Kevin Drum - July 2013

Another Enclosed Mall Bites the Dust

| Mon Jul. 22, 2013 12:53 PM EDT

This is a few days old, but here's some local news I just ran across:

About half of Laguna Hills Mall will be demolished and converted into an open-air shopping corridor as part of a radical overhaul, according to plans submitted to the city by Merlone Geier Partners, the mall's new owner. The planned three-year revamp is designed to boost foot traffic at the struggling mall. Sales tax revenue for the center dropped to a seven-year low of $1.4 million last year, from $1.8 million in 2005, according to city records.

This is, obviously, part of the trend away from enclosed malls and toward open-air shopping centers that's been going on for the past two decades. But it's a little more dramatic when you actually demolish an already-existing mall in order to convert it to open-air shopping.

I think I've asked about this before, but I'm going to ask again anyway: does anyone know why open-air malls have become so popular? I can sort of understand it in a place like Southern California, where the weather is pretty good, but only sort of. Albert Hammond to the contrary, it does rain in Southern California, and sometimes it's hot and sometimes it's windy and cold. And the rest of the country is mostly worse: who wants to go to a mall during a snowstorm?

I suppose the obvious answer is just that fashions change. Enclosed malls came to seem sterile and dead, and the consuming public was in the mood for something new. But is that all there is to it? Or was there something more going on?

UPDATE: We don't really have any kind of firm consensus on this, but this is nonetheless the winning comment so far:

Goldman Sachs probably has a huge position in Westfield and wants to tear down malls and rebuild them so it can move some of its aluminum.

OK, probably not. But it's possible that outdoor malls are cheaper to build and maintain and therefore more profitable. However, a bit of googling suggests that the primary dynamic here is the demise of department stores, which were always the traditional anchors of enclosed malls, and the rise of "category killer" stores like Home Depot and CostCo and Toys R Us, which are better suited to freestanding structures with nearby parking.

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Goldman Sachs and the Aluminum Warehouses: Part 3

| Mon Jul. 22, 2013 11:48 AM EDT

Why does Goldman Sachs own a big aluminum warehousing business that it deliberately runs poorly? Yesterday I suggested that Goldman couldn't possibly have any interest in the warehousing business per se, so instead their interest must have something to do with trading profits to be made by controlling and manipulating physical stocks of aluminum.

Today, Izabella Kaminska of Alphaville confirms that this is the case. But how and where does Goldman make money? I can't pretend to follow every twist and turn of Kaminska's explanation, but here's my take on the basics.

Suppose that aluminum sells for $1,800 per ton on the spot market, but a contract for December delivery sells for $2,000. There's a moneymaking opportunity here: buy the aluminum now, warehouse it, and simultaneously forward sell it at a premium. As long as your storage and financing costs are low, you're guaranteed to make money.

This condition is commonly called contango, and it's not unusual in commodities markets. Goldman was able to profit from this—their financing costs were already low, and buying the warehouse business provided them with low storage costs—but that's not the whole story. It turns out that lots of Goldman customers wanted to get in on this action too, but they were limited by the fact that contango plays were a big drain on their balance sheets. To help out, Goldman "created a business in freeing up the balance sheets of those firms which were encumbered by large but clearly profitable contango trades, by financing these trades and taking them off-balance sheet in return for some of the contango margin." In other words, Goldman helped its customers expand their trading positions in return for a cut of the profits. Owning the warehouses was key to this.

There are six paragraphs of detailed explanation that follow this, and I might as well just fess up that I don't understand them. Click the link if you're more finance savvy than me and want to know more. The end result, says Kaminska, was "the mass encumbrance of physical commodities for the purpose of collateralising implied future demand from retail and pension funds — which would otherwise take the shape of a much less tangible and uncollateralised futures investment."

Roger that. In any case, Kaminska suggests that this would basically be OK except that:

  1. The process creates the means by which speculation does end up driving and influencing physical prices (rather than being priced off physical realities)
  2. There is a fiduciary issue because banks have an incentive to maintain the illusion of physical scarcity to mislead investors. This is so that pension and institutional money keeps flowing into commodities so that synthetic yields can be extracted from the flows to be handed over to the sell-side and/or commodity industry. It is, in effect, a stealth yield transfer from those who have been sold the myth that commodities are a viable (and scarce) asset class to those who have too many commodities to sell. Further perpetuated, we should add, by the myth that commodities can protect wealth from inflation.
  3. The dark inventory hoards can be used to the trading advantage of the banks.

