Felix Salmon

How helium is like mortgages

Felix Salmon
Mar 28, 2013 21:32 UTC

John Kemp might just have delivered the perfect John Kemp column yesterday: 1,700 words on an obscure commodity you probably didn’t even realize was a commodity. In this case, it’s a noble gas: the Federal Helium Reserve (yes, there’s a Federal Helium Reserve) is at risk of imminent shutdown, which in turn threatens everything from the semiconductor industry to MRI scanners. Already, at least one particle accelerator had to delay operations “because of problems obtaining fresh supplies of helium.”

Kemp’s column is based in large part on a 17-page GAO report which includes this chart, showing the seemingly inexorable rise in the price of refined helium. (Another thing you didn’t know: helium comes in both “crude” and “grade A refined” versions.)


As you can see from the chart, the problem here isn’t finding crude helium, so much as it is refining the stuff into something usable. Reports Kemp:

Problems at helium refineries in Texas, Oklahoma and Kansas, as well as start up delays with new refining facilities in Qatar in 2006, led to shortages and rationing, as well as price spikes for some customers.

Reliable and affordable supplies are essential. But around half of the helium used in the United States, and roughly a third of the gas consumed worldwide, is sourced from a stockpile in northern Texas left over from the Cold War.

At the moment, the only way that helium can be sold from that stockpile is in order to pay down the debt which was run up in 1960 building the Texas facility. But thanks in large part to the soaring helium price, there’s virtually none of that debt left — and when it’s all gone, the government can’t sell any helium any more. As a result, it’s pretty urgent that Congress put in place some kind of mechanism to keep the sales going. The alternative would be devastating to many industries including the medical profession.

It also turns out that the US government’s role in the helium market is not dissimilar, in some ways, from its role in the mortgage market. Here’s Kemp:

The cost-recovery pricing formula ensured BLM was originally charging much more for its helium than other suppliers, minimizing the market impact.

But BLM has become such an enormous seller, in a market with few other competitors and substantial barriers to entry, that other suppliers have taken it as a benchmark, and moved their own prices higher to match it.

Essentially, when you’re the US government and you’re a major participant in a market, you can’t help but become the marginal price-setter. Whatever Frannie pays for mortgages becomes the market price for mortgages; whatever the government asks for helium becomes the market price for helium.

In both markets, the government wants out and wants the private sector to take over. But in both markets, the process of disentangling the government from the market is extremely difficult, because it can’t just shut down its operations and leave the market to its own devices.

Because Congress has left the helium problem to the last possible minute, it’s unlikely they’re going to be able to come up with an elegant solution here. Instead, they’ll just kick the can down the road by allowing the stockpile to continue to sell helium for another year or so. But over that time, someone is going to have to work out how to extricate the US government from the global helium market. If and when that happens, I hope that mortgage-minded legislators are paying attention. Because it’s long past time that the government stopped underwriting the vast majority of home loans in this country, and they could use all the ideas they can find.


This article is wrong (in a nice way to Mr. Salmon). The price for Grade A helium is FAR ABOVE what is shown on Figure 2. The obscure nature of the VALUE of helium makes it easy for companies to shroud the actual price they’re getting. The U.S. Government is literally giving away helium to the refiners along the BLM pipeline and they, in turn, are making a veritable fortune.

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Why fuel-economy standards make sense

Felix Salmon
Sep 12, 2012 14:04 UTC

Eduardo Porter has a very good explanation, today, of why it makes much more sense, from an economic perspective, to simply start raising gasoline taxes than it does to implement ever-tougher fuel-efficiency standards. But before we get to the meat of his argument, it’s worth correcting his numbers. Here’s his conclusion:

In Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 86 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.

This is an apples-to-oranges comparison on not one but two different levels. I’m not sure about the gas taxes, I think they’re correct. But the mileage figures are misleading. Yes, UK Fiestas are more fuel-efficient than US Fiestas. But not by nearly as much as Porter suggests.

