All Bets Are (not) Off

M. Lee, CPA

T. