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A Shuffle of Aluminum, but to Banks, Pure Gold

nytimes.com

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Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#31

Post by derleth »

patio11 wrote: post #20
guard-of-terra wrote: post #3

Could not figure out what is going on from reading the page one, can somebody explain using simple terms?

Some people believe that the future price of aluminum is going to be sufficiently higher than the prevailing price today that they would prefer to pay to store their aluminum and sell at some point in the future. The NYT correctly suggests that this increases the price of aluminum today and that this generates (literal) rent for people who own warehouses. The NYT is furious about it, because they are not envisioning…

> the possible future headline "Women and poor worst hit as consumer good prices skyrocket due to aluminum shortage."

Actually, I'd expect rolling blackouts long before an actual Al shortage.

(Reasoning: Aluminum is one of the most abundant metals in the crust, but it's never found pure. It's always found in an ore, and the cheapest way to refine the ore is very electricity-intensive. As a side note, aluminum was once a fairly expensive metal; the tip of the Washington Monument is made out of it, which was an extravagant expense at the time.)

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#32

Post by msandford »

MikeCapone wrote: post #25
patio11 wrote: post #22

Earlier quoted context omitted.

They're presumably avoiding that because they'd have to answer the uncomfortable question "And how many billions of dollars have speculators stolen from hardworking Americans by hoarding aluminum since the Reuters piece?" "Er, the spot price is down by a third, actually."

People need to realize that if you hoard something, you might be reducing supply now, but if you want to make money you have to eventually sell and that increases supply at some later point. There's no cure for high prices like high prices, and vice versa.

Goldman will probably pump-and-dump the warehousing business onto someone unsuspecting.

1. Buy up metal warehouses

2. Stockpile metal, thus reducing market supply

3. Watch as market price increases and rental income holds steady

4. When market prices have risen enough (say 30-50%) and you have a giant stockpile of metal, put the whole business up for sale

5. A giant inventory coupled with high prices and increasing cashflow for the last several years makes the business very attractive to someone with money but not a lot of sophistication

6. Goldman makes a boatload and doesn't have to figure out how to unwind the mess

7. Unsuspecting buyer goes bankrupt within two years

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#33

Post by msandford »

jbert wrote: post #29
temphn wrote: post #10

The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation. And sure enough, here it is: industry rules require that all that metal cannot simply sit in a warehouse forever. At least 3,000 tons of that metal must be moved out each day. Without looking I'd bet this is some kind of "anti-hoarding" provision, probably intended to prevent…

Could you elaborate on how the "metal must be moved" rule incentivises delayed shipments?

It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..."

If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing the activities then rules are an absolute good. But all those assumptions and assertions I made rarely hold in the real world. So their usefulness tends to be less of an absolute good and more of a mixed bag.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#34

Post by jbert »

msandford wrote: post #33
jbert wrote: post #29

Earlier quoted context omitted.

Could you elaborate on how the "metal must be moved" rule incentivises delayed shipments?

It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..." If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing…

I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#35

Post by msandford »

jbert wrote: post #34
msandford wrote: post #33

Earlier quoted context omitted.

It allows people to do just barely enough to satisfy the rule and nothing more, which can be a problem if the rule is set too low. And to silence their (potentially legitimate) critics with the line "we comply with X, Y and Z regulations..." If the rule system can't be gamed and those making the rules aren't allowed to participate in the activities they're ruling on, nor can they take kickbacks from those performing…

I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.

Because the "metal must be moved" number is way too low.

Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just those 30 minutes and nothing more would be completely logical.

That's the situation facing these metal warehouses. Being efficient and shipping metal faster than absolutely required gets them no short term benefits and does them short term harm: reduced rents.

The problem isn't necessarily the "metal must be moved" rule it's the quantity in the "metal must be moved" rule. So some people say "fix the rule" and others say "abolish the rule" because of substantially different world views. Some people like maintaining and fixing code; others like organizing differently to reduce the amount of code necessary.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#36

Post by jbert »

msandford wrote: post #35
jbert wrote: post #34

Earlier quoted context omitted.