For one thing, the mileage tests are different. The test you use makes a huge difference, to the point at which the 2025 fuel-economy standard of 54.5 mpg actually corresponds in the real world to cars bearing window stickers advertising 36 mpg. The US Fiesta is already there, or extremely close. On top of that, UK gallons, also known as Imperial gallons, are significantly larger than US gallons. (Which is why a pint of beer in the UK is larger than a pint of beer in the US.) As a result, 85.6 miles per Imperial gallon is 71.3 mpg in American. And only one expensive “ECOnetic” Fiesta model gets that mileage in the UK; the other ones go as low as 42.8 miles per Imperial gallon, which is 35.6 mpg in the US.

I’s hard to say for sure which cars are more efficient, because the tests are different. To be sure, any UK fleet will be more efficient than any US fleet, for three main reasons: the UK has smaller cars, with more manual transmissions, a higher proportion of which are diesel. These are consumer choices driven by high gasoline taxes, and that really makes Porter’s point for him: raise taxes, and people will automatically start driving more efficient cars. But let’s not kid ourselves that Ford could simply import UK Fiestas into the US and overnight start shipping cars getting 86 mpg.

Porter’s central point is absolutely right: there are two ways to reduce the amount of fuel that people use. The first is to make cars more efficient; the second is to reduce the number of miles that people drive. Higher gasoline taxes work on both fronts, while higher fuel-economy standards only work on the first. Indeed, at the margin they increase the number of miles people drive: since more efficient cars cost less to drive per mile, people drive further when they get more efficient cars.

Porter is also right that in countries with higher gas taxes, fuel economy tends to be much higher. But he’s not necessarily right that the higher gas taxes alone are responsible. Porter implies that the US only has fuel-economy standards just because “a tax on gasoline doesn’t stand a chance” of being passed. But the fact is that even countries with very high gas taxes have fuel-economy standards as well. And, guess what, they’re significantly tougher than ours, and they always have been.


The fact is that the US has pretty much the lowest fuel-economy standards in the developed world, and it still will in 2025, even after the new standards are fully phased in. If US carmakers want to be internationally competitive, they’re going to need to develop more fuel-efficient cars anyway, no matter what happens in the US.

As a result, I really don’t buy Porter’s scaremongering about the cost of the higher standards:

According to the government’s analysis, the additional production and maintenance costs made necessary by the mileage rules will rise gradually to about $31.7 billion in 2025 — which will add about $1,900 to the average price of cars and light trucks. There are other costs, too. Some Americans will not be able to afford a new car. Profits of some automakers and dealers are likely to decline. Greater congestion will impose an added burden on health.

The idea here is that the average price of cars will go up over the next 13 years; it’s far from clear why that would decrease profits at automakers rather than increasing them. What’s more, it’s equally far from clear that the average price of cars would go up significantly less if the new standards were not put into place. The question isn’t how much cars in 2025 cost compared to cars in 2012; it’s how much cars in 2025 will cost under various possible future regimes.

And when Porter starts talking vaguely about the health burden of greater congestion, you know he’s grasping at straws. Auto emissions pollution was a problem in the 70s and 80s; it’s not a problem now, with today’s much cleaner cars.

The fact is that fuel-economy standards are a pretty good way of ensuring that carmakers can plan for a more fuel-efficient future, without worrying about competitors undercutting them with gas-guzzlers. If the US government ever comes to its senses and increases the gas tax, or if it — wonder of wonders — actually implements a broader carbon tax, then at that point you would have three different forces conspiring to make America’s fleet more efficient. You’d have the tax, you’d have the fuel-economy standards, and you’d have the general global increase in fuel efficiency.

Without new taxes, we’re down to two; and without new fuel-efficiency standards either, we’d be down to just one. And that’s dangerous, because the US market is big enough that at that point there’s always a risk that we could replay the era of SUVs and Hummers, with manufacturers of small, efficient cars running a risk that they might get crushed if oil prices fall.

Fuel-efficiency standards are a way of preventing car companies from being forced to hedge their bets by working on gas guzzlers as well as efficient runabouts. As a result, those companies can take the money they’d otherwise spend on developing six-ton monsters, and invest it instead in the efficient cars of the future. Everybody wins, and the cost — contra Porter — is negligible. He’s absolutely right that higher gas taxes are a very good idea. But that’s no reason at all not to implement higher fuel-economy standards as well.