Point 3 has to do with the practice of reclassifying inventory as either public or private. By manipulating apparent inventory levels, Goldman and its customers can benefit when markets are in contango and when they're in the opposite, or backwardation, state:

When it suits an institution to benefit from a move towards backwardation, public inventory will be taken dark, and positions established to benefit from an apparent destocking effect — even though the collateral is not heading to market at all. When it suits an institution to benefit from a move towards contango, dark inventory will be taken public, presenting the appearance of a sudden surplus and glut in supply (even though the glut was always there).

This is the other reason why owning warehouses became so appealing. It’s much harder to keep inventory out of sight of public eyes if you’re dependent on the LME warrant system or third-party providers.

Bottom line: you just knew that this whole thing had to be some insanely complicated trading ploy, and you were right. It's complicated enough that I still don't really understand the details. In a nutshell, though, if you control the inventory of a commodity, you can make a lot of money. Speculators have known that for a very long time, but the old, crude days of simply cornering a market are gone. These days, markets are manipulated in much more sophisticated ways. As always, though, you and I are the ones who pay the price.

Map of the Day: Where the Poverty Trap is Worst

| Mon Jul. 22, 2013 11:04 AM EDT

David Leonhardt of the New York Times presents this map today, based on a new paper about intergenerational mobility. Basically, the authors find that in some regions, poor kids have a decent chance of growing up and moving out of poverty. In other regions, poor kids pretty much stay poor forever.

There are several regions that are above and below average, but the obvious outlier is the deep South. This is yet another reminder of a lesson from politics: never look solely at nationwide data. Politically, this means that the South votes fundamentally differently from everyone else. Working class whites, for example, aren't actually a big problem for Democrats. Only Southern working class whites are a big problem. When it comes to mobility, apparently the same thing is true. If you look solely at nationwide trends, you'll miss the fact that one particular region is way, way different than the others. Poor kids don't exactly have a great chance in life no matter where they live, but in the South, they have almost no chance at all. If you take a look at the policy preferences of Southern governors and legislatures, that's apparently exactly the way they like it.

Is It Time to Ban Banks Completely From Commodities Trading?

| Sun Jul. 21, 2013 3:12 PM EDT

Last night the New York Times put up a story about the purchase of an aluminum warehousing business by Goldman Sachs. Today, Matt Yglesias points out that the whole thing really doesn't make sense. Here is Goldman's apparent business strategy:

  1. Buy Metro International, a leading aluminum warehousing firm.
  2. Deliberately slow down customer service so that it take 16 months to ship orders instead of six weeks.
  3. Charge customers extra for storage because their aluminum is lying around longer.
  4. Game the regulations requiring that at least 3,000 tons be moved out of storage each day by simply shuffling it between warehouses.

Needless to say, this is ridiculous. If you could make money in the warehousing business by deliberately slowing things down, a whole bunch of textbooks would have to be thoroughly rewritten. And yet, the Times seems to have the goods here. Goldman really is doing this.

But why is Goldman doing this? They can't possibly be interested in the aluminum warehousing business per se. And they can't possibly be interested in the small pittance they might earn in the short term by deliberately sabotaging their own company. So what's the deal?

The Times very carefully doesn't say. What they do say is that, thanks to the arcane rules of the aluminum spot market, the price of aluminum goes up when average storage times increase. They suggest that Goldman's warehousing strategy is a "major reason" that the spot price of aluminum has increased dramatically since 2010.

This is obvously bad news for beer companies, but why is it good news for Goldman Sachs? The obvious answer is that, somehow, Goldman is making money by betting on the spot price of aluminum. This would be a great strategy: buy up the infrastructure for a commodity, manipulate the infrastructure to affect the spot price, and then make bets on the direction of the price. It would be a money spinning machine.

But even though this seems obvious, we don't know that Goldman is actually doing this. Presumably Times reporter David Kocieniewski did his best to find out, but just couldn't find a source to tell him what was going on. Nonetheless, the idiocy of allowing an investment bank to own the infrastructure of markets that it trades in should be pretty obvious, and Reuters reports this weekend that maybe the Fed is starting to understand that:

The Federal Reserve is "reviewing" a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets, it said on Friday, a move that may send new shockwaves through Wall Street.

