Thanks, Desiderius Erasmus, for your comments. GDP may be measured by either the consumption-oriented method you discuss or by income -- a method that includes corporate profits. Essentially, corporate profits flow back into households as either consumption of investment, linking the two methods. Wikipedia has a decent discussion of this: en.wikipedia.org/wiki/...
On Aug 18 09:26 AM Desiderius Erasmus wrote:
> Jeffrey, your thesis is compelling, and one I ascribe to myself. > A quibble, though: there is an error in the second paragraph of the > piece. Corporate profits are not "an important GDP component" -- > they are no component of GDP at all. The GDP calculation does not > include corporate profits. The formula for GDP is: > > C + I + G + (X - M) > > C = Consumption > I = Investment > G = Gov't spending > X = Exports > M = Imports > > One could reply that corporate profits show up in the "I" portion, > but that is not the case. All coporate profits occur at the bottom > of the income statement, after all investment moneys (e.g., capex) > have been spent. You make a strong case, but one that could be strengthened > further by being a bit more careful with the terminology. Overall, > though, a good piece.
IMPORTANT UPDATE (8/7/9 10:30 a.m.) — A reader on mmy blog, "David – NC,” caught an error in my calculations and is absolutely correct. The breakeven for a reasonable tradeoff (an 18 mpg clunker turned in for a 28 mpg new vehicle) is 89,090 miles not the 17,640 miles I incorrectly stated. Even under my flawed numbers, the program made little sense from a conservation standpoint — given David’s proper numbers, the cash for clunkers program clearly has no conservation benefits. Thank you David.
Fundamental Misconceptions in the Speculation Debate [View article]
I haven't changed my mind, but I'm certainly thinking about the economic efficiency of inventory building per the remarks. My gut is that it is still economically flawed -- the most efficient ways to hold inventories in oil is by not taking it out of the ground, and the people who can make that decision are the best informed, too. A lot of the oil is not be hoarded/inventoried with forethought, but purely as an arbitrage against the futures, and the futures are not necessarily being bought with conscious expectations, but rather because it backtested in asset allocation model. The other issue is this whole business of systemic risk -- if you overwhelm the cash market, that cash/futures arbitrage breaks down and you have a potential disaster with future becoming uncoupled from cash. That's big issue, improbable (I hope), but possible. The problem with the lack of oversight of these markets is that we can't even assess the potential for that systemic risk. Sounds crazy, but so did those who called the subprime disaster.
On Jul 30 06:03 PM Living4Dividends wrote:
> Terrific article, Jeff. And your original source article was even > better. I agree with your conclusions in the "300B Ponzi Scheme." > > > Clarification Sought: Reading thru your reply, I can't understand. > Have you changed your opinion based upon the comments? > > My guess: no, you haven't.
Fundamental Misconceptions in the Speculation Debate [View article]
A quick note of thanks to all those who post comments -- for example, JeffDB's and Rayden's comments today remind of the value I get from having my blog posts appear on SeekingAlpha. We may not agree, but I read everyone's comments and take the challenges very seriously -- and I've learned a lot from these, sometimes changing my opinion, sometimes forcing me to tighten my own arguments. It's great stuff. I'm paid to do this for a living. Many of you are not. I appreciate your time and effort.
Why Crude Oil Traders Should Care About Wheat [View article]
rayden- I don't normally take the time to reply, but you obviously put some good thought into your comments, so I wanted to provide you with some additional info. Your last comments are dead on, but are based on the assumption that a producer has not already hedged his cotton. What I believe happened (and the statistics support) is that all this pension and investment money in cotton had already made forward selling so attractive that virtually every bale of cotton was already hedged. The commitment of traders report showed that the commercial short positions in cotton exceeded the annual production of the U.S. by Feb of 08. This meant that a rise in futures (with cash staying constant) was only a negative -- a cash flow squeeze; no hedger could take advantage of the higher price. I spoke with people in the industry who literally had to mortgage their homes to stay in business. The magnitude of the squeeze was enormous, and required more credit than even the most prudent participant could reasonably have established in advance. I'm all for speculators of the traditional sort - and have been one myself, having actively traded about 20 different markets (financials, softs, grains, meats, metals). They indeed provide liquidity and aid in price discovery. The problem is the new type of index speculator who provides not liquidity, but rather a big, fat bid (liquidity is 2-sided, this is not). For the economy to operate efficiently, price discovery should be determined by producers and users of the commodity, with speculators assisting, not determining the price ahead of those fundamentals. Your points about the benefits of stockpiling are also quite astute and an issue I've wrestled with. However, as long as the cotango is held up by index speculators, those stockpiles won't be released into the market, but simply rolled. At some point, you run out of storage, and the whole thing may unravel, but that has its economic costs as well. At the end of the day, it is economically more efficient for most commodities that are produced to be used rather than stored. Stockpiling should be more of a marginal activity, not a major use of the production. Thanks for your thoughtful and thought-provoking comments. --Jeff K.
