trades rather than mark their moment of victory.

This week is set to provide confirmation that we’re in the midst of a true tightening cycle in the U.S., with rate hikes in consecutive quarters for the first time since 2006.

10-year Treasury yields hover just below the two-year high, but I don’t see them breaking higher in an environment where commodity prices are plunging.

Oil was just the latest victim last week, with prices falling the most in four months. The broader Bloomberg Commodity Index topped out a month ago, with everything from metals to agricultural goods turning sharply lower since then.

This undermines the reflation trade in three ways.

1. Most directly, it’s hard for inflation to keep accelerating when input prices are slumping.


2. It also suggests that real demand is not growing as quickly as hoped, which provides caution on economic optimism.


3. Finally, while cheaper commodity prices are a long-term positive for economic growth, the more immediate wealth/portfolio effect is negative.

Price data from the U.S. this month has validated the suspicion that inflation is not rising as fast as forecast, with the PCE deflator coming in below expectations.

This isn’t an environment that supports much higher long- term yields. Add in the context that speculative short positions in Treasuries remain near record levels and it appears to be a market ripe for a squeeze.

Furthermore, as Bloomberg"s Richard Breslow concludes:

The abrupt about-face by the Fed has dealt a severe blow to the efficacy of forward guidance.

Markets will understandably assume that central banks are now using commentary as a tactical device to control the moment rather than a way of describing a strategic plan based on long-term forecasts.

It means we are in for a lot more false steps, conspiracy theories and greater volatility

Meet The Singapore Futures Trader Who Has Bought 3,000 Swimming Pools Worth Of Sugar

There is a new powerhouse dominating the U.S. futures market for raw sugar contracts and it"s creating a bit of confusion among the the more established trading houses of the world"s most volatile commodity markets.  The firm is Wilmar International, a Singapore-based agribusiness whose major shareholders include the family of Malaysian billionaire Robert Kuok and Chicago-based Archer Daniels Midland.  Founded 26 years ago, Wilmar is one of the world"s largest palm-oil producers but was essentially non-existent in the sugar market until just a couple of years ago.

Now, in just two short years, Wilmar has scooped up more than 6 million tons of raw sugar, enough to fill roughly 3,000 Olympic-size swimming pools at a cost of some $2.3 billion, by physically settling tens of thousands of futures contracts and collecting the commodity from ports across South America and elsewhere.  

The timing and size of the purchases have raised some concerns among other futures traders that Wilmar may be looking to manipulate global sugar prices.  As the Wall Street Journal points out, purchases made by Wilmar in 2015 were large enough soak up the entire global supply glut that pushed sugar prices to multi-year lows. 

The effects of Wilmar"s moves have been the subject of debate among traders. At one point in 2015, when sugar prices were at multiyear lows because of a world-wide glut, Wilmar bought so much that traders say the company in effect mopped up that year"s global oversupply. In the rally that followed, sugar prices more than doubled.

Then, as prices peaked in September last year, Wilmar changed course and delivered excess sugar it owned to other traders on the exchange. Sugar prices fell 24% in the ensuing months.

The company"s size and scale, however, are sowing concerns among some traders that it could control a large amount of the world"s tradable sugar and influence prices.

"They are a market mover," Nick Gentile, head trader of New York commodities trading firm Nickjen Capital, said of Wilmar. Around two-thirds of the world"s sugar production is consumed in the countries that produce it, and the rest is traded internationally.

Of course, Wilmar denies the importance of their massive trades in determining global sugar prices saying they represent just a small component of a very fragmented commodity market.

Jean-Luc Bohbot, the 48-year-old Frenchman who runs Wilmar"s sugar business, said there is no evidence that the company"s trades affect market prices. That is "very much an incorrect view," he said in a recent interview. "Sugar is an extremely fragmented commodity, with a very large number of players around the globe."

While Wilmar"s sugar purchases and sales appear in some cases to have preceded rising and falling prices, Mr. Bohbot said, "There is no clear correlation" between the two. Over the past few decades, sugar prices have gone in both directions when there were large physical deliveries, he added.

But perhaps even more rare than Wilmar"s quick rise to become one of the world"s largest sugar traders, is their propensity to take physical delivery of the sweet stuff and ship it to refineries in Asia and the Middle East, often at a loss. 

