The Oppenheimer Arbitrage

Recently, the always-interesting Dylan Grice at Soc Gen received some well deserved blog virality for his aphorism that to be ‘long commodities is to be short human ingenuity’ – a sentiment with which the current author is fully in accord.

Several years ago – during the first wave of rediscovery of commodities as an investible medium – we used to warn everyone to whom we presented the relevant investment case not to confuse the exigencies of commodity production with the fashionable millennialism of the anti-carbon, Green Malthusians who pose such a threat to our future well-being, whether they are active at the bottom end of the power structure in their most virulently Luddite, Neo-pagan guise or conspiring together at its pinnacle, among the elite Fabians of Davos and the UN.

In our formulation of the issue, we used to say that, as with any good or service which meets an unanticipated demand, the signal encapsulated in any sustained rise in prices would trigger a compensating reaction we called I²E²S² – namely, Innovation, Economisation, and Substitution driven by an Investment guided by Entrepreneurialism and fuelled by Savings.

The overriding caveat, however, was and remains that this beneficial adaptation requires that the free market be allowed to work its magic and that price formation not be deprived of much of its crucial informational content by our dysfunctional monetary and, hence, corrupted financial systems.

If we accept this line of reasoning, you quickly come to see that while Mr. Grice is right in so far as he goes, he has only stated half the case. The true dictum is that ‘to be long commodities is to be short human ingenuity but also to be long political stupidity and avarice.’

This is therefore not so much an outright as a paired trade (or perhaps a call option where Grice’s view constitutes the time decay element): one firmly based on Franz Oppenheimer’s observation that the only two ways to acquire wealth are to make it through honest work, or, once someone else has made it, to take it thence by dishonesty and force, i.e., via the terrifying apparatus of the state.

It is true that it has been humankind’s great good luck that, on the broadest of time scales and over most of its known history, the former has tended to win out over the latter, which is why even the most ordinary of us today, in lands where the sanctity of contract and the rule of impartial law are not completely dead letters, enjoy a material standard of living greater than any of which the tyrants of old could dream. Every man a Sun King, even despite a stultifying bureaucracy and penal levels of taxation.

However, to know that we usually win the struggle against our would-be oppressors is not to say that we may not lose the occasional battle, or even be bested in one or two more protracted campaigns. It is during these reverses that commodities tend to do their best, eschewing the slow, secular path of declining real prices for a medium term advance, often interspersed with spectacular spikes, periods during which the returns to invested capital in other forms are usual exceedingly hard to come by.

War is the obvious case in point: inflation (yet another state-incubated pestilence) is another and hardly a novel one, either. As Karachi newspaper baron and would-be monetary reformer, Sir Montagu de Pomeroy Webb, had already noted in 1912:-

“Reference has already been made to the fact that gold [i.e., money] is now slowly but steadily depreciating in value—that prices are everywhere rising. To all fixed wage earners, and particularly to all workers on the lowest stages of the mechanism of modern production, (i.e., to over three quarters of the population of every nation, India included), this loss of purchasing power involves the cruellest injustices which it ought to be one of the first aims of Government to remove…   promoting the manufacture of millions after millions of [new money]… is simply to swell the volume… available in the world, and so to emphasise the rise in prices which, on every ground,—justice, expediency, sound administration,—it is Government’s first duty to arrest.”

No longer the first duty to arrest, but rather the first duty to ensure, alas!

But to these two, concentrated evils we must add the whole litany of venality, special-interest rent-seeking, and economic illiteracy which may manifest themselves in a far less striking fashion but which, nonetheless, are far more insidious – and certainly more persistent – inhibitors of the capitalist immune system.

With the rights to so much of the resource base of the world claimed as its fiefdom by the dead hand of the state and so subject not just to a lamentably inefficient and ill-directed exploitation, but to a heavy and harmfully inconsistent burden of taxation and regulation, is it any wonder that the scope for the exercise of ‘human ingenuity’ can sometimes seem so cramped?

With voluntary choices about the merits of commodity usage – subject to consumer sovereignty under the discipline of hard budgetary arithmetic – being abrogated in favour of wasteful, collectivist conceits such as biofuel legislation or the forced diversion of time, capital, and effort such to woefully, sub-optimal boondoggles as windmills and sun-catchers, are we surprised when ‘human ingenuity’ does not manage to forestall all occasions for a counter-secular rise in hydrocarbon prices?

When governments – whose own execrable record in providing the framework for the enjoyment of just and transparent property rights thus condemns their people to scrabble unnecessarily at the edges of subsistence – penalise production (as well as encourage precautionary stockpiling elsewhere) by imposing arbitrary export bans, while simultaneously subsidizing the consumption of motor gasoline, or wheat, or cooking oil, in order to placate the immiserized masses, can we really expect ‘human ingenuity’ to alleviate any increase in scarcity in the swiftest and most rational manner?

When, in accordance with the unsung triumph of Silvio Gesells’ Schwundgeld ideas, the global monetary Hoi Phyllakes routinely attempt to atone for each of their preceding, disastrous interventions by promoting yet further debasements of the medium of exchange and by overtly cheerleading the resulting rise in asset prices – which, nowadays, must inevitably include assets based upon the prices of raw materials (a Bad Thing!) as well as those of financial claims upon those same materials’ makers and users (a Good One!) – are we then so shocked to find so much of that same ‘human ingenuity’ being devoted to making money from the process of despoilment rather than engineering solutions to it?

Sadly not.