Trading in World's Commodities

This book gives a good insight into how commodity traders and companies work behind the scenes and supply raw materials, essential to modern life - like energy, metals and food. Often they work around any sanctions and make things happen carving out their cut amidst all that.

In the past, this group has intervened in Iraq by supplying Saddam to sell oil, helped Cuba with a sugar-for-oil scheme and supplied U.S wheat to Russia. They have also advanced big loans to cash-strapped countries in exchange for guarantees for future supplies of natural resources there (Kurds, Congo).

In the complicated financial world, they are now so intertwined that retirement funds of teachers in U.S states of South Carolina and Pennsylvania ended up in the Middle-East before. LINK

The big ABCD firms in agricultural commodity trading are Archer Daniels Midland, Bunge, Cargil and Louis Dreyfus.

The business model is very simple: 

• Buy natural resources in one place and time, and sell them at another making a profit.

• Possible because supply and demand aren’t in sync.

• Natural resources (mines, farms, oilfields) are far away from the places they are needed.

• Not every producer can afford to build a network to sell their produce.

In the past commodity traders were so successful because -

• There was less access to information. (If the coffee crop suffered in Brazil that info flowed very slowly and to limited places. Not anymore).

• Size and scale of the bets.

• Their investments in networks of pipelines, ports, tankers, farms and mines. (If the oil pipeline which they owned had a snag, they would be the first to know and anticipate price movements and bet accordingly).

• Finance the producers.

Although now most of these advantages have vanished in the 21st century.

The book also contains an explanation of how the U.S dollar is being weaponized via sanctions.

Also, in the book learned bunch of new terms related to shipping/logistics -

TOLLING
Supply raw product and take as payment the finished product. Self-explanatory.

Demurrage
Containers that are left at the port or rail yard longer than their allotted free time.
Hire a Very Large Crude Carrier (VLCC) with crude oil in it but do not deliver it and wait by the port side until oil prices jump.

Commodity SuperCycle

There’s a correlation between a country’s wealth and its consumption of natural resources. As the country’s per capita income passes $4000 people start spending money on things other than essentials (food, shelter, medicine). 

China crossed this threshold around 2001 thus requiring more raw materials than before and more than what it produced domestically. This sparked a commodity supercycle - an extended period where the price of raw materials is well above its long run trend lasting for decades. Towards the end of 2000s, other BRICS countries joined this phenomenon.

However, the authors take a nuanced view when it comes to the question whether commodity traders are responsible for spikes in commodity prices. They say NO. In their view, commodity traders are buyers and sellers of last resort. Even though it is always tempting to blame them for food crises.

Duty - A Memoir Worth Reading

I hesitantly picked up this book (published 2014) looking at the number of pages (~640) and wasn’t sure if it had any good insights in it. But I pushed through it and by the time I was a few chapters in - I was enjoying the memoir actually and finished it in a week. It had some few good aha moments and some reconfirmations of what I thought happened.

By the end of the book the author who served as Secretary of Defense aka Defense Minister under POTUS 43 (last 2 years) and POTUS 44 (first two years) - acknowledges and underlines few things about War in general -

• There is always this assumption in the beginning that the war would be short. And it never is. 
• Once the first round of shots/bombs are fired - war is unpredictable and it takes its own course.

No country is fully prepared for the next war. I liked Donald Rumsfield quote -

You go to war with the army you have, not with what you wish you had.

Another thing which I thought was a big deal for someone of the author’s stature to mention was that in the intervention in Libya (2011) - out of 28 NATO allies, only half provided some contribution and only half of them sent in their aircrafts. And the U.S had to step in to provide not only recon capabilities but also midair refueling of those planes. After only 3 months, the U.S had to replenish NATO’s dwindling ammo as they started to run out of them.

It is remarkable in my view, because as per NATO’s charter every country has to spend ~2% of its GDP on defense but very few do for various reasons. This was called out by POTUS 45 but the message was lost due to other ongoing things. Adjacent to this was what he writes about Russia - those views are no longer acceptable today.