Physical settlements of futures trades, however, are rare. Exchange operator Intercontinental Exchange Inc. estimates that fewer than 0.5% of trades result in the actual delivery of commodities. The vast majority of futures contracts are unwound by traders before they expire because most firms want to avoid the hassle of transporting commodities to or from inconvenient locations. With sugar futures, buyers don"t know where in the world they will have to pick up the sweetener until after the contracts expire.

That hasn"t deterred Wilmar. Mr. Bohbot said the company has found it economical to purchase sugar in bulk using futures contracts, because the exchange"s rules require sellers to deliver the sugar on board buyers" ships, which facilitates international trading. In other commodity markets, such as grains or metals, the handover usually happens inside warehouses in locations that often might not be easily accessible.

Mr. Bohbot said Wilmar ships and sells most of the raw sugar it buys to refineries in Asia and the Middle East, where consumption is growing. This sort of trading, however, is often barely profitable when shipping and other costs are factored in, he said, noting, "There is very little margin, and sometimes no margin."

And while their strategy may be confusing to other large trading houses, it certainly seems to be working as the company"s sugar division posted a 33% year-over-year increase in revenue in 2016 on the back of substantially higher sugar prices...which we"re sure has nothing to do with their massive trading volume but rather was just the result of a little bit of "luck".

Pssst... Wanna See The Best-Looking Chart In The World?

Submitted by Kevin Muir via The Macro Tourist blog,

Happy Groundhog day! Instead of writing about yet another macro economic topic, I am going to break with tradition, and just present what I think could be the best looking chart in the whole world.

Without further ado, I present Cotton:

And in case you think you might have missed the move, scale back and have a look at the longer term picture:

I know just enough about the fundamentals of various “soft commodities” to get myself into some serious trouble. I won’t insult you with any sort of attempt to explain the recent price action. I don’t have a clue, but it sure seems bullish.

Yet I remind you that for too long, many of these “soft commodities” have been overlooked. Decades of persistent disinflation will do that.

But what if the trend has finally turned? What if the next great bull market will not be in stocks, or bonds, but “soft commodities?” Remember, nothing offers better opportunities than “Shit no one trades”.

Sometimes you need to find new territory. Spread your wings. Trade different stuff. Venture to the other side of the road… Much like this other Canadian groundhog did almost a decade ago at a different F1 race.

The Copper Market Relative to Gold, Equities, Dollar (Video)

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These Are Barclays' 13 Commodity "Black Swan Threats" For 2017

In a special report by Barclays" Michael Cohen, the analyst lays out what he believes are the 13 commodity "black swan threats" for the current year, divided into two "shock" categories: supply and demand, split evenly between bearish and bullish.

Investors, Barclays warns, will have to balance the risks of unforeseen macroeconomic shocks and their effect on demand (bearish price) with potential geopolitical shocks disrupting the supply side of the market (bullish price). A tightening commodity inventory picture, especially in oil, will likely exacerbate how the market prices supply risks even if no physical supply disruption occurs.

The potential threats, which range from a trade war with China, to a default in Venezuela, to riots in Chile, all have a common denominator: politics: "we assess several black swan threats to the supply, demand, and transit of commodities that could potentially move markets in 2017. Our analysis illustrates an important point: politics are likely to matter just as much as economics" and not just any politics: "in particular, the new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities."

Those who have been following Trump"s twitter feed are all too aware of this.

While we realize the futility of "identifying" black swans in advance, something which is by definition impossible, nonetheless here is what Cohen warns:

In 2016, few people predicted a Trump election or Brexit, not to mention that the Chicago Cubs would win the World Series or that Leicester City would take the Premier League title. And commodities markets were not without their own set of surprises as well. OPEC cut production with non-OPEC countries for the first time in 10 years. Weather whipsawed natural gas, and Trump’s election inspired a late metals complex rally on the basis of hopes for new infrastructure spending. In fact, when all was said and done, 2016 was a pretty good year for commodities, with the asset class posting its first annual advance since 2010.

Commodity market black swan events come in many forms, and the market may take years or an instant to price them in. Technological innovation caused the US shale gas revolution, the Great Recession caused structural demand destruction, while geopolitical strife has disrupted commodity supplies overnight. We all know that markets will surprise in some fashion in 2017, so we attempt this review to shine  a spotlight on the specific commodity market risks that clients should watch.