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The gold price tells us nothing about inflation

Felix Salmon
Apr 5, 2012 06:06 UTC

Matthew Bishop and I have a fundamental disagreement when it comes to gold. There’s a “canary in a gold mine,” says Matthew: when the price of gold goes up, “it tells you we should worry about why it’s going up, and what it tells you about the value of paper currency.”

Whereas I think it tells you no such thing.

Essentially, we’re looking at two different things. Here’s a chart of the gold price, in green, versus the 30-year bond yield, in orange, over the past five years.


The long bond currently yields just 3.36%, which is the clearest way that the market knows of saying that there’s not going to be any nasty inflation in the future. If you want, you can even get an exact number, by subtracting the 30-year TIPS yield of 0.94%: the market is saying that over the next 30 years, inflation is going to work out at just 2.42%, on average. Which is not anything to get worried about.

Now TIPS are not a foolproof guide to future inflation, but gold certainly isn’t. Indeed, the bond market does more than undermine the gold price as a guide to future inflation: it actually provides a much more credible explanation for the gold price than an inchoate fear of future price increases. After all, if you want to protect yourself against inflation, you buy assets which throw off income which goes up when prices go up, like TIPS, or companies, in the form of stocks. Gold, on the other hand, throws off no income at all, and its price is just as crazy and volatile in real terms as it is in nominal terms.

And if you think that prices in the Treasury market represent an idiosyncratic flight to quality rather than a reliable guide to future inflation, then you can look at an even broader market indicator. As Peter Rudegeair notes, if you look at the $1.246 trillion in the 100 largest US corporate pension funds, more of it is invested in bonds than in stocks. And retail investors, too, are moving their money out of stock funds and into bond funds. Essentially, everywhere you look, the market is showing that it trusts the dollar and that it has no fear of inflation.

Of course, the market might be wrong. But Bishop isn’t telling us to mistrust the market, he’s telling us to trust the market — albeit just one tiny slice of it, in the form of the gold market. That’s silly. If you’re going to trust market signals, you should trust the big market signals which are sending a clear message, rather than the noisy and volatile ones which mean whatever you want them to mean.

Why is the price of gold going up? Simple: when interest rates are this low, bonds are increasingly unattractive as a source of yield, so you might as well just buy stuff — call it SWAG — instead. SWAG doesn’t have any yield, but then again, neither does cash, really. And when there aren’t attractive investments out there, then it becomes more attractive to spend money rather than to invest it. As a result, people spend their money on SWAG, and some of them even kid themselves while doing so that by buying their SWAG they’re making some kind of investment. They’re not. And they’re certainly not producing a reliable guide to the future status of the US dollar.


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How to get $12 billion of gold to Venezuela

Felix Salmon
Aug 23, 2011 01:59 UTC

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.


What is the big deal anyway ? India imports nearly 800-1000 tons of physical gold every year and China is close to that number. All this gold is used for jewelry and hence actually travels every year. Obviously, commercial modes are well established to transport physical gold in hundreds or even thousands of tons a year.

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Chart of the day: Commodity flows

Felix Salmon
May 16, 2011 13:35 UTC

This chart comes from a presentation on commodity ETFs by my Reuters colleague Andy Home:


QE, of course, only happens when interest rates hit the zero bound, so it’s impossible to disentangle the effects of QE from the effects of G3 interest rates all coming down to 1% or lower. But the effect of all these investment flows is clear: if you look at commodities as an asset class, total commodity assets under management have risen from just over $150 billion at the end of 2008 to over $400 billion today.

The impossible-to-answer question is how much of that investment is leveraged, in one way or another. The lesson of the commodities crash is ultimately a hopeful one: it didn’t set off any panic, and Main Street didn’t suffer much in the way of visible losses. And I don’t think that Wall Street has a leveraged long position in commodities in the same way that it had a leveraged long position in subprime in 2008. So the systemic risks posed by any commodities bubble are probably small.

Still, this is clearly now a speculators’ market, and that’s bad news for commodity-reliant industries. They’re up against finance types, now, which is never a pleasant position to be in. The crash will come — but only after real-world end-users have hedged their needs at very high prices.

