Loading...
Symbols:
Get Seeking Alpha Free Stock Alerts by Email!
Get Free Stock Alerts by Email!
Transcripts
- Tortoise Capital Resources Corporation Business Update Call Transcript
- Peoples Educational Holdings, Inc. F1Q09 (Qtr End 08/31/08) Earnings Call Transcript
- Altera Corporation F3Q08 (Qtr End 09/26/08) Earnings Call Transcript
- Genentech Q3 2008 Earnings Call Transcript
- Domino’s Pizza, Inc. F3Q08 Earnings Call Transcript
- SuperValu, Inc. F2Q09 (Qtr End 09/06/08) Earnings Call Transcript
- PepsiCo, Inc. Q3 2008 Earnings Call Transcript
- Johnson & Johnson Q3 2008 Earnings Call Transcript
- Manulife Financial Corporation Business Update Call Transcript
- The Great Atlantic & Pacific Tea Company, Inc. F2Q08 (Qtr End 09/06/08) Earnings Call Transcript
-
Editor's Picks
-
Most Popular
- State Capitalism: Ideology Now Bonds Russia, U.S.
- This Is What Happens When Everything Is Undervalued
- Governments Wave Magic Wand; Ludwig von Mises Turns in His Grave
- 10 Reasons I'm Glad To Be Doing Business in America
- AMD Sheds Fabs to Keep Up with Intel
- Are Analysts Being Fooled By The Data?
- Full list of Editor's Picks »
- Why Cramer Should Be Suspended »
- Bargain Buys For Patient Investors - Barron's »
- The Bottom's Within Sight - Barron's »
- Chesapeake Energy Corporation Business Update Call Transcript »
- What Does Warren Buffett See in General Electric? »
- Gold: The Last Carry Trade »
- Paulson in a State of Panic »
- Jeremy Grantham: Stocks Still Aren't Cheap »
- The Crash of 2008 »
- GM/Chrysler Merger Could Be Very Interesting for Sirius »
- Bullion Shortage and Spot Prices Tell Two Different Gold Stories »
Trading Center
Hedge Fund Jobs
Job Seekers: Search jobs by category, get job alerts by email or live feed, apply online See full list of jobs »
Employers: See all recruitment options, get applications online or by email Post a job »
Shalom Hamou
16 Comments
Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
Your remarks are interesting and numerous:
"
You say:
"The elephant in the room, however, is your implicit assumption that owners of minerals should NOT take advantage of today's high prices and sell product."
High in economy is not compared to yesterdays price, which you can't act on but with regard to tomorrows prices. The Miners have two choices: Mining today and invest long-term or Mining tomorrow and invest an profit from the expected short-term yield implied by futures and forward prices.
you say:
"You should have seen the flaw of your model when you wrote this: "Under this framework, there is no theoretical higher limit of the price of the minerals."
In other words, your model suggest that mining firms are always willing and able to become sitting-around-and-doi... firms with no negative effect on their business, because they have this perfect asset in the ground. Thus the price will go to infinity if the yield curve is bad."
I am not saying that they are sitting-around-and-doi... I am saying that they extract at a lower rate than output Maximization would suggest.
You say;
"You'll realize this is wrong when you ask yourself why people issue short term debt when the market is clearly over-valuing short-term debt. They know they'll be able to borrow more cheaply very soon, and yet the price of short-term debt doesn't go to infinity. Why are they not willing to shut down *their* businesses until the cost of financing gets cheaper?"
It is the FED that create this distortion in prices, it is taking off liquidities out of the system, or more exactly diminishing money supply: the FED never look to maximize its profit.
You say:
"You'll realize this is wrong when you ask yourself why people issue short term debt when the market is clearly over-valuing short-term debt. They know they'll be able to borrow more cheaply very soon, and yet the price of short-term debt doesn't go to infinity. Why are they not willing to shut down *their* businesses until the cost of financing gets cheaper?"
Business have to borrow they can't close down, they are faced with the borrowing cost today. However they can chose between borrowing short-term or long-term. Individual businesses do chose to borrow short term because they have some expectations or because the Market won't let do so. The Market as a whole, in that configuration, prefers to borrow long-term rather than short-term. This is the way monetary policy influence investments decisions.
Shutting down a business is never a possibility, and by definition, they usually earn more than interest rates.
If people know to make one thing they usually continue to do that thing even if it is not profitable or optimal.
An example of that irrational behavior was what the financial industry did as yield curve was inverted: their optimal behavior would have been to stop making long-term loans. however they looked for something which was long-term and provided an expected return that would pay for the interest rate risk: mortgage backed securities. Not only did they buy all there was to buy their pressured their providers to sell them more. The providers provided them with sub prime or Alt-A products.