The one-sentence statement suggests the Fed is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.

While the Fed has been debating for years whether to allow banks including Morgan Stanley and JPMorgan to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.

Between Goldman's shady aluminum business and JPMorgan's shady energy business, it's about time the Fed took a fresh look at this. If they went even further, and banned big banks from trading in commodities markets at all, it would be OK with me. Rumors of commodity manipulation—and sometimes more than rumors—have been rife for years in the oil market, the water market, the energy market, and others. This is worth keeping an eye on.

The Vampire Squid Has Set Its Sights on Your Beer Can

| Sun Jul. 21, 2013 1:34 AM EDT

Many of us already view the financial industry as little more than a gigantic shakedown of the American public. But even so, there are still days when we can be dumbfounded by the sheer scale and gall of their machinations. Today is one of those days.

The New York Times reports that Goldman Sachs, apparently unhappy with the profits to be made solely in the financial markets, decided a few years ago to buy an aluminum storage business called Metro International. Their business strategy is to shuttle that aluminum around from one warehouse to another, something that's earned Goldman $5 billion over the past three years. If you don't understand how this is possible, well, it means you're just not very smart:

Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.

Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.

....Interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses....Because Metro International charges rent each day for the stored metal, the long queues caused by shifting aluminum among its facilities means larger profits for Goldman. And because storage cost is a major component of the “premium” added to the price of all aluminum sold on the spot market, the delays mean higher prices for nearly everyone, even though most of the metal never passes through one of Goldman’s warehouses.

Aluminum industry analysts say that the lengthy delays at Metro International since Goldman took over are a major reason the premium on all aluminum sold in the spot market has doubled since 2010. The result is an additional cost of about $2 for the 35 pounds of aluminum used to manufacture 1,000 beverage cans, investment analysts say, and about $12 for the 200 pounds of aluminum in the average American-made car.

Did you follow that? Some genius at Goldman apparently had a brainstorm after reading the detailed rules that determine the spot price of aluminum. They figured that if storage times could be artificially lengthened, prices would go up and Goldman could make a killing. So they bought an aluminum storage business with the explicit goal of making customers wait a longer time for their aluminum. And they made a killing.

The Times hastens to add that Goldman has done nothing illegal. Of course not. Why bother when "special exemptions" granted by the Federal Reserve and "relaxed regulations" approved by Congress allow you to make billions legally? But perhaps considering the industry's track record, the Fed is thinking of reversing its rule that allows investment banks to buy nonfinancial commodities businesses? Don't be silly:

All of this could come to an end if the Federal Reserve Board declines to extend the exemptions that allowed Goldman and Morgan Stanley to make major investments in nonfinancial businesses — although there are indications in Washington that the Fed will let the arrangement stand. Wall Street banks, meanwhile, have focused their attention on another commodity. After a sustained lobbying effort, the Securities and Exchange Commission late last year approved a plan that will allow JPMorgan Chase, Goldman and BlackRock to buy up to 80 percent of the copper available on the market.

I hope you don't have any copper tubing or wiring in your house. If you do, you're going to get badly screwed the next time you have to replace it. But don't worry. It's all for a good cause.

How Public Should Public Information Be?

| Sun Jul. 21, 2013 12:57 AM EDT

Just how public should public information be? That's a trickier question than you might think, and it's one that we should have addressed a long time ago. Here's today's example: should California publish on the web the names and monthly pension payments of all state retirees? It's public information, after all. But just how public?

Michael Hiltzik has a good rundown of this issue here. It's worth a read.

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Saturday Suburban Wildlife Blogging

| Sat Jul. 20, 2013 5:00 PM EDT

We have been besieged lately by a possum who comes in through the cat door and hoovers up Domino's cat food. This is Not Good. I tried and tried to trap him using cat food as bait, but he was too smart for that. He only wanted the food that was actually in Domino's bowl. Then, a couple of days ago, I foolishly left a package of cookies on a coffee table that's low enough to be possum accessible. When I woke up, it looked like a bomb had gone off in the living room. Cookie crumbs were everywhere.