Why commodities crashed

Felix Salmon
May 10, 2011 15:37 UTC

If you want to see market reporting done right, I can recommend the 2,000-word Reuters special report on Thursday’s commodities crash. It doesn’t just pick a random news event or gesture vaguely at “worries about economic growth” while saying what prices did: it looks at the mechanisms behind the market moves and what might have caused them.

It’s worth underlining that Thursday’s percentage declines in commodities like silver and oil would count as a full-on disaster if they occurred in the stock market. Commodities markets are rowdier places than stock markets, however, and the only people who really got hurt are sophisticated investors who can take their medicine.

The move was certainly accelerated by the rise of algorithms and high-frequency traders, who have moved quite aggressively from stocks into commodities of late. These black boxes can go from being very long to very short in an alarmingly short space of time, and I suspect that many of them made money, rather than lost it, in the volatility.

But there was also a sense that this move had to happen. Between early February and early May, the yield on the 10-year Treasury bond fell from 3.7% to less than 3.2%. That’s a massive move in Treasury yields, which indicates that market fears about inflation are abating significantly. At the same time, however, the price of silver — a classic inflation hedge — rose from $27 to $47. One of those two markets was wrong — and it was much more likely to be the thin silver market than the Treasuries. Silver was bound to fall in price; the only question was when.

When the inevitable silver crash happened, it took down other commodities like oil with it. That’s because of all the speculation in the market, and the fact that funds which speculate in silver tend to be exactly the same funds speculating in oil. When you get a big margin call in silver (and margin requirements on silver had just been raised before the crash), then you have to sell some of your other holdings to meet that call. And your most liquid holding is likely to be in oil.

At times of volatility, correlations move towards 1. We saw that in every market during the crisis, and we saw it again in commodities on Thursday. Which is why protecting yourself with diversification is so dangerous. Just when you need the protection, it disappears.


“China, the world’s fastest-growing consumer of commodities, also is tightening monetary policy to tamp growth rates and control inflation, raising the prospect of a slowdown in demand for oil.”

Surely Reuters means a slowdown in the *increase* in demand for oil? Oil demand in barrels won’t get smaller just because China’s needs this year are only 8% more than last year instead of 10% more, meaning monetary changes in China will not adversely affect the current price of oil, only the futures price. Overall, the oil price is unlikely to itself go down, based on fundamentals such as this.

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Fat tail of the day, oil edition

Felix Salmon
May 5, 2011 19:04 UTC

This is what a fat tail looks like: crude oil is down 8.8% today. According to my colleague John Kemp, who knows everything, the standard deviation of oil prices, on a daily basis, is 1.64%. Which means that today’s price movement is equal to 5.4 standard deviations.

In a normally-distributed world, 5-standard-deviation moves never happen. In this world, however, such moves can happen even when there’s no news at all. (Reuters, for what it’s worth, blames “concerns about economic growth and monetary tightening”, which is code for “we have no idea why this is happening, or whether there even is a reason”.)

I do think today’s price move should give pause to anybody who dismisses theories that high prices in oil or other commodities are the result of financial speculation. Clearly there’s no fundamental reason to explain this move: most likely the market was just very long oil, and does what it always does in such situations, which is to move in the direction which causes the greatest pain to the greatest number.

For most of us, these kind of intraday gyrations, rare though they are, are pretty much irrelevant. But they do inflict a toll on the economy, as companies feel the need to hedge such things. And all hedging operations involve some kind of profit for Wall Street.

All of which is to say that a financial-transactions tax looks particularly attractive on days like this. It would reduce speculation, and raise lots of money. What’s not to like?


The margin requirements were raised, and speculators push leverage to the limit. They had to cover and cover fast.

This is the definition of speculation and in our current overly financialized world it happens far often than Gaussian math can accomodate. The earlier comment about Mandelbrotian math being more accurate is correct.

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Why Glencore’s going public

Felix Salmon
Feb 25, 2011 15:39 UTC

I can highly recommend the big Reuters report on Glencore, a company likely to go public some time in the second quarter at a valuation somewhere in the neighborhood of $60 billion.