Where could the surprises come from: "Watch these spaces: China, Russia, the Middle East and Turkey are likely to surprise the commodity complex in 2017."

Below is the summary list of the proposed "black swans"

Breaking down the list, Barclays says that generally "it sees risks skewed to the upside in 2017, based on several supply-side risks."

Given the scenarios laid out below we view supply driven disruptions in 2017 as being more likely than demand side Black Swan events. Although commodity price disruptions may mean higher prices in the short-term there is a risk they result in lower medium-long-term prices. A supply disruption that results in a higher futures curve could result in the sanctioning of new projects or increased producer hedging activity, eventually putting downward pressure on prices in the long-dated contracts. There are, of course, supply-side risks that would be bearish for the market as well, such as higher production from Libya or the Neutral Zone."

Demand events less likely but more structurally impactful. Given the relative liquidity in global commodity markets we see supply related outages being shorter in duration compared to potential demand side risks. We see demand side events, such as those driven by economic weakness, as less likely but events that would have a longer term structural impact on commodity prices to the downside.

As noted above, the two big categories laid out by Barclays are as follows:

Threats to Commodity Supply:

• Iran/US rhetoric escalates and leads to more Iranian ballistic missile testing (oil): It should come as no surprise that Trump’s pledge to dismantle the Iran nuclear deal (JCPOA) ranks as one of the most significantly bullish risks towards oil markets this year.... We do not believe that the reimposition of sanctions would lead to an abrupt cut in Iranian exports, but the threat of new US sanctions will likely slow the pace of investment needed for Iran’s oil sector to mitigate the decline from existing oil fields. Commodity market effect: Heightening geopolitical tensions would likely have a short-term price effect (threat to transit via the Strait of Hormuz), and a dampening of investment prospects would threaten Iran’s ability to attract foreign investment.


• Venezuela defaults on its 2017 debt obligations, causing a cash crunch and production shut-ins (oil). After demonstrating its willingness to pay over the past three years, Venezuela could default on 2017 debt obligations. This would cause creditors and business partners to step back and banks to freeze PDVSA’s bank accounts. The ensuing liquidity crunch could prevent PDVSA from making payments to partners that are necessary to facilitate day-to-day operations. Although PDVSA employees would still receive payment in VEB, a deepening of the economic crisis could increase social and political tensions. Commodity market effect: A production shut-in of this nature would be bullish for the oil market and likely push the curve into backwardation in short order. Roughly two-thirds (1.5 mb/d) of Venezuela’s oil production (2.2 mb/d) is heavy and extra-heavy crude oil, so a disruption is likely to be a bearish for light-heavy spreads. The effects of the disruption would likely be more pronounced in the US, which imports nearly one-third of Venezuela’s production (predominantly heavy oil). We would expect the WCS-WTI spread to strengthen markedly.


• Large-scale water contamination issue caused by wastewater disposal incident in major oil and gas producing state (natural gas): Following the events in Flint, Michigan, this year, there is a renewed focus  on the right to safe drinking water. An event in a major natural gas producing state such as Pennsylvania, Oklahoma or Texas, where it was concluded that the wastewater from hydraulic fracking wells had contaminated drinking water would result in major public outcry and likely affect production levels. The market could see a temporary or even permanent ban on fracking activity, such as in New York State, or significantly more stringent and costly regulations. Commodity market effect: The back of the natural gas curve could strengthen significantly as producers limit supply. New regulations would likely increase producer costs.


• Riots in Chile over the 2017 general election results halt production at mines across the country (copper). Protestors decrying the election results might occupy railways, ports, and other critical infrastructure, affecting all 5,700kt of Chile’s copper production. Although the risk of political turbulence is low in Chile, the risk of riots and political protests affecting copper production is high and real. In 2016, protests by workers in Peru, Chile, and Indonesia resulted in disruptions to several hundred thousand tons of planned copper supply (see Copper Disruption Tracker: November brings more disruptions, Chilean production drop). Commodity market effect: Disruptions are a well-known phenomenon affecting the copper market, which already incorporates a limited amount of these in its pricing outlook. However, they have the potential to provide a short-term boost to prices if the supply affected is large enough. Any disruptions above our 1mnt allotment have the potential to shift the market into a substantial deficit, which could provide a more sustainable boost to prices, given plateauing production post-2019.


