Category Archives: Commodities

Inflation Is About To Disappear

The main factor is U.S. oil production,” the IEA said. “In just three months to November, crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader.


Thomas Peterffy
November 14, 2017

J. Christopher Giancarlo
Chairman, Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581

Re: Dangers of Clearing Bitcoin and Cryptocurrency Derivatives in Same Clearing Organization as Other Products

Dear Chairman Giancarlo:

I am the Chairman and founder of Interactive Brokers LLC, a futures commission merchant and broker-dealer with over $ 3.8 billion in regulatory net capital and over $1.2 billion in client margin funds (Interactive Brokers Group is publicly traded on Nasdaq with a market cap of over $22 billion).

As a CME clearing member, we are deeply concerned with proposals that would allow Bitcoin and other cryptocurrency derivatives to be cleared in the same clearing organization as other products. This letter is to request that the Commission require that any clearing organization that wishes to clear any cryptocurrency or derivative of a cryptocurrency do so in a separate clearing system isolated from other products. There is no fundamental basis for valuation of Bitcoin and other cryptocurrencies, and they may assume any price from one day to the next. This has been illustrated quite clearly in 2017 as the price of Bitcoin has increased by nearly 1000%. Cryptocurrencies do not have a mature, regulated and tested underlying market. The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the real world.

Margining such a product in a reasonable manner is impossible. While the buyer (the long side) of a cryptocurrency futures contract or call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short side) is impossible. Instituting daily price move limits on cryptocurrency derivatives does not solve the problem. In a runaway upward market for example (like the silver market in the 1980’s caused by the Hunt brothers), the futures price gets locked limit-up day after day with little or no trading and the short sellers are unable to cover, leading them (and potentially their clearing firms) to ruin. If the Chicago Mercantile Exchange or any other clearing organization clears a cryptocurrency together with other products, then a large cryptocurrency price move that destabilizes members that clear cryptocurrencies will destabilize the clearing organization itself and its ability to satisfy its fundamental obligation to pay the winners and collect from the losers on the other products in the same clearing pool. Accordingly, even clearing members who do not wish to clear cryptocurrencies because they judge the risk to be too great cannot isolate themselves and their customers from a potentially catastrophic loss from cryptocurrency risk at the clearing organization. Thus, it is no answer for the proponents of clearing these products to suggest that objecting clearing members can simply charge very large margins or not offer cryptocurrencies at all. In a central clearing organization, all members are at risk for the activities of any member (and of the clearing organization itself).

Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy, as critical equity index and commodity markets cleared in the same clearing organization become infected. The only way to protect clearing organizations and their members (and the financial system as a whole) from the unique risks inherent in clearing cryptocurrencies is to require that they be cleared in a separate clearing system, isolated from other products.

We would be happy to discuss this with you or to provide any further information at your convenience.


Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

Crude Remarks

WTI crude is down sharply today after an EIA report that showed substantial increases in inventories of both products and crude itself. Inventories remain well above historical ranges, close to or at record levels.

US production has been increasing steadily and a slowing economy appears to be sapping end-user demand. However, one presumes that most if not all domestic producers have taken advantage of crude’s prolonged OPEC-supported trading in the $50 range to sell their output forward, either in the futures market or by private contract. So for the time being they are more or less indifferent to the market price.

The question is, who is holding the bag for all that $50 crude – obliged to buy at that price or just looking at tanks of the stuff. When do they decide to liquidate their positions before $40 crude becomes $30 and then $20?

No Joy In Mudville

Well the employment report this morning was a big miss to expectations on all fronts. The household report showed a net loss of jobs, and overall the quality of jobs declined as part-time, minimum wage jobs replaced full-time. However, the VIX sellers strode in to pump up stocks, leaving Treasuries as the main beneficiary of the report, with the 30-year yielding 2.86% as I write. TRIN at 2.03 shows that while the VIX sellers hold up the mega-caps, there’s a lot of distribution going on.

Oil is trading weak, in the low 47s. Wages disappointed as the employment mix changed unfavorably, even though shortages of skilled workers are widespread.