On Jul 01 01:05 PM rayden wrote:
> Just read up on the cotton spike; interesting, and that story had > stayed below my radar until now. My analysis of what happened and > why is a little different though. This was a liquidity (lack of) > driven spike. If I am a hedger of cotton, and I have an actual crop > in the field or bales in a warehouse, such a spike is almost the > best thing that can happen to me: I will sell, sell, sell forward > (waaay into future years if necessary) and then simply wait for expiration > and deliver physical. There is no conceivable reason why I should > ever want to close an existing long position due to such a spike. > However... there is such a thing as too much of a good thing. In > order to do that, if I already have large long positions, I would > need someone to lend me enough money for the margin I would need. > Such lending is actually very low risk, and given what the market > was doing, even taking a loan at usurious interest rates for margin > would have had an excellent rate of return (as margin is leveraged, > the interest would be diluted, and the loan would be repaid as soon > as the spike is over). So, there are basically just 2 things needed > to make such a spike work for you as a producer/hedger: a) someone > willing to lend to you on SOME terms, perhaps with your entire physical+futures > position as collateral (btw: I would have happily lent a lot of cash > to the cotton merchants at 20% annual, so no prob there ;) and b) > for you to keep your cool and not blink. I think in cotton, hedgers > failed at both of those. There is a lesson here: if you're a commercial > hedger and you're net short futures, make SURE you have agreed upon > margin financing for essentially unlimited moves in the commodity, > so you are never forced to liquidate a position.
Understanding the 'Q' Recovery [View article]
On Aug 18 09:26 AM Desiderius Erasmus wrote:
> Jeffrey, your thesis is compelling, and one I ascribe to myself.
> A quibble, though: there is an error in the second paragraph of the
> piece. Corporate profits are not "an important GDP component" --
> they are no component of GDP at all. The GDP calculation does not
> include corporate profits. The formula for GDP is:
>
> C + I + G + (X - M)
>
> C = Consumption
> I = Investment
> G = Gov't spending
> X = Exports
> M = Imports
>
> One could reply that corporate profits show up in the "I" portion,
> but that is not the case. All coporate profits occur at the bottom
> of the income statement, after all investment moneys (e.g., capex)
> have been spent. You make a strong case, but one that could be strengthened
> further by being a bit more careful with the terminology. Overall,
> though, a good piece.
Clunker Conservation [View article]
David's comments can be found on the blog post: inefficientfrontiers.w.../
Fundamental Misconceptions in the Speculation Debate [View article]
On Jul 30 06:03 PM Living4Dividends wrote:
> Terrific article, Jeff. And your original source article was even
> better. I agree with your conclusions in the "300B Ponzi Scheme."
>
>
> Clarification Sought: Reading thru your reply, I can't understand.
> Have you changed your opinion based upon the comments?
>
> My guess: no, you haven't.
Fundamental Misconceptions in the Speculation Debate [View article]
Why Crude Oil Traders Should Care About Wheat [View article]
I don't normally take the time to reply, but you obviously put some good thought into your comments, so I wanted to provide you with some additional info. Your last comments are dead on, but are based on the assumption that a producer has not already hedged his cotton. What I believe happened (and the statistics support) is that all this pension and investment money in cotton had already made forward selling so attractive that virtually every bale of cotton was already hedged. The commitment of traders report showed that the commercial short positions in cotton exceeded the annual production of the U.S. by Feb of 08. This meant that a rise in futures (with cash staying constant) was only a negative -- a cash flow squeeze; no hedger could take advantage of the higher price. I spoke with people in the industry who literally had to mortgage their homes to stay in business. The magnitude of the squeeze was enormous, and required more credit than even the most prudent participant could reasonably have established in advance.
I'm all for speculators of the traditional sort - and have been one myself, having actively traded about 20 different markets (financials, softs, grains, meats, metals). They indeed provide liquidity and aid in price discovery. The problem is the new type of index speculator who provides not liquidity, but rather a big, fat bid (liquidity is 2-sided, this is not). For the economy to operate efficiently, price discovery should be determined by producers and users of the commodity, with speculators assisting, not determining the price ahead of those fundamentals.
Your points about the benefits of stockpiling are also quite astute and an issue I've wrestled with. However, as long as the cotango is held up by index speculators, those stockpiles won't be released into the market, but simply rolled. At some point, you run out of storage, and the whole thing may unravel, but that has its economic costs as well. At the end of the day, it is economically more efficient for most commodities that are produced to be used rather than stored. Stockpiling should be more of a marginal activity, not a major use of the production.
Thanks for your thoughtful and thought-provoking comments. --Jeff K.
On Jul 01 01:05 PM rayden wrote:
> Just read up on the cotton spike; interesting, and that story had
> stayed below my radar until now. My analysis of what happened and
> why is a little different though. This was a liquidity (lack of)
> driven spike. If I am a hedger of cotton, and I have an actual crop
> in the field or bales in a warehouse, such a spike is almost the
> best thing that can happen to me: I will sell, sell, sell forward
> (waaay into future years if necessary) and then simply wait for expiration
> and deliver physical. There is no conceivable reason why I should
> ever want to close an existing long position due to such a spike.
> However... there is such a thing as too much of a good thing. In
> order to do that, if I already have large long positions, I would
> need someone to lend me enough money for the margin I would need.
> Such lending is actually very low risk, and given what the market
> was doing, even taking a loan at usurious interest rates for margin
> would have had an excellent rate of return (as margin is leveraged,
> the interest would be diluted, and the loan would be repaid as soon
> as the spike is over). So, there are basically just 2 things needed
> to make such a spike work for you as a producer/hedger: a) someone
> willing to lend to you on SOME terms, perhaps with your entire physical+futures
> position as collateral (btw: I would have happily lent a lot of cash
> to the cotton merchants at 20% annual, so no prob there ;) and b)
> for you to keep your cool and not blink. I think in cotton, hedgers
> failed at both of those. There is a lesson here: if you're a commercial
> hedger and you're net short futures, make SURE you have agreed upon
> margin financing for essentially unlimited moves in the commodity,
> so you are never forced to liquidate a position.
Grading the Stimulus Package [View article]
gregmankiw.blogspot.co...
Here's some in depth about the "multiplier debate":
www.econbrowser.com/ar...
Will try to respond to other questions, later...
JDK