• An aggressive Russia further pushes into Ukraine, resulting in a disruption to the country’s iron ore production. Ukraine is a small but regionally significant producer of iron ore, supplying the domestic steel market and nearby European and Russian mills. Iron ore production in 2016 was approximately 74mnt. Any conflicts in the region could halt the country’s iron ore production and exports, resulting in stronger European reliance on Brazilian exports and a tightening global balance. Any outages of iron ore production, assuming crude steel production remains constant, would result in a strong positive headwind to prices.  Commodity market effect: The severity and length of any supply disruptions from regional Russian aggression would ultimately determine the price effect. A rerouting of any exports to European would have knock-on effects, forcing Europe to reply more on Brazil, thus reducing Brazilian supply available to China. The disruption to global supply chains could be bullish for iron ore in the short term, but bearish in the long term as Russian and European steel production contracts from the ensuing economic fallout.

On the other side, Barclays notes that the major black swan risk for commodity demand is an unexpected economic downturn in any of the major commodity consuming nations. Namely, investors will continue to focus on the Chinese economy. Our economists continue to see solid GDP growth for the country in 2017 and are forecasting 6.3% in 2017 and 6.1% in 2018. Moreover, our China economists continue to see upside, not downside, risks to growth. That said, economic shocks do happen, and China is not immune from the unforeseen. A Chinese hard landing scenario resulting from heightened capital outflows, geopolitical tensions, or a global trade war remains possible, if unlikely.

Threats To Commodity Demand

• Trade war with China escalates into geopolitical tensions, interrupting global commerce (cross-commodity). In an attempt to reduce its trade deficit with China ($365.7bn in 2015), the US might implement a tariff schedule designed to halt the flow of Chinese imports. With the US taking the lead, other developed nations with sectors similarly threatened by China, such as the EU steel sector, may implement a range of tariffs, quotas, and other barriers to trade. China might respond by taking a more aggressive stance in the South China Sea, leading to a standoff that halts the flows of global commerce in and out of China. Commodity market effect: Such a scenario would effectively slow global trade, affecting global GDP estimates across the board. Countries with economies heavily weighted towards manufacturing would have drops in industrial energy and metals demand, while energy used for the transit of goods would also fall. In the short term, the event would put downward pressure on prices across the commodity complex. However, over the longer term, the strains in global trade would result in more regionalized commodity markets, resulting in higher levels of price volatility.


• Metals hit the hardest if China weakens: Given the leverage of iron ore and copper to the Chinese economy (60% and 50% of global demand, respectively, 70% of iron ore seaborne trade), any risk to the Chinese economy would have large and serious negative effects on the prices for the two commodities. A stimulus-driven revival in the Chinese economy led a metals sector recovery in 2016. Although China retains significant reserves of iron ore and copper and is a major producer for both commodities (third-largest for both commodities), its vast levels of consumption require significant imports to fuel demand. Commodity market effect: The loss of the primary consumer for both commodities would likely result in a bifurcation of the global market, with domestic Chinese prices reaching record highs, while global prices ex-China plummet to new lows. Oil and gas effects would likely to be limited due to infrastructure build-out and continued robust car sales. Based on a historical GDP/oil demand rule of thumb, a reduction in GDP growth by one percentage point would likely shave 80-100 kb/d off of China’s oil demand.  Precious metals, particularly gold, may benefit from a risk-off move over the heightened geopolitical tension.


• Elon Musk might deliver the Model 3 on time and customers love it or 2017 experiences a major and concentrated battery technology breakthrough. Though our equities analysts expect that there will be delays on Model 3 delivery, as they highlight in 4 Tweets to Expect from Elon Musk, of course, the opposite could occur which might lead market participants to price in a more rapid EV adoption in to their outlook. In our view, even if this were to occur, we would expect the effect on gasoline demand to be quite limited in 2017 and even in the medium term, as we elaborated in Affirming Upward Bound (p. 43). EVs still hold only a minuscule (0.1%) share of the global vehicle stock. That said, markets have a tendency to price in future developments and this development or a battery technology breakthrough that pushes prices far below current levels could turn the tide on how the market perceives EVs" medium-term effect on oil demand. Similar to technology that cracked the code in shale plays, we do not expect this development to be concentrated in the timeframe of one year, but given our definition of a ‘black swan’ it is of course a possibility.


