The History of the Future
27th of March, 2018
The History of the Future – sounds like some sort of oxymoron doesn’t it? Bit like the title to my favourite movie “Back to the Future”.
We say that the Cycle must repeat over and over again while the 5 Drivers of the Economy remain in place. We also know that these drivers have been in place for hundreds if not thousands of years.
These Economic drivers are built into the DNA of our economic system.
The role of the speculator can NOT be understated.
However, the speculators go back much further than 1980’s Wall Street’s Gordon Gekko or even Jessie Livermore from the 1930’s or JP Morgan who saved Wall Street back in 1907……
No, let’s go back to Mesopotamia 1750BC and the sixth king of Babylon – Hammurabi.
Hammurabi; the King of Babylon
Hammurabi set down in stone 12 laws and displayed them publicly for all to see, the most well-known being, “Eye for an eye, tooth for a tooth.”
From what I can glean, Hammurabi, was the first person to legitimise the role of the speculators. In fact, he literally wrote it into stone! (sorry couldn’t resist that pun..)
Hammurabi’s law clearly said that goods and assets had to be delivered for an agreed price at an agreed future date.
According to Investopedia.com the definition of a futures contract is:
“A futures contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.” Investopedia.com
What do you reckon? Sound like Hammurabi’s law to you?
But what about the Greeks I hear you say?!
Yes, Mesopotamia didn’t rule for ever and we all know that the Greeks are all over the concept of speculation. So much so that Aristotle even wrote about it in the story of Thales.
This story tells the tale of a poor philosopher from Miletus who created a “financial device, that involves a principle of universal application.” Thales used his skill and this financial device in forecasting future weather events that would affect the olive harvest.
It turns out that he was pretty good at it and soon became a wealthy man by correctly cornering the supply of olive presses (ie option contracts) or olive prices (futures contracts) depending on which version of the story you read.
Our History of the Future doesn’t stop there. Next it was the Japanese!
Did you know that when Japan’s feudal lords and samurai ruled Japan, rice was the favoured currency? So much so that during this time the feudal lords and samurai warriors weren’t paid in gold or silver but rather cold hard rice!
Rice, being the Bitcoins of the day, drove the rise in status and importance of “The Rice Broker” as the samurais and feudal lords needed places like the Dojima Rice Exchange to get their cash.
The ingenious brokers on the Dojima Rice Exchange are in fact credited with the introduction of Japan’s first paper money (which spread as quickly as the cash thrown by “Helicopter Ben Bernanke” in his free spirit Quantitative Easing days) throughout Japan.
In 1697 Osaka rose to prominence with Shogunate (the government of the time) “granting the first licence” to open and operate a Rice Exchange.
And like sands through an hourglass, in just a few short years after the first few grains of rice changed hands we had the birth of the modern futures exchanges.
Let’s not forget our Commonwealth heritage!?
Since 1570 the red coats had been trading stocks on dodgy unregulated exchanges that usually had a front as a “Coffee House”. The London Metal Market and Exchange Company (LME) was not officially founded until 1877 when the Brits joined the party.
Trading on the LME covers an impressive amount of the periodic table – Aluminium, Cobalt, Copper all the way through to Lead, Tin and Zinc!
Staggeringly, its said that today, the total value of futures trading on the LME exceeds $12 TRILLION; more than 40 times the value of world metal production…
Yankee Doodle Dandy
Not to be outdone, the Yanks created the Chicago Board of Trade (CBOT) in 1848 with the first contract being corn.
CBOT spawned the Chicago Produce Exchange which was renamed the Chicago Butter and Egg Board and then after the war became Chicago Mercantile Exchange or CME.
The CME holds a very special place in history.
See in 1972, after the breakdown of the Bretton Woods accord currency and under the creative direction of a Polish/American attorney and finance executive named Leo Melamed, the CME introduced financial futures.
The revolution had started as now you could trade futures on the British pound, Canadian dollar, German Mark, Japanese yen, Mexican peso, and Swiss franc all within a division of the CME known as the International Monetary Market, or IMM.
