Wednesday, December 15, 2010

Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’"

Well duh.
Commodities are for tradin' not investin'.
Which makes one wonder how CalPERS and the other big institutions got snookered by Goldman Sachs into being "Long-Only Index Investors".

Do you, gentle reader, think for one minute that Goldman's crown jewel, Alaron Trading, just buys and socks the stuff away?
Of course not. Alaron makes directional bets, both long and short, to take advantage of the movement.
To a competent trader, volatility is your friend.

In the case of the grains the darn things are mean-reverting.
If wheat doubles in price, the acreage devoted to wheat goes up and prices come down. The substitution effects at the producer level are predictable if not timable:
better net profit for soybeans than corn? Beans it is boys!

In the metals and in energy the more important substitutions are at the user level. If a utility's cost of a BTU is cheaper when gas-fired, the coal orders slow down.
And over-arching everything is the point that Mr. Grice is making. Human beings are adaptable.

From MarketBeat:
Some interesting thoughts from Dylan Grice, of SocGen’s research shop on the bullish push higher in commodities markets. Short version: Keep in mind that commodities are for traders, not buy-and-hold investors.
A bushel of wheat, a lump of iron-ore or an ingot of silver today is identical to a bushel of wheat, lump of iron-ore or ingot of silver produced one thousand years ago. The only difference is that they’re generally cheaper to produce because over time, human innovation has lowered the cost of production. When you buy commodities, you’re selling human ingenuity....MORE
I get a bit intense on the subject of human ingenuity, adaptability and innovation. In a 2008 post, "Solar: Peak Gallium? Indium?" I closed by saying:
You know how this ends up?
We'll figure something out. That is really the only claim to fame of Homo Sapiens, singular and collectively.

But, it's a pretty good one.