• A broader US/Mexican trade war might make US natural gas exports into  Mexico uneconomic due to new tariffs (natural gas). A NAFTA trade-related fight could result in gas relations between the US and Mexico becoming strained (under NAFTA there is no tariff on basic petrochemical goods, which is the category under which natural gas falls). Given an oversupply in global gas markets, a new tariff put on US gas exports to Mexico would make LNG imports more economic in some regions of Mexico than US pipeline gas. Higher domestic gas prices in Mexico due to new tariffs might spur the government to accelerate programs to develop its own largely unproven shale gas resource base. Commodity market effect: A drop in US exports to Mexico would lower natural gas prices. In the short term, US gas would have to price lower to compete in Mexico, given the additional tariff. Longer term, the gas curve could come under pressure as developers cancel proposed infrastructure projects to transport additional volumes of US gas into Mexico.


• A Fukushima-type incident in China turns public opinion against nuclear power, causing a short- to medium-term tightening in global thermal fuel markets, especially LNG and coal. China’s aspirations to grow its nuclear generation profile have already encountered issues with large-scale delays, cost overruns and questions about safety and adequate regularity oversight. A nuclear incident with large-scale social effects would cause all other nuclear plants to shut down until adequate inspections were done. In the meantime, China would need to boost thermal generation, causing global LNG, coal and even oil markets to spike under the unexpected demand similar to what occurred after Japan’s Fukushima disaster in 2011. Commodity market effect: In the short to medium term, LNG, coal and oil markets would all receive a boost as China’s imports skyrocket due to downed nuclear capacity. With the future of nuclear in China called into question, long-term gas and LNG projects would receive a boost. China would likely gain newfound interest in pipeline gas projects with Russia and Central Asia, while another generation of LNG projects in the Asia Pacific would also benefit from new Chinese buyers.


• North Korea nuclear tests: Continued nuclear and missile test would draw the ire of President Trump. North Korea carried out a number of these tests in 2016. According to a recent assessment by CFR, North Korea is likely to obtain the ability to strike the US with a nuclear weapon during the next president’s term. In the past year, it has enhanced enrichment capabilities, added to its nuclear warhead arsenal, and accelerated proliferation activities in the Middle East. Pessimistic assumptions indicate the regime has 13-21 nuclear weapons as of June 2016 and even more fissile material. Commodity market effect: Missile testing would have a secondary and bearish effect on Chinese economic growth and likely put a damper on air travel to/within Asia.

Finally, Barclays lays out two potential transit threats.

• China deploys a rig to drill in the disputed waters of the South China Sea: Given President-elect Trump’s China stance, as well as his cabinet appointments and the aftermath of the Hague ruling, China could exert its right to sovereignty over territory in the South China Sea. The seizure of a drone in mid-December 2016 may be a precursor to further conflict. Although China concluded new trade agreements with Vietnam and the Philippines in September and October, respectively, the potential for conflict remains. The region is more important for the role that it plays in energy transit than future oil or gas supply. The nearby Strait of Malacca transits almost 30% of the world’s oil and about half of global LNG trade. Further conflict in the area would threaten the ease of transport for those energy resources and damage China’s ability to sustain economic growth. Commodity market effect: Tension in the S. China Sea with either regional neighbours or the US dampens China’s economic prospects (bearish demand), but could be bullish for oil and global gas prices, as these commodities would have to find sub-par routes to market.


• Further terrorism in Turkey: In the aftermath of the coup attempt on Turkish PM Erdoganseveral months ago, the tension between Kurdish groups and the government is intensifying at the same time the divisiveness of the political institutions is growing. The assassination of the Russian ambassador to Turkey could bring Moscow and Ankara more in line with one another in some respects, but the threat of terrorism in Turkey as a result of Turkey’s alliances in proxy conflicts in Syria and Iraq is likely to worsen in 2017. As we highlighted in Turkey Quarterly Outlook, 18 November 2016, Erdogan’s arrest of journalists, deteriorating institutional quality, and worsening judicial independence hurt the investment environment. In addition, barriers to growth include banking sector headwinds, unfavourable capital inflow dynamics, and continued currency depreciation. Commodity market effect: On the one hand, a slowdown in Turkish economic growth would be bearish for global gas and oil markets. A contraction in diesel demand could cut 50-75 kb/d off the country’s oil demand of 950 kb/d in 2016. On the other hand, a more serious bullish effect would come from Kurdish or jihadi groups targeting energy infrastructure