Even before the IPO, there’s lots of speculation about what Glencore will do with the proceeds, which could be $16 billion or more. Top of the list is further growth — a merger with Xstrata alone would probably suffice to push the capitalization of the combined company over the $100 billion mark. The deal will also mean a huge uptick in the wealth of Glencore’s partners, who currently cash out at book value. Given that the company is likely to trade on a multiple of 3x book, no one’s going to be doing that any more.

Glencore has been a highly secretive operation from its earliest days under Marc Rich, and constitutionally hates the transparency involved in being public. So if even Glencore is capitulating, what does that say about my thesis that the stock market is increasingly irrelevant?

For one thing, I think it says that Glencore is run by highly-aggressive traders who judge themselves and others on how much money they have. Billionaire CEO Ivan Glasenberg is no philanthropist, and neither does he feel, as many Silicon Valley founders do, that what their companies do is more important than how much money they make. Far from mistrusting speculators, Glasenberg is one. So the only real reason to stay private is the question of privacy. But Glencore already gives enormous amounts of financial information to so thousands of people around the world — it told Reuters that “full financial disclosure is made to all of the company’s shareholders, bondholders, banks, rating agencies and other key stakeholders.” As a result, anybody important who wants to know details of Glencore’s finances can probably find out pretty easily.

Going public will certainly mean more press for Glencore — and given what the company does, more press necessarily means more bad press. It’s hard to position yourself as a major force for global good when your main businesses are mining and commodities speculation, and when you generate a lot of your edge by being willing to do deals with highly-corrupt politicians that other companies won’t touch. But Glencore’s bosses are hardly the first people to make the calculation that for hundreds of millions of dollars, they’re OK with being hated.

There’s also a sense of statistical inevitability about going public. You can stay private for decades, but the option of going public will always be there, and there will always be charming investment bankers telling you what a wonderful idea it is. A single moment of weakness, and it’s done. And once done, it’s more or less irreversible. A unified and single-minded family like the Cargills can stay resolute — but that’s an impressive feat, and if Glencore starts draining Cargill’s milkshake after it goes public, even the Cargills’ resolve might waver.

This part of the Reuters report stood out for me:

Glencore’s arrival in the FTSE would intensify the London exchange’s shift into natural resource firms. Fox says the increasing domination by a single sector is a “big headache” for smaller British investors who want a diversified portfolio. “It concerns me as much from a financial perspective as a moral perspective,” he says. “Customers will not expect that when they invest in a mainstream UK growth fund that a third of their money will end up in commodities.”

The point here is that the stock market, at least in the UK, is becoming a commodities play — much as the Russian and Brazilian stock markets have been for some time, not to mention Canada and Australia. Betting on commodities is all well and good, but it’s not the same as investing in the economic growth of a country. “While the stock market is certainly not a perfect reflection of corporate performance,” Ira Millstein tells me, “it is one measure.” That’s true — but it’s a measure of declining utility. The Glencore IPO only serves to underline how the stock market is more of a reflection of global asset values and of financial speculation than it is of underlying corporate performance in the real world.


I believe that a impetus for Glencore going public is that many of its senior executives are scheduled to retire in the next few years. Glencore typically repurchases the equity of people leaving the company. Making the repurchases necessary to repurchase the equity of these senior leaders would be a significant drain on Glencore. While Glencore could manage these payments, going public should allow the retiring senior executives to retain their equity – and prevent the need to purchase the shares. Of course, this motivation supplements the others mentioned above.

Glencore definitely has internal lawyers now, although that may be just another preparation for the IPO.

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The WSJ vs Christopher Pia

Felix Salmon
Aug 20, 2010 13:43 UTC

The WSJ is going big today on this shocker from Susan Pulliam, splashing it across the front page of both the newspaper and the website:

The hedge-fund industry has been rocked over the past year by allegations that fund managers reaped illegal profits by trading stocks based on inside information. The investigation of Mr. Pia and the case against Moore suggest that commodities trading also can be an insiders game—a market where big investors may be able to throw their weight around to move prices to their advantage.