Tipping Point

I think we’re close. Very close. Oil gave up the 50s again today, down about 4.5% as I write. Could be a tell. How about this:

Still, dip-buyers as enthusiastic as ever. It works until it doesn’t, then folks get trampled in the rush for the exits. Markets are making no sense because of massive government intervention. Markets are a voting mechanism, but government doesn’t like the results so it suppresses them.

Consumer Prices

Everybody has a bias when it comes to measuring price inflation. Reports like the Devonshire one come out quite frequently, usually complaining that the government indexes understate inflation. They all say, well the numbers don’t reflect reality. The problem is, they don’t know what reality is any more than the government does. My reality and the next person’s are completely different because we buy different things. Cheap loans have allowed universities to raise prices in an outrageous fashion – but our kids have long since graduated so it doesn’t affect me, although anyone putting kids through college is being eviscerated. Consumers react to prices. Technology changes. Quality changes. Fashions change. And so on. All these things make any index pretty much useless, except for making political arguments. So one has to ask, in the famous words of Ms. Clinton – “What difference does it make?”

If you ask someone in Venezuela right now, of course, you would get an expletive for an answer. There is massive consumer price inflation because there are not enough consumer goods to meet demand, and so people are going hungry and without toilet paper. They are driving up prices, trying to outbid one another to compete for what little supply there is. But even in that desperate situation, there is no agreement on what consumer prices actually are, even by disinterested parties. The only way to fix the problem in Venezuela is to get goods back on the shelves. If the Venezuelan government can do that, then consumer prices will reflect the value of the bolivar and general world price levels.

There’s your clue. If you want to measure consumer prices, it is easy. Just use the Big Mac, as the Economist does. It works. 2016 USA Big Mac price inflation was 2.6%. Venezuela Big Mac prices in bolivars:

July 2014: 75

December 2014: 245

July 2015: 485

December 2015: 940

December 2016: 3550

Looks like a pretty decent metric. It tells you what you need to know – there’s a big problem.

But the economy does not run on Big Macs, and I’m interested in the inputs, not the outputs so much. And those are labor and energy. Nothing else much matters.

The End Of Volatility?

This morning, the VIX has a 9 handle. The stock market has gone 8 days without a move of more than 0.2%. Buffett, Grantham and others are arguing that this time really is different. In fact, they agree that the market has reached a permanently high plateau, although they do not dare us those words. Who are these people and what have they done with Warren Buffett and Jeremy Grantham?

Of course it is different. It is always different. History never repeats itself. In the first four months of 2017, according to Bank of America, central banks – mostly the ECB and BoJ – purchased more than $1 trillion in securities, a record rate. So of course that means blue skies forever.

And that blue sky is full of tree-tops. As the Chinese proverb goes, this too will pass. That massive liquidity pumping is not benign, it is a symptom of panic as economies refuse to respond to the therapy the bankers prescribe.

As John Hussman observes, these signs and portents are a call to lace up the gloves, not hang them up. Extended periods of low volatility and excessive bullishness are always followed by the converse. Commodities and trade are quietly collapsing, GDP barely has a heartbeat and subprime defaults are rising, especially in cards and autos, pension funds are struggling, valuations are beyond extreme.

Beware the gathering storm.


I’m holding to my opinion that CADUSD will see 0.65 before 1.00, and here’s a little confirmation bias.

I’m Yelling Timber! CAD’s Going Down!

In addition to the collapse of the housing bubble, commodity prices, especially energy, are going to take a hit. And that could be right now – it looks like the oil longs – the hedgies – are already getting nervous about OPEC’s ability and/or willingness to sacrifice their cash flows in order to bolster the oil price.

The Dog That Didn’t Bark

The boyz pulled out all the stops today, including a spectacular VIX slam, to squeeze the shorts. This travesty of a market responded as usual. However, what is unusual and interesting is that crude oil is not participating in the bullish euphoria. At least so far today, 3pm, it has extended yesterday’s losses as OPEC jawboning has failed to generate any enthusiasm.

Inventories continue to set new records as OPEC production cuts are offset by weaker demand from a slowing economy. My suspicion is that it will be a  serious sell-off in crude that triggers the next major stock market decline.