I have always wondered why the U.S defense budget is so huge and always keeps increasing. And reading the former Secretary of Defense’s autobiography gave me enough understanding for that. 

• First factor is Inflation. The budget obviously will keep going up at least at the same rate as inflation. And Military salaries need to go up accordingly.
  
  
• Fuel. This is such an overlooked factor. Lot of transport vehicles - trucks, tanks, planes, helicopters - all require fuel (diesel) and that cost keeps going up.
  
  
• The Military Industrial Complex is real!
  Lot of projects of manufacturing ammo, weapons are spread across the country providing a lot of jobs and driving local and regional economies. Even if the President and Secretary of Defense want to shut down some programs which aren’t needed - as per the author, often the Service chiefs would go to Congress and lobby for them.
  
  Similarly, in a rare case where neither the civilian government nor the Service chiefs want some program/weapons shelved as its outdated or less value add - the Congress would still allocate budget for it overriding them both. Congresspersons are scared and clueless how to replace those factories and jobs. As mentioned so many times in the book - parochial interests drive the budget mostly and not national security vision.

Reading the book the delicate Middle East situation became clearer.

How the U.S has been successfully managing the volatile region and trying to hold back Israel (mostly) is admirable and praiseworthy. However, understanding all the aspects makes it feel like it is a matter of When not If, when it all erupts.

There is also some good wisdom on revolutions. They always start with hope and idealism, but mostly end with bloodshed and authoritarianism. Because often the more organized and extremist groups capitalize on it and take power. We have seen it happen in Iran (1979), Cuba and even in Egypt (Arab revolution 2008).

Overall, this book gives a very good overview on how the U.S government functions.

• One would think meetings would be a problem only in the corporate world but no it was amusing to see that even at such a top level there are so many meetings all day and so much context switching.
  
  
• Transfer of power requires lots of work from a dedicated team. Since it is humans we are talking about here - you can expect all kinds of attitude you can think of from an outgoing team to incoming team regardless of political affiliations. 
  
  
• It is remarkable how the Secretary described his experience interacting with Congresspersons.
  In the privacy of a room devoid of cameras they can be intelligent, thoughtful and insightful in discussions but once the little red light went on the top of a camera, it has the full effect of a full moon on a werewolf. No wonder public hearings are all about hot-takes!
  
  
• In Iraq and Afghanistan there was often a lot of frustration at the slow progress in the newly formed governments of those countries. Ironically, the U.S Congress can be equally frustrating at arriving at consensus on big ticket items.
  
  
• Finally, in big positions in government you make decisions with either too little time or too much ambiguous info. That’s par for the course.
  
  
  

Overall, for the above reasons it's a good read. 
⭐⭐⭐⭐

Unwinding Globalization

The book's central theme is perfectly captured in the subtitle - Mapping the Collapse of Globalization. The author lays out in great detail how Jan 2020 was the peak of globalization, and the onset of the Covid pandemic marked the start of the demise of this global order. Post World-War II the world was together in a way in which security was no longer a concern but keeping costs low was. This was solely possible due to the U.S guaranteeing security under its alliance in exchange for opening its market to other countries who joined. Trade was the norm of the day with capital flowing freely to investment opportunities aided at times by the credit cycle.

But with the U.S retreating from the current position - global trade will have a serious dip, globalization will collapse and the era of abundance will be over. Trade will not be as seamless and smooth as before due to a bunch of security concerns and inward looking perspectives. 

Various other factors will also hasten the demise of globalization - 

Demographics

The author places a lot of importance on Demography which I felt odd at first but as I read along I understood better its significance. The key thing with demographics is that you cannot change it/reverse it/innovate around it even with infinite amounts of money. If there are less children today it guarantees that there will be a small labor force 25 years from now. Also, keep in mind that the most of the spending a person does occurs between the age of 15-45. Thus a lopsided demographic may not help.

The replacement rate is 2.1 and a lot of countries in Europe are past the point of no return. Some Asian countries like Japan (oldest society in the world) and China (fastest aging society) are also on that path. 

