Rogue Traders

I recently read The World For Sale, an investigation into commodities trading in the 20th century. While the whole book is a good read, the early chapters in particular are a ton of fun, following the swashbuckling post-WWII days where traders made fortunes with chutzpah and instinct.

I found it interesting to reflect a little on what factors made this first big boom of commodities trading possible: transport, communication, and opportunity. The most obvious one, and Farchy and Blas explicitly highlight, is networks of global transport. Shipping of bulk commodities goes back to antiquity, but only because truly possible at scale in the modern era.

We have evidence of long-range metals transport as far back as the Bronze Age. The Uluburun shipwreck had a cargo of metals from the late 14th century BCE, including tin and copper from around the Mediterranean. Other shipwrecks in the near East have had copper from as far away as ancient Cornwall. Lundgren (1996) identified three revolutions in shipping technology over the 19th and 20th centuries. The first was the optimization of wind power. For most of human history was limited to relatively high-value cargoes like spices, sugar, and human beings, powered by wind. By the early 19th century, in the golden age of sail, these technologies had reached their pinnacle, significantly reducing intercontinental shipping costs compared to previous centuries.

Like every technology, sail power reached its peak just as it was about to be replaced. In the late 19th century, the first transcontinental steamships emerged, beginning in North America, but then quickly growing to cross the Atlantic and then further beyond. This marked the second revolution.

In the 1950s and 60s, we see the beginning of the third revolution, where ships become much larger. Lundgren doesn’t draw this connection, but I have to believe that this would be supported by the improvements in shipbuilding and engineering from the Second World War. Regardless, bulk carriers get much larger, including a increase in the number of specialized oil carriers.

All together, this made bulk international transport possible, bringing the prices of far-flung sources of commodities close enough together that oil from Kuwait and Texas become valid substitute goods. Firms like Phillipp Brothers could then make a profit by trading off the difference.

To trade that profitably, traders need an information advantage, which was made possible by fast communication, with undersea cables connecting signals from continent to continent. When higher bandwidth was required, early aviation, primitive by today’s standards, shuffled traders and their agents over the oceans for meetings and fact-finding expeditions.

This information was available, but expensive, and so it could be exploited as a source of edge. If you had the contacts, the courage, and the determination, you could obtain that information before other people, and make better decisions, or at least better gambles.

In their conclusion, Farchy and Blas talk about the golden age of the swashbuckling commodities trader as coming to a close. One reason they give is the reversal of the liberalization of international trade in the 2010s, coming from a rejection of globalization and a rise in populism.

This is strange to me, because most of the stories in the first couple of chapters involved stories of tradeing across geopolitical boundaries, shipping metals back and forth across the Iron Curtain. This actually seems like the third ingredient for the age of commodities high adventure: a complicated environment with uncertainty, unpredictability, and lots of price/energy gradients to exploit.

Of these three factors, transport cost, communication cost, and cost surface complexity, most of the arrows still point in the interesting direction. Transport costs continue to get cheaper technologically, though the rising cost of energy threatens to occasionally push things back in the other direction. Communication has become so cheap, easy, and efficient that the information edge functionally no longer exists: the only remaining edge is analytical, extracting signal from information that others fail to process.

That leaves opportunity, and the future is likely to have that in spades. The return of the multipolar world and increased trade barriers will certainly make trade less efficient, to the detriment of many, but those same inefficiencies will create cost differentials, in turn creating opportunity, and a fresh generation of would be Marc Riches will be there to capture them.