"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
The General Theory of Employment, Interest and Money (1935)
It does not mean that men don't make rational choices about present value maximization, it means that they are constrained i doing so.
You say:
"You've also completely forgotten the futures market. Since the very point of the futures market is to smooth cash prices, one way they do that is to tempt producers into locking in a profitable price. They who produce the very commodities you discuss feel - unlike you - that they cannot be sure about price direction. Do you have any evidence that mineral producers suddenly stopped trying to lock in profits with hedges? No, you don't."
I have not forgotten future Markets, I use them to explain the expected short-term return, but if long-term return is to low to compensate the Market for interest risk they tend, as a result from Market arbitrages, to extract less and enjoy the implied short-term returns rather than extract and invest the proceeds in long-term assets.
My assumption is that the Market does not have expectation about future prices, otherwise the Market would be at a different price today.
The Market as a whole does not lock in profit with hedges, some do and some don't the result is today Market price. Individual entities have expectations about the future evolution of the price of the minerals, the Market don't.
I am not saying that miners look at the prices of bonds, in fact they don't. The cause of their actions is a complex arbitrage that take place between fixed income instruments and their derivatives and the Minerals an their derivatives.
Miner are into the business of making dirt into something useful but doing that they mak choices which maximise under constraint their profit.
Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
The difference with what I say and what you say is that I am saying that there is an expected short-term interest rate build in commodities as a result of their forward term structure.
So the factor in making the decision to extract the marginal unit today or tomorrow is function of the difference between short-term rate and long-term rates.
Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
The proven reserves are such that we have at least for another 30 years of production, Peak Oil is a theory that doesn't even evaluate the cost of extraction. It is on of those Malthusian theories that are around since Malthus invented them.
Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
Whatever the demand the classical hypothesis is that the price of a mineral is its marginal cost of extraction.
under that hypothesis any producer would maximise his production under the constraint of his marginal cost of extraction.
I doubt the marginal cost of extraction of gold is 1000 USD or the marginal cost of extraction of oil is 120 USD
Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
I never mentioned the value of the USD as a parameter of my model.
It is probable that there is a link between the yield curves and the value of currencies and it is the object of my next work.
The question of increasing demand is not something I discount, what I questioned is the increase of the Marginal cost of extraction and the decrease of demand
Commodities and the Fed: Answering the Skeptics
Interest Rates <br><br>Th... Shape of the Yield Curve as a First Order
Parameter of the Minerals' Price Movements <br><br>Ex... summary:</b>
<br><br>Th... commodities I am studying here are the one with
potentially very low storage cost. <br><br>Mi... when kept in the ground
have a storage cost next to zero. <br><br>In... need of a
reliable, efficient, timely and precise index of the future evolution
of the price of minerals. <br><br>Th... need a mean to evaluate the
risk of a position in order to calibrate the size of
their exposure. <br><br>I observed a strong link between the
evolution of the market price of minerals and the shape of the yield
curve. <br><br>Th... slope of the yield curve indicates the preference of the Market between short-term assets and long-term assets.<br><b...
When the yield curve is inverted, because of profit maximization, Miners and Drillers, as a group, prefer hoarding a higher proportion of their minerals in the ground (their preferred short-term assets) rather than extract them and invest the proceeds in long-term instruments.
<br><br>He... the marginal cost of extraction of minerals becomes irrelevant to their market price as miners stop maximizing their output under the constraint:
<br><br>&l... Price - Their Marginal Cost of Extraction > 0</b>
<br><br>Re... the Marginal Cost of Extraction does not include fixed cost (i.e. exploration cost, cost of an offshore platform...) <br><br>Th... quality of the
index, the slope of the yield curve, is superior to any other known
system. <br><br>It is Timely. <br>It is Accurate. <br>It Gives a
Measure of How Stable Is the Trend and How Safe is the Exposure. <br>The
Model of the Yield Curve is Proprietary.<br>...
<b><u>Trac... Record:</u></b> I post on my Blog, Independent Yield Curve Special Adviser, at the end of each week, the type of yield curve at the close (steep, normal or inverted) and the price movements of the components of my recommended portfolio over the last day of trading.<br><...
<b><center>... the Full Paper in HTML or PowerPoint Format by EMail</center>&l...
<br><br>Sh...
Hamou<br>Indepen... Yield Curve Special Adviser
<br>shalem.ashal...
Alpha
</p>
Interest Rates and the Mineral Bubble: The Hidden Parameter
You say:
"When the yield curve was not inverted the price of gold doubled......as the US dollar went down, gold went up even though the yield curve was positive... "
We are not using the same yield curve and/or we have not the same evaluation of what an normal slope of the yield curve is.