I still don't see how the claim made of "The only way that Goldman could possibly make more money by artificially delaying shipments would be because of a market-distorting regulation." gibes with "metal must be moved" as the offending regulation.

Because the "metal must be moved" number is way too low. Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just…

> Because the "metal must be moved" number is way too low.

I can see that the regulation might be ineffective because of that.

But I don't see how anyone could claim such a regulation makes it more profitable to make late shipments.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#37

Post by MikeCapone »

msandford wrote: post #32
MikeCapone wrote: post #25

Earlier quoted context omitted.

People need to realize that if you hoard something, you might be reducing supply now, but if you want to make money you have to eventually sell and that increases supply at some later point. There's no cure for high prices like high prices, and vice versa.

Goldman will probably pump-and-dump the warehousing business onto someone unsuspecting. 1. Buy up metal warehouses 2. Stockpile metal, thus reducing market supply 3. Watch as market price increases and rental income holds steady 4. When market prices have risen enough (say 30-50%) and you have a giant stockpile of metal, put the whole business up for sale 5. A giant inventory coupled with high prices and increasing c…

Maybe. Or maybe it'll backfire and they'll lose a lot of money.

If it was that easy, it's all that everybody would do. But it's harder than that (just ask the Hunt brothers), I believe.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#38

Post by msandford »

jbert wrote: post #36
msandford wrote: post #35

Earlier quoted context omitted.

Because the "metal must be moved" number is way too low. Imagine that your boss set metrics for you that you could knock out in 30 minutes, but the boss is paying you to be there for a full 8 hours. And imagine that if you worked harder than that, your reward was actually less pay. Also imagine no room for advancement. Someone from outside your company might say that situation is effed up. But to you working for just…

> Because the "metal must be moved" number is way too low. I can see that the regulation might be ineffective because of that. But I don't see how anyone could claim such a regulation makes it more profitable to make late shipments.

Currently the way the regs stand, people have to keep paying rent until the metal leaves the warehouse. So if the owner/manager of the warehouse drags its feet on every shipment and every shipment takes an extra week, that's a lot of rent.

One of the proposed solutions is that the warehouse isn't allowed to charge rent once the order to distribute the metal has been made, but that's not in the regs yet. It's merely propsed. Right now they do charge and as such have every incentive to delay as long as possible.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#39

Post by msandford »

MikeCapone wrote: post #37
msandford wrote: post #32

Earlier quoted context omitted.

Goldman will probably pump-and-dump the warehousing business onto someone unsuspecting. 1. Buy up metal warehouses 2. Stockpile metal, thus reducing market supply 3. Watch as market price increases and rental income holds steady 4. When market prices have risen enough (say 30-50%) and you have a giant stockpile of metal, put the whole business up for sale 5. A giant inventory coupled with high prices and increasing c…

Maybe. Or maybe it'll backfire and they'll lose a lot of money. If it was that easy, it's all that everybody would do. But it's harder than that (just ask the Hunt brothers), I believe.

The difference is that the people at GS have relationships with many (most, all?) of the wealthy people in the world. That makes finding a buyer who has enough cash but not enough brains easier.

I'm not suggesting that it's a slam dunk and everyone could be doing it. But being one of the premier investment banks in the world does have some perks.

Re: A Shuffle of Aluminum, but to Banks, Pure Gold

#40

Post by MikeCapone »

msandford wrote: post #39
MikeCapone wrote: post #37

Earlier quoted context omitted.

Maybe. Or maybe it'll backfire and they'll lose a lot of money. If it was that easy, it's all that everybody would do. But it's harder than that (just ask the Hunt brothers), I believe.

The difference is that the people at GS have relationships with many (most, all?) of the wealthy people in the world. That makes finding a buyer who has enough cash but not enough brains easier. I'm not suggesting that it's a slam dunk and everyone could be doing it. But being one of the premier investment banks in the world does have some perks.

Agreed. There's definitely a very high chance of information asymmetry when you are dealing with GS. All I'm saying is that there's enough reflexivity (Soros' term) and unknowns in the market that even very smart people like them can lose money.

I think we're probably saying the same thing, just coming from different ends of it.

Cheers.

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