Friday, October 18, 2019

Oil Tankers and Interest Rates and Scallywags and Time

Earlier today I mentioned the Dow Jones transportation Average and what I thought its recent action might say about the future which of course got me thinking of the intersection of financial and physical, a street corner we visited a few years ago.

October 3, 2018
Yesterday's post on Izabella Kaminska's thinking about journalism and news and crypto and stuff
[voice-over: these tweets] 
Click through for the threads
The comments on both threads are interesting, e.g.
reminded me of one of my all-time favorite Climateer Investing posts.

It has a stock broker-turned-muckraker who couldn't quite give up his promoter ways,

Although Tom Lawson wasn't part of the McClure's Magazine crew: Ida Tarbell, Lincoln Steffens, William Allen White et al, Lawson's exposure of the doings of the Boston copper crowd in his book Frenzied Finance was a bombshell and a timely one; the next year saw the Panic of 1907, initiated by said copper kings, see "Boston Fed: In Which A Copper Speculator's Attempted Corner Causes A Stock Market Crash"

In addition we have a God-awful-ugly oil tanker named for said stock promoter which, but of course, created the world's first major marine oil spill.

Oh, and it begins with the return of Ms. Kaminska after an earlier absence, triggering a reminiscence.

Wednesday, February 3, 2016
Oil Tankers and Interest Rates and Scallywags and Time

Izabella is back.
We didn't see anything by her on Monday or Tuesday but yesterday she was to be found hanging out at the intersection of physical and financial.

She was looking at one aspect of time in the commodities biz (here's another) dropped a "shedload" on unsuspecting reader and asked the question that's been on everyone's collective mind:
"where the hell has the floating contango trade been?!"
However, before we join her here's the first thing that came to mind when I saw her headline,

"Floating cash and carry rates, and the GO SLOW tanker phenomenon":

That ridiculous looking thing is the seven masted schooner Thomas W. Lawson, named for a guy Wikipedia describes thusly:
 "A highly controversial Boston stock promoter, he is known for both his efforts to promote reforms in the stock markets and the fortune he amassed for himself through highly dubious stock manipulations...."
But of course.

Though originally designed as a dry bulk--coal in this case--carrier, after just a few years the Lawson  was converted for use as an oil tanker.
And boy was it slow.

As an extra bit of specialness, when it sank in 1907 it created what was probably the world's first large marine oil spill.

That's what I thought of when I saw the headline.

On to FT Alphaville:

Floating cash and carry rates, and the GO SLOW tanker phenomenon
The world is a confusing and tangled web of interconnections. One such set of interconnections relates to the cost and storage of commodities and how it feeds into the wider economy.

For years we’ve made a simple point: the return on commodities is pretty indicative of the natural rate of return. When the return on money beats the return on holding commodity inventories, commodity companies are encouraged to drawdown on inventories in a bid to turn them into higher yielding monetary holdings. All of which has two effects.

In the first instance this encourages a liquidation effect. Commodity prices fall as the market scrambles to swap oil for cash reserves. In the second instance it reduces the amount of buffer commodity stocks in the economy, because holding anything other than emergency reserves is considered a capital cost.

Essentially, when rates rise, it’s symptomatic of a market call for the distribution of previously pent up/stashed up reserves, inventories and commodities.

To the contrary, when the return on money underperforms the return on holding commodity inventories (after storage costs, depreciation, insurance and maintenance are accounted for), commodity companies are encouraged to load up on inventories at a funding expense to themselves in a bid to benefit from the higher returns that can be achieved in commodity markets. All of which also has two effects. In the first instance it encourages a purchasing effect. Commodity prices rise as the market scrambles to swap cash for oil reserves. In the second instance it increases the amount of buffer commodity stocks in the economy, at an overall economic cost to society (because it was drilled up for nothing: idle capital which now has to be maintained, secured and managed for no real reason at all.)

That’s the arbitrage.

Since 2008, commodity markets have mostly benefitted from the latter situation: appalling returns in money markets diminishing the natural costs of storing commodities and hence incentivising storage, especially at times when a guaranteed risk-free return could be had by way of futures market hedges.
But the ability to secure a risk-free hedge in a way which made this trade worthwhile began to be compromised from about 2013 onwards. Significantly, this was about the same time the market began to wake up to the shale over-abundance threat in oil and the scale of the warehouse oversupply problem in metals markets.

It is our proposition that until that point the market had entirely misconstrued the degree to which money dynamics rather than demand were driving commodity prices — whilst driving commodities into dark inventory stashes — and to what degree the futures markets was behind the curve rather than ahead of it....MUCH MORE
Here are some of the other rabble rousers we've highlighted: 

In 2011 we visited Ida Tarbell in "Ida M. Tarbell: 'John D. Rockefeller: A Character Study'" in part because I wanted a searchable link to the Tarbell collection at Allegheny college and partly because she described John D.'s grandfather, Godfrey as "a shiftless tippler, stunted in stature and mean in spirit".

In 2016, it was Ida's buddy Lincoln Steffens in "Goldman Sachs: Death Of Capitalism Averted, Time For Working Schlubs to Partaay!", again not for the work he was most famous for, in Steffens' case his Shame of the Cities (St. Louis, Minneapolis, Pittsburgh et al) but because of his famously wrong statement about Soviet Russia in a letter dated April 3, 1919: “I have seen the future and it works.”.

It didn't.

In 2015 there was Jacob Riis because I was reminded of one of the photographs from "How the Other Half Lives: Studies among the Tenements of New York":
Jacob Riis Lives! "San Francisco Housing Bubble Goes Subterranean: $500/Month To Live In A Crawlspace"
And along the way Theodore Dreiser got a major link (possibly one of the best business novels ever) in "Switzerland Begins Two-Year Trial of Driverless Buses (plus money, art, glory and sex)"

So yes, more than wary reader might have anticipated and I've probably forgotten a couple.
Circling back to Ida, here's an online version of History of the Standard Oil Company.

Although there are quite a few critiques you can raise about her book it was pretty important and was one of the factors that led to the breakup of Standard Oil in the Supreme Court decision "Standard Oil Co. of New Jersey v. United States" seven years later. So Mr Rockefeller probably considered the book important.

It ranks #5 on NYU's Journalism school's list of the 100 best works of 20th-century American journalism. (via the NYT)