Voila, the world of speculation was changed forever!
Next came the interest rate contracts, then Eurodollars and then the big daddy of them all; the first successful stock index futures contract based on the S&P 500 Index.
Now the CME has gone totally bonkers as it offers futures on Bitcoin….!
But now 45 years after Leo Melamed’s financial brain wave, the Chinese are finally joining the party!
On March 26th this year, Beijing launched its long-awaited crude futures contract.
Believe it or not, but China now imports more oil than anyone else – over 8.4 million barrels a day and the Chinese are seeking to leverage their position and extend their influence over the pricing of oil sold into Asia.
As for consumption, well the US is the biggest consumers at about 19,533 thousand barrels a day. Compare this to second place China at 12,375 thousand barrels.
Not surprisingly, these new contracts will be denominated in yuan which will help promote the country’s key long-term goals “the use of China’s currency in global trade”. Make no mistake about this, China will try to challenge the USD at some point.
Believe me this is not just about oil, it’s also about currency – so watch this space!
https://www.eia.gov/beta/international/index.cfm?view=consumption
Total Petroleum Consumption – 2015 ›
Thousand Barrels Per Day
The Chinese love to gamble! They love to speculate. In 2015 Nickel was trading in Shanghai and within 6 weeks its trading volumes went through the roof and volatility went wild.
“Daily liquidity on SHFE (Shanghai Futures Exchange) is surpassing that of the LME and Comex put together. The highest monthly trading volumes for copper and zinc last year were on the SHFE” – Henry Sanderson, Financial Times, April 2015
Finally, the Chinese Authorities stepped in and slowed the nonsense down, by tightening the rules, increasing fees, margins and shortening trading hours.
In 2015, according to the Futures Industry Association, Chinese futures contracts traded on SHFE were among the top four most traded metals contracts in the world.
It’s said that oil futures traded on the US and UK exchanges already outstrip physical trading 23 times to one!
The Chinese are going to have some fun with this one!
Back in 2014, Ian and I ran a seminar called “Actions for Wealth Planning Day” and in one of the sessions we hypothesised just what events could unfold in this cycle to eventually bring about another GFC type event. On that day we spent some time telling the audience that amongst the possibilities there were two very real possibilities to watch.
- The growth in Crypto Currencies
- Asia gaining access to leveraged financial instruments that they can speculate heavily on
There were a few others, but we will leave it to another time to discuss them.
Each cycle is “The Same, Same but Different”
Whilst the drivers remain in place, they must manifest into a boom bust cycle.
We will need to watch the oil future space and the speculation that is likely to occur with it very closely. Remember China has NEVER seen a full cycle. En masse they have never witnessed first-hand or felt the emotional effects of a massive speculative bull market.
They love to wager and financially are very inventive when given the chance.
Folding Money, as my Grandmother used to call it, was said to have first been used during the Tang Dynasty (A.D. 618-907). This advancement was years ahead of Europe or Japan.
The implications of China trading oil futures are likely to be more far reaching than just the price and distribution of oil. Be aware this is as much the preamble to a currency war between two heavy weight titans. You can hear the announcer now, can’t you…
“IN the blue and white corner, weighing in at $19.42 trillion is the USD
And in the Red corner, weighting in at $11.93 trillion is the Yuan.”
Largest Banks in the World
According to the Wikipedia 4 of the 5 biggest Banks are located in …
-you guessed it CHINA.
What do you think that’s likely to do for this cycle??
The outcome of the next GFC like event will test the emotional reactions of billions of over leveraged speculators with the Chinese being the new kids on the block.
Remember King Hammurabi set down in stone 12 laws, including the definition of a futures contract and another law that will likely play a part in the final bust.
“Eye for eye, tooth for tooth.”
This is the other inevitable but regrettable outcome of human behaviour….
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You’ve excelled with this one Jeremy – nice work!
Jeremy, very good article. This cycle looks like it will be huge!