Craig Pirrong

Independent research, commodities, macro
Craig Pirrong
Independent research, commodities, macro
Contributor since: 2009
3 times a small number is a small number.
Peter-Thanks for your comment. Re the title, it just refers to the sinking feeling that Iksil/Morgan no doubt had when they found that there was no liquidity underneath them, and to the fact that I have lost count of the number of times I have heard/read about trades that went bad because profitability depended on liquidity, and the trader overestimated it or found out that it had disappeared precisely when he needed it.
yongliu--it's important not to confuse the message with the messenger. Although there have been widespread assertions that speculation in futures has caused unwarranted fluctuations in prices, the evidence supporting these assertions is thin, not to say non-existent. I evaluate the evidence in an article titled "No Theory? No Evidence? No Problem!" that appeared in Regulation Magazine in the summer of 2010. I conclude that the evidence does not support the claim that speculation caused the price spikes in oil and food.
Thanks for following the blog.
@LKofEnglish--because they are guaranteed by the Federal government. Treasury prices have been soaring/yields plunging too. GSE debt is effectively equivalent to Treasuries.
@nocon and @yeti. Thanks for commenting. Here are my two cents.
There's a problem with these either/or mutually exclusive, dualistic approaches that you two epitomize. Government, alas does some things better. The question is to figure out which. The answer to the question depends, in no small way, on the entire institutional setting; the answer isn't the same everywhere.
Relying on private mechanisms is particularly problematic in a place like Russia, where the court system for enforcing liability rules is weak and corrupt. Relying on private mechanisms in other settings, particularly where courts are strong and unbiased, is quite different.
And that is in many senses Russia's curse. The state is inefficient and suffocating, but due to the absence of a variety of institutions to support private transactions and deter bad conduct through the imposition of liability, privatization tends to result in disaster. Ironically, moreover, the state bureaucracy has an incentive to throttle the development of a robust set of institutions that would encourage private activity because that would undermine their own power and their own ability to profit at the expense of others.
BPYHO: (1) make sure you spell my name right when you insult me--or give me left-handed compliments--so that people know whom you are talking about: proper spelling is right at the top of every article; (2) what's with the scare quotes re "Dr"?--(a) I do have a PhD, but (b) it's not like I throw around the title; (3) somewhat puzzled by your comment, because what I say in this article is quite similar to what I've been writing about Russia for years.
@Tony. It never ceases to amaze me how people draw inferences about what I know about the REAL world from reading a snippet of my biography, and noting that I am an academic.
Truth be told, I have watched manipulation up close and personal going back to the 1980s, when the Japanese were squeezing the US and I was working at an FCM in Chicago. I have been deeply engaged in a variety of manipulation matters, ranging from Ferruzzi in the 1980s, to copper and canola and Brent and Bunds in the 1990s, to more recent stuff in oil, gas, and Treasuries. I have heard, first hand, from the horses' mouths, all the standard alibis. Including those you offer up. So color me less than persuaded.
RE "agreements in place." Hardly exculpatory: indeed, quite the opposite. If you know anything about manipulation, you know that the biggest risk is burying the corpse, i.e., disposing of what is delivered to the squeezer. (A phrase that I've been accused of coining. Alas, untrue. I wish I had, but that honor goes to P.D. Armour long before my time.) A smart manipulator does a pre-arranged funeral. Which appears to be the case here.
RE "not sitting idly." Well, duh. What do you think I think manipulators do? Burn what is delivered to them? Eat it all themselves? Frame it for their visual enjoyment? No. It gets sold and consumed. But manipulation distorts the spatial and intertemporal patterns of consumption, leading to the price distortions that can make manipulation possible.
I am not shocked by physical deliveries. But if delivery economics work for one party they typically work for several. That's why it's highly suspicious when one party stops everything. It's not dispositive evidence of manipulation, but it is highly suggestive.
I reserve definitive judgment pending a more thorough evaluation of price relationships and delivery economics. But what is in the public domain suggests that a manipulation allegation would pass summary judgment.
@Snowmann. A mann of few words, I see. Snowmenn usually are. Since you are so reticent, let me spell it out for you.
For a seasonal commodity, at an instant of time supplies are given until the next harvest. Hold demand fixed. Now posit the arrival of news about the impending harvest, specifically, that the new crop will be unexpectedly small. That means that future scarcity will be greater than expected, and since (in my scenario) that's the only news, you'd expect the new crop price to rise relative to the old crop. Future scarcity has risen, current scarcity remains the same, so the future price should rise relative to the current one.
There's another way to see this. With anticipations of a smaller future harvest, it's more likely that it will be optimal to carry-over supplies from the old crop year to the new crop year, or to increase the amount that will be carried over. In a competitive market prices will adjust to induce that result. This means that new crop prices have to rise relative to the old in order to reward carrying more inventory. (If prices are already at full carry across the crop year, a highly unusual circumstance, then the prices will essentially move in lockstep.)
Hi, Jeanne--
LOL. It could have been worse, I guess. They could have written "rain in."
Thanks for reading so carefully :)
I do see Darrell at conferences. In fact, I commented on his paper on clearing at this summer's NBER conference. These are completely different issues than the quant finance/pricing modeling matters at which Darrell excels. I feel quite comfortable in debating him on these issues. We agree on some, disagree on others. I just find the quote in the WSJ article to be superficial.
Yes, Vernon Smith is quite a trip in person. No doubt about it. I remember first meeting him at Arizona in the mid-90s. Imagine my surprise--pony tail, big silver belt. I thought "hey, the 60s went thataway." But he is very thoughtful, and his writings are quite deep and interesting. And his work on experimental economics is truly pathbreaking.
CHDexter. You miss the basic points. Most importantly, even if dealers want a dark market because it makes them more money, what power do they have to keep the market dark if their customers want something different? Like I said, GM wants people to buy overpriced crappy cars, but competition from companies offering better value all but put them out of business. There have been many attempts to compete with dealers, offer more transparency, etc., and they've failed.
Your statements about sell side debilitating losses/buy side poor investments are incomprehensible, and in fact contradictory on their face. Since derivatives are a zero sum game, how can both lose? Huh? And firms made these choices long before the sh*t hit the fan in 2008-2009, so your argument that the opposition to clearing is intended to buy time to permit markets to return to normal hardly explains why OTC markets grew absolutely and relative to exchanges prior to the crisis.
The "explanation" for the survival of dark OTC markets that permit dealers to make money at the expense of their customers presumes that customers have no competitive alternative. This is just incorrect. Which means you have to figure out where the gain from trade comes from, and why dealer structures offer a better value than exchanges for many end users.
Nice article, Howard. It seems, based on your description, that climate models are ill-posed problems. This makes them of dubious use, at best, for out of sample forecasting.
von Neumann once said (I quote from memory) "Give me four parameters, I can fit an elephant. Give me five, and it will swing its trunk." Climate models have a plethora of parameters which allow you to "fit" just about anything. Fitting, though, is not the proper criteria by which to evaluate these models. Out of forecast skill is, and the metapaper you cite casts serious doubt on that.
Thanks, PMK--I taught the first course on carbon trading in the country, and am currently writing a piece on the regulation of carbon derivatives.
Re c&t overall, yes . . . impending train wreck. For many reasons. I will hopefully write on some of the issues soon. The details of offsets in particular will be nightmarish. This could make the CA electricity market experience look like a cakewalk.
Thanks again.
On Jul 09 03:44 PM Keltorttruth wrote:
> Excellent article. It should be required reading for the sheeple
> in D.C. I would be interested in reading your thoughts on cap and
> trade. I think it is an impending disaster that will plunge us squarely
> back into the throws of the recession.