Demographics are visibly shifting as baby boomers (born in 1940-60s) retire rapidly in 2020 and 2030s. And they will no longer have any new income to invest in fact they will also change the profile of their investments - from risk taking to risk averse. Combined with rising interest rates this change in investing choices of the richest generation will dry up capital for many industries.

Another impact would be on tax revenues. Gone are the days of 2000-10s of a tax-heavy, mature worker heavy demographic and with the days of 2020-30s of tax poor and retiree heavy demographics. 

Thus, if the consumption economy starts to sputter thus will the related export/manufacturing led economies like China which thrive on supplying and meeting the endless demand for products.

Region	TFR (2015-2020)
Africa	4.4
Oceania	2.4
Asia	2.2
Latin America and Caribbean	2.0
North America	1.8
Europe	1.6

Capital

The era of easy free money is over. Poor capital allocation decisions and an easy money credit cycle has propped up a lot of industries (and has led to many innovations) - in place of profitability. Conditions of the last 13-14 years aren’t coming back. Fiscally prudent economies will survive and there are not many in that category. 

• Countries have grown credit at a rapid pace and Monetary expansion is Inflationary.
• Coupled with falling consumption habits of an aging population is Deflationary by nature.
• Building a new supply chain, a new plant not dependent on globalization is Inflationary.

Thus, a dizzying number of factors will pull the economic stability in all different directions.

Renewables

I liked the nuanced take of the author on renewables. He says that he’s a believer in green tech when it's matched to correct geography.
The example given is of Austin v/s Denver. Even though TX is hot, sunny -  Denver which is the sunniest metro area and at a high altitude there is no humidity and no air to block sunlight is more effective for solar. Also, most parts of the world are neither very windy nor very sunny. 

On-demand electricity is a very important concept that currently can’t be fulfilled by renewables as of today.

Also, the hastened rush to phase out oil & gas can cause a lot of problems. Worth remembering, oil is also the base material for the building world's petrochemical needs. Modern petrochemicals are like food packaging, medical equipment, footwear, tires, diapers. 

Greentech requires much more Copper, Chromium and Lithium. And the supply chain of these rare metals are much more complex than oil & gas (OPEC). Also, worth mentioning that mining these rare metals is not an environmentally friendly process.

However, amidst all this per the author the US will continue to have enough supply of these materials as it will retain access to the Western Hemisphere and Australia and also a powerful military to go out there and get what it needs. 

Agriculture

This was very interesting as it's not exactly obvious at first how globalization and agriculture are linked. But it made sense. Fertilizers - nitrogen, phosphate and potassium are chemicals but none as important as potassium fertilizers. It comes from a mineral potash which is found mainly only in 6 countries. With the collapse of globalization, the supply chain for global fertilizers will also collapse, forcing some to substitute it with organic foods or manure. 

Here the author provided an interesting outline of organic  - they aren't environmentally friendly as they consume a lot of water, require chemical free fertilizers & herbicides which are expensive and have a low yield/acre requiring more acreage. 

Also meat supply chains will suffer too. Due to globalization caloric intakes have increased and there are a bunch of sources now. But that may be going away. 

My take 

The author is unbelievably bearish on China - he thinks not only that country will implode due to severe disruption in supply chains, but also be affected by slowing consumption rates in the West due to an aging population and finally its own demographics will vanish it's labor force and eat it's cheap manufacturing advantage.

At the same time the author is very bullish on the United States. Even though a retreat from the world stage wouldn't hamper it's prospects as per him. He gives three reasons - strategic geographical advantage, very strong military and a global reserve currency (dollar). Now I'll take it with a grain of salt considering many financial institutions and even the U.S military are clients of the author's geopolitical strategist firm.

Good book overall. Got to learn about quite a few trends and some not-so-obvious changes which are lurking around the corner.

P.S -

Although at few places it feels like the author is B.S. He says "... for manufacturing machinery Germans are so good at it due to their penchant of being so precise. Americans are not at the same level but not too far behind as 2nd." Really? No other country can manufacture machinery?