Stupid possum. But a little while later I happened to be on the phone with my editor, Monika, who suggested that if the possum likes cookies, why not bait the trap with cookies? Good idea! So I bought more cookies, crumbled up a couple of them, and put them in the trap. No dice. So then my mother chimed in: the possum obviously doesn't want crumbled-up cookies. He wants whole cookies that he can demolish himself. Fine. I put out a whole cookie.

And that was that. I finally trapped the possum. As you can imagine, he was not a happy possum during his brief imprisonment, but I drove him over to a local marsh and let him loose. It seems like pretty ideal possum territory, and it's not too near any residential areas. Hopefully he'll now spend a long and comfortable life in the company of his fellow critters.

Republican War on Obamacare Reaching Absurd New Heights

| Sat Jul. 20, 2013 4:45 PM EDT

We all know that Republicans are hellbent on sabotaging Obamacare any way they can. But the lengths they're going to are pretty astonishing. A few weeks ago The Hill reported that some Republican congressional offices, which routinely help constituents navigate the federal government, plan to turn away callers with Obamacare questions. "We know how to forward a phone call," said the always charming Rep. Jason Chaffetz (R-Utah).

Yesterday brought yet another wheeze as the state of Indiana released the projected cost of insurance on its Obamacare exchanges. The usual standard of comparison is for silver-level plans, but Indiana didn't release that separately because then it would have been clear that Indiana's costs were about the same as everyone else's. Instead they munged together the bronze, silver, gold, and platinum plans in some unspecified way, and did it for no apparent reason except that it allowed them to trumpet a supposed 72 percent increase in the cost of health insurance.

Who do they think they're fooling? Nobody, I suppose, but it provides fodder for Fox hosts and right-wing radio talkers who don't really care whether the numbers have been deliberately cooked. All they care about is having an outrageous number to bellow about on the air, and Indiana gave them one.

Sarah Kliff breaks down the con job here, if you want more details.

Friday Cat Blogging - 19 July 2013

| Fri Jul. 19, 2013 3:05 PM EDT

This is Domino totally zoned out on a hot afternoon earlier this week. All that's missing is the chalk outline.

But despite its apparent lack of excitement, this picture shows off something that you normally don't get a chance to see. In most photos, Domino looks like a black cat. But in fact, only the tip of her fur is black. Underneath it's white. You can see that a bit in this picture because she's so stretched out. It makes her look a little mangy, but actually her fur is quite glossy and lovely at the moment. She's in pretty high spirits these days.

"Stand Your Ground" Did Indeed Play a Role in the Zimmerman Trial

| Fri Jul. 19, 2013 2:25 PM EDT

Over the past week, I've heard endlessly from various talking heads that Florida's "Stand Your Ground" law had nothing to do with George Zimmerman's acquittal for killing Trayvon Martin. Zimmerman, they said, was actually acquitted on ordinary grounds of self defense. I've gotten really tired of hearing this obvious misconception, and today Mark Follman and Lauren Williams finally demolish it for good. You should read the whole thing, but here's the key bit:

The jury instructions—and a reason for their verdict: Just because Zimmerman's defense team didn't bring up Stand Your Ground in the trial (more on that below), that doesn't mean the law was irrelevant to the jury's decision. To the contrary, Judge Debra Nelson made clear in the jury instructions (PDF) that they should consider the law:

If George Zimmerman was not engaged in an unlawful activity and was attacked in any place where he had a right to be, he had no duty to retreat and had the right to stand his ground and meet force with force, including deadly force if he reasonably believed that it was necessary to do so to prevent death or great bodily harm to himself or another or to prevent the commission of a forcible felony.

And consider it they did. According to the most outspoken juror, known only as Juror B-37, Stand Your Ground was key to reaching their verdict. She told CNN's Anderson Cooper in an interview that neither second-degree murder nor manslaughter applied in Zimmerman's case "because of the heat of the moment and the 'stand your ground.' He had a right to defend himself. If he felt threatened that his life was going to be taken away from him or he was going to have bodily harm, he had a right."

Let's at least get the basic facts right in this case. "Stand Your Ground" did play a role. There's really not much doubt about it.

UPDATE: Hmmm. I'm getting some pushback from lawyer types who say that the judge's instructions are based on common law, not SYG. Maybe. But Judge Nelson had to know that SYG had been the subject of enormous public scrutiny over the past year. It's hard to believe she'd use the phrase without clarification if she was basing her instructions solely on common law.