Friday, October 30, 2020

Understanding Commodities: Scarcity, Prices and Revisiting the Simon-Ehrlich Wager 40 Years On

 Commodities are for trading, not investing.

From Quillette, October 13:

Revisiting the Simon-Ehrlich Wager 40 Years On

It is 1980, and you are getting married. Your parents decide to celebrate your nuptials by inviting 100 guests to a wedding reception. The reception cost them $100 per person or $10,000 in total. Fast forward to 2018. Now it is you who is throwing a wedding reception for your child. The guest list has increased by 72 percent (some of the old folk are no longer around, but the cousins have exploded in number). That means that you are now catering to 172 people. The price per guest remained the same (suspend your disbelief and ignore inflation for now), and you expect to get a bill for $17,200. Instead, the bill comes to $4,816, which is less than half of what your parents paid for you. How is that possible, you ask the caterer? The caterer responds that for every one percent increase in attendance, the bill fell by one percent. And so, while the number of guests rose by 72 percent, your bill declined by 72 percent. Surely, things like that don’t happen in real life, or do they?

In fact, that’s exactly what has happened to the affordability of 50 basic commodities between 1980 and 2018. Over those 38 years, the world’s population rose from 4.458 billion to 7.631 billion or 71.2 percent. Over the same time period, basic commodities, including energy, food, materials, and metals became 71.6 percent more affordable on average. For every one percent increase in population, in other words, resources became slightly more than one percent more abundant. Put differently, the time it took to earn enough money to buy one unit in that basket of 50 commodities in 1980 bought 3.62 units in 2018. The compounded growth rate of abundance came to 3.44 percent per annum. That means that the affordability of our basket of commodities doubled every 20.49 years. This relationship between population growth and resource abundance is deeply counterintuitive, yet it is no less true. The facts surprised us, and they will surprise you too.

Generations of people throughout the world have been taught to believe that there is an inverse relationship between population growth and availability of resources, which is to say that as population grows, resources become more “scarce.” That was, historically speaking, true. In the animal world, a sudden increase in the availability of resources, such as grass after unusually plentiful rain, leads to an animal population explosion. The population explosion then leads to the exhaustion of resources. Finally, the exhaustion of resources leads to population collapse. If you take the Theory of Evolution seriously—and we do—you’ll appreciate that human beings evolved from much humbler beginnings and were, as such, much more exposed to vicissitudes of fortune.

Over time, however, humans have developed sophisticated forms of cooperation that increase their wealth and chances of survival. Consider, for example, trade and exchange. As the British writer Matt Ridley observed in his 2010 book The Rational Optimist: How Prosperity Evolves, “There is strikingly little use of barter in any other animal species. There is sharing within families, and there is food‐for‐sex exchange in many animals including insects and apes, but there are no cases in which one animal gives an unrelated animal one thing in exchange for a different thing.” Trade is particularly important during famines. A country struck by drought, for example, can purchase food from abroad. This is not an option available to other animals....


Re: Ridley, yes, yes Northern Rock, he was a greedy idiot that oversaw the first major British bank run in over a century and led yours truly to begin channeling New York tabloid headline style:

Panic on the streets of Britain: Northern rocked, City shocked

Rock, Paper, Scissored

However! That doesn't on its own discredit other observations he might have. For if previous failure was the criteria for dismissing someone out of hand Paul Erlich would not have his comfy endowed chair at Stanford.

June 2015
"UN flags grain price falls as it ups world harvest forecast"
When is science not science? When it's done by Paul -Population Bomb- Ehrlich.
"In ten years all important animal life in the sea will be extinct. Large areas of coastline will have to be evacuated because of the stench of dead fish." Paul Ehrlich, Earth Day 1970
The guy would be an embarrassment a third rate college much less to Stanford of all places.
"I would take even money that England will not exist in the year 2000." (1969)

"Before 1985, mankind will enter a genuine age of scarcity . . . in which the accessible supplies of many key minerals will be facing depletion." (1976)
May 2013 
Last month I tangentially mentioned Paul Ehrlich:
See also: the spectacularly wrong and wrong-headed forecasts made by Paul Ehrlich for which he has been rewarded with an endowed chair at Stanford-definitely a mark against Stanford.
And fully intended to gather some of his wrong-beyond-wrong predictions.
I forgot.
I'll get around to a full post on his doom-mongering but for now here are a couple of his comments on India:

"I don't see how India could possibly feed two hundred million more people by 1980."
-Population Bomb, 1968 

"I have yet to meet anyone familiar with the situation who thinks that India 
will be self-sufficient in food by 1971." 
-Population Bomb, 1968

In the book's 1971 edition, the latter prediction was removed, green revolution and all that.
The World Bank estimates India's population was 511 million in January 1968.
India is feeding 700 million more people than when Ehrlich wrote his 200 mil. line.
Meet M.S. Swaminathan and his students.

There are many, many more examples but for now, you get the point.

"Commodities: 'The Case for Human Ingenuity'":

“When you buy commodities, you’re selling human ingenuity.”
Dylan Grice on why investing in commodities for the long run is a bad idea (SocGen Cross Asset Research, December 2010)