You say:
"The sovereign funds have more money to invest than all of the hedge funds in the world combined...they are investing in hard assets because their respective country's currency reserves are overweight dollars and each country would like to diversify directly but can't without debasing the dollar even further..."
Most of the sovereign funds are from countries which do have mineral ressources one of their way to invest in hard assets, as you call them is precisely to keep their ressources in the ground.
You say:
"What is the Yield curve in say...India,China,Braz... middle East,The Eastern European Bloc,Vietnam, etc....or don't they have any say in the little USA Box you have constructed."
Even though the dollar has gone down and a lot of other currencies are used in the global economy, still nearly all international transactions are made in Dollar and all the minerals are quoted in dollars.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Interest Rates and the Mineral Bubble: The Hidden Parameter
You say:
"Gold, silver, oil, and commodities in general do not follow the yield curve, although they may seem to due to the fact that the fed normally keeps, or tries to keep, yields in more or less lock step with inflation, and inflation forecasts. This time the fed lowered rates in the face of higher inflation, along with printing billions of dollars of bailout money. Watch what happens to the "inflation curve", which commodities do follow."
The fact that minerals are an hedge to inflation is not proven: minerals have gone up when the Fed increased short term interest rates to 2.5% at that time there was next to no inflation.
Inflation has started to increase only six month ago.
Shalom Hamou
Independent Yield Curve Special Adviser
shalem.ashalem@gmail.c...
Interest Rates and the Mineral Bubble: The Hidden Parameter
Yous say:
"The price of oil is going up, even though our reserves are also going up, as of today. So it can't be demand, and it proves that conservation may not change the price of oil."
This is precisely my point saying that the supply is more a function of the yield curve rather than the equilibrium of offer as defined by the marginal cost of extraction and demand.
Your observation is backing my article it is not a rebuke.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Interest Rates and the Mineral Bubble: The Hidden Parameter
You say:
"The fed has been decreasing interest rates for some time. So your first premise is wrong. Bernanke has cut rates 3 full percentage points. Commodities have risen in price throughout the period of those cuts. But Greenspan raised rates 14 times between 2004 and 2006 and commodities rose in price during that time frame also. Go back and do your research again."
I am talking about the shape of the yield curve, more precisely its slope, if the cut of the short term rate causes a decrease of the long term rate that is consistant with an inverted yield curve minerals can go up even if short term interest rate go up.
This is true also when short term rate goes up.
That phenomenon is of such an importance that Alan Greenspan has mentioned it pubicly and called it a Conundrum.
You say:
"Name a miner that is "hoarding reserves". Copper is nearing $4.00 per pound and every miner with a pick and shovel is digging as fast and as hard as they can. High prices are a strong motivation to over produce, not hoard. "
I can't name one miner hoarding reserves, what I am talking is market behavior, if someone is hoarding reserve do you believe he will make that public?
The high market price of something doesn't say anything about your willingness to sell it, if your expectation is that it will increase 1% in price tomorow wouldn't you wait till tomorrow rather than sell it at the "high" price of today?
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Interest Rates and the Mineral Bubble: The Hidden Parameter
Since digital photography has replaced traditional film photography the industrial usage of silver has dramatically gone down.
You say:
"Almost every oz. of silver that has ever been mined has been used, not hoarded, and mining production is dropping even as industrial demand applications are rising."
What I am saying is that minerals are hoarded in the ground, so that remark is consitant with my article.
Hoarding, anywhere else than in the ground is not economically viable because the storage cost are higher and are deducted from the short term interest rateinterest rate.
Interest Rates and the Mineral Bubble: The Hidden Parameter
The fixed cost of extraction are not relevant to the pricing of oil what is relevant is the marginal cost of extraction which is the highest variable cost of all the oil well that are needed to satisfy demand.
It is true , however that there might be some cases where the owner have no command on his output. I am willing to discuss that point here with you.
Shalom Hamou
Independant Yield Curve Special Advisor
shalem.ashalem@gmail.c...
Interest Rates and the Mineral Bubble: The Hidden Parameter
Get Out of Commodities - Barron's
The yield curve gets inverted and mineral goes up, it gets normal or steep the minerals go down with a vengeance: a difference of few basis point make the difference between bull and bear
Thorough knowledge of the yield curve yields to substantial excess returns.
Shalom Hamou
Independent Yield Curve Special Adviser
shalem.ashalem@gmail.c...
Commodity Prices Now Driven By Interest Rates
The yield curve gets inverted and mineral goes up, it gets normal or steep the minerals go down with a vengeance: a difference of few basis point make the difference between bull and bear
Shalom Hamou
shalem.ashalem@gmail.c...