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Julian Simon on Hillary’s Incredible Commodity Deal (mid-1990s revisited)

By Robert Bradley Jr. -- October 17, 2016

“How could Clinton make money when people on average lose? There are two possibilities: She may have been incredibly lucky. Or it may have been fixed that she would gain and not lose. Neither possibility reflects well on her.”

“[T]he investment records of commodities between 1900 and 1975 … showed that the investor would have lost spectacularly by buying and holding commodities; AAA bonds produced a rate of return 733 per cent higher than holding resources.”

  • Julian Simon: 1996 (below)

Remember the Clinton commodity-investment home run back in 1994? One thousand dollars increased one-hundred-fold in ten months of trading. Some of the facts were reported at the time by the Washington Post:

Hillary Rodham Clinton was allowed to order 10 cattle futures contracts, normally a $12,000 investment, in her first commodity trade in 1978 although she had only $1,000 in her account at the time, according to trade records the White House released yesterday.

The computerized records of her trades, which the White House obtained from the Chicago Mercantile Exchange, show for the first time how she was able to turn her initial investment into $6,300 overnight. In about 10 months of trading, she made nearly $100,000, relying heavily on advice from her friend James B. Blair, an experienced futures trader.

The new records also raise the possibility that some of her profits — as much as $40,000 – came from larger trades ordered by someone else and then shifted to her account, Leo Melamed, a former chairman of the Merc who reviewed the records for the White House, said in an interview. He said the discrepancies in Clinton’s records also could have been caused by human error.

This astounding success caught the eye of Julian Simon, himself a sophisticated investor and student of commodity prices. Here is his piece from December 1996:

Two stories about commodities were in the Washington Post and the Wall Street Journal in a single week.

One told how Mr. and Mrs. Elek Lehoczky tried to “supplement his $15,000-a-year retirement income” in commodity futures and lost all their $82,000 stake. The other story said that Mr. Mark Holowesko, a fund manager for Franklin Resources, part of the Templeton group of mutual funds, believes that increased demand for natural resources and energy “will force prices up”.

That eminent investor in commodity markets, Hillary Clinton, can perform a great public service with the column she now writes by telling her readers what the scientific evidence reveals about commodity markets, and the readers’ prospects of making money there.

This is what she should write:

In the market for equity stocks, an average investor with average luck has a reasonable chance of making money in the long run as long as he or she does not trade too frequently; the long-run average increase in stock prices makes that possible. And it is entirely possible for the average investor to make a shrewd assessment for the long run in one or more equities – such as that a new local hamburger chain is so well-managed that it will prosper in the long run, with a consequent increase in stock prices.

But the situation is entirely different in the commodities market. The hard truth is that a person who buys and sells commodities frequently depending on which way the prices are moving is not an investor: playing the commodities market is about the same as going to a gambling casino and playing craps or the slots. The expectation of winning is less than fifty-fifty on every play, and the more plays the more you will lose your initial stake.

The only difference from the casino is that in the commodities market there are two causes of leakage rather than just one.  First, you leak money in the transaction fee. Mr. Lehoczky paid almost as much as his initial stake in fees to his broker for his 900-plus trades. Therefore, it is entirely to be expected that after you have played long enough the “transactions cost” of each play will run your stake down to zero.

You also leak because on average your commodities will become less valuable. Raw materials have consistently fallen in price over the decades and centuries relative to consumer goods. That is, natural resources have been becoming less scarce rather than more scarce throughout history. 

The classic book Scarcity and Growth by H. Barnett and C. Morse documents this trend for the period 1870 to 1957, and my own work does the same for periods up to the present and going back as far as 1800 (where the data are available).  G. Anders, W. P. Gramm (now Senator), S. C. Maurice, and C. W. Smithson assessed the investment records of commodities between 1900 and 1975, and showed that the investor would have lost spectacularly by buying and holding commodities; AAA bonds produced a rate of return 733 per cent higher than holding resources.

A broker or a commodities fund like Goldman-Sachs may be able to show that over some selected short period of time commodities do better. But such a showing is either scientific foolishness — the error of relying on an inadequate sample from a short period of time, rather than looking at the long-term record — or outright fraud. There is no other possibility.

Is it impossible in principle to make money in commodities? No, you could sell short and bet that commodities prices will fall. But you are then still battling the broker’s fee, and there are no markets for you to make short sales lasting over several years, to maximize the effect and minimize the broker’s fees.

Hillary Clinton – clever person that she is – should be expected to know the basic characteristics of a market in which she sinks her money.

You ask: How could Clinton make money when people on average lose? There are two possibilities:  She may have been    incredibly lucky. Or it may have been fixed that she would gain and not lose. Neither possibility reflects well on her.  Either she had dumb luck, meaning she did not understand what she was up against. Or she understood what was happening and closed her eyes to the means of her winning.

Hillary Rodham Clinton has a chance here to show people that she is that rarest of benign public figures: A person who is     willing to smear some egg on her own face by admitting she was a fool or worse, in order to educate the public and save some  number of hard-working folks like the Lehoczkys from losing their life earnings.

How sure am I that the advice for Clinton to give is good advice? I’ll put my money where my mouth is. And yes, I’ll be    delighted to take a position on the other side of any commodities purchase, selling what the other person buys.

[Bio accompanying the above article] “Julian L. Simon (Chevy Chase, MD) teaches business administration at the University of Maryland and is a Senior Fellow at the Cato Institute. His The Ultimate Resource 2 is being published this month by Princeton University Press.”

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