Really: that’s the shocker. Apparently traders sometimes try to move markets in commodities! Which, of course, is something so ingrained in popular culture that they were making blockbuster movies about it back in 1983.

Is the problem getting worse? Pulliam suggests that it is, talking about “a kind of improper trading that regulators worry is becoming more widespread”:

Cases involving investors trying to artificially move commodities prices are nothing new. But abusive trading practices have become more prevalent, says Bart Chilton, a CFTC commissioner, because regulators, until recently, have lacked the tools needed to aggressively go after and punish wrongdoers.

Over the long term, supply and demand dictates prices in the commodities markets. What concerns regulators, for the most part, are efforts to move prices over the short term. The growing number of large investors speculating in commodities has created “aberrations” that can present the “opportunity for foul play,” says Mr. Chilton.

This doesn’t make a great deal of sense. Commodities markets have always been largely unregulated, so that in and of itself wouldn’t explain why this kind of trading might be increasingly common. And if the number of large investors in the market is growing, why would that increase the frequency of price aberrations, which are normally a symptom of illiquidity?

Pulliam concentrates on one trader, Christopher Pia, but the only activity she ever talks about involves him buying large amounts of a certain instrument in the hope that doing so would move the market. That might be abusive, but it’s also been a standard part of the commodity-trading arsenal for decades. It’s also very dangerous for the trader in question: if the market gets wind of what he’s doing, he can lose a huge amount of money very quickly.

What’s more, I’m pretty sure that Pulliam is off by a factor of 100 when she tries to explain one of Pia’s trades:

In 2008, for example, Mr. Pia entered into a trade under which Moore would get a $25 million payout if the New Zealand dollar rose to a certain level. Goldman Sachs Group Inc. was on the hook to make the payout. If that level wasn’t hit, Moore stood to lose $1 million.

As the trade’s expiration date approached, the New Zealand dollar was trading about 25 cents below the price at which the contract would pay out. Mr. Pia got clearance from top Moore officials to spend billions buying New Zealand dollars, hoping the currency would hit the set price, according to the person with knowledge of the trade. Fifteen minutes before the contract expired, Mr. Pia began buying billions of New Zealand dollars, lifting the currency to the price at which Moore was able to collect the $25 million, the person says.

Gary Cohn, Goldman’s president, later congratulated Mr. Pia on the trade, the person says.

The kiwi dollar exchange rate is certainly volatile, but no trader would ever dream of trying to engineer a move of 25 cents. A quarter of a cent, maybe. And as Goldman’s reaction shows, this is the kind of trade which is more likely to get respect on Wall Street than to trigger an investigation into market manipulation.

The investigation of Pia and Moore seems to be par for the course when it comes to these kind of things: allegations are made, questions are asked, and at the end of the day everything’s pretty inconclusive. The trader in question has plausible deniability (“Mr. Pia said his last-minute timing was intended to thwart rival traders who often would try and buy ahead of Moore’s orders”), and no excess profits seem to have been made.

It’s possible that the ongoing CFTC investigation into Pia’s trading will result in some kind of censure or sanction. But even if it does, that’s not big news, it’s just the CFTC doing its job. I know that this is a slow news month, but I still can’t see much of anything here, let alone the “Wild Trading in Metals” promised in the WSJ’s headline. I’m sure that Moore Capital accounted for most of the volume in palladium for a few minutes on a few separate days. But that really is not a big deal, and it’s pretty sensationalist of the WSJ to compare it to much sleazier and much more illegal insider trading or pump-and-dump schemes in the stock market.


College basketball players have served serious prison time for point shaving where the only impact is the game was a little closer than it would have been.. Yet, when gamblers disrupt currency markets and commodity markets, you guys all yawn. What planet do you guys live on? This kind of manipulation has consequences for innocent people. Several times speculators have driven the price of natural gas through the roof, causing families and retirees to struggle to pay their utility bills. The commodities bubble of 2008 did serious damage to the livestock industry, and led to food riots across the world.

You guys do not live in a vacuum. Speculation has consequences for people who live in the real world, and you don’t seem to care.

Posted by randymiller | Report as abusive