Tuesday, March 12, 2013

Keynes in the Commodities Markets

The paper is formally titled "Speculation and Regulation in Commodity Markets: The Keynesian Approach in Theory and Practice" but for right now my interest is Keynes' trading abilities not the regulatory questions.
We've looked at Keynes' trading in equities (I'm pretty sure he traded on inside information)* and foreign exchange and briefly at his adventures in commodities. Here's a whole lot more, the book has 13 authors.

A quick word for folks new to commodities theory, don't confuse "normal backwardation" with backwardated markets.

From the Sapienza – Università di Roma via the Munich Personal RePEc Archive, Feb. 2, 2013:
TABLE OF CONTENTS
Introduction
Maria Cristina Marcuzzo 
I. Keynes as speculation theorist and practical speculator
1. From speculation to regulation: Keynes and primary commodity markets
Maria Cristina Marcuzzo 
2. Keynes’s activity on the cotton market and the theory of the ‘normal backwardation’: 1921-1929
Carlo Cristiano and Nerio Naldi 
3. Keynes’s speculation in the London tin market: 1921-1930
Nicolò Cavalli and Carlo Cristiano
4. An analysis of Keynes’s investments in the wheat futures markets: 1925-1935
Tiziana Foresti and Eleonora Sanfilippo

...MUCH MUCH MORE (286 page PDF)
*In our April 2012 post titled "Keynes The Stock Market Investor" we see differing opinions on the trading-on-material-non-public-information question.
The Wall Street Journal's Jason Zweig who directed us to the Chambers, Dimson paper says:
...But, to paraphrase Keynes’s friend Bertrand Russell, it’s important to distinguish what you wish were true from what you believe is true.

You may wish that Keynes traded on privileged information, but that doesn’t make it true. There is zero evidence that he ever traded on inside information; furthermore, as my column pointed out, Keynes’s investing performance improved when he stopped relying on his own macroeconomic forecasts....
While here are Dimson/Chambers on the question, page 29 of the paper:
...Was Keynes an insider? One difficulty in answering this question is that the investment community then did not have the same view of insider trading that we have today. Other than directors who owed fiduciary duties to their company not to trade on price-sensitive information, insider trading by investors in general was not subject to regulation until 1980 in the UK (Cheffins, 2008: 39–40).

It is certain that Keynes was in receipt of what today would be deemed price-sensitive information – he was, for example, aware of a change in the UK bank rate before it occurred in 1925 (Mini, 1995). However, it is impossible to discover how frequently and the extent to which he exploited such information in his trading. What we can say is that he would most certainly have regarded the exploitation of inside information as substantiating the view of stock trading as a “low pursuit” rather than a “game of skill” (CWK XII, 109)....
Not that there's anything wrong with the insider trading if that's what he did, I bring it up as a component of  his alpha generation rather than for legal reasons.
You can download Chambers, Dimson (2012) which is now the paper on Keynes, the Chest Fund and its equity investments at the SSRN link, above.

In 2009's "John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)" I repeated a comment I had left at Clusterstock:
Neil,
Although Keynes ran King's College's Chest Fund 12-fold, £30,000 to £380,000, '27-'45,
the record is decidedly mixed.
Drawdowns of 32.4% and 24.6% in '30 and '31 exceeded the losses in the London market and had the fund at 1/2 it's 1927 value.

1932's 44.8% and '33's 35.1% return's were coincident with and subsequent to, Britain's departure from the gold standard.
As an economic adviser to the government Keynes was well aware of the coming devaluation.
Although King's hasn't opened all the trading records, there is strong evidence to suggest that Keynes was trading on inside information.

Some things never change.
and we note:
...In a 1983 paper "J.M. Keynes' Investment Performance: A Note" the authors are dubious of his performance, without casting the aspersion that I do in my comment. They on the other hand have a great tidbit:
...Investments in commodities were more substantial. The highest annual gain was for ₤17,000 from September 1936 to August 1937 and the highest annual loss, mainly in lard, for ₤12,600 in the following twelve months...
One final note, Jazon Zweig is pretty knowledgeable about Keynes, and his views are not to be taken lightly.
For some comments on the Keynes (attributed) quote "Markets can stay irrational..." see Mr. Zweig's MarketBeat post "Keynes: He Didn’t Say Half of What He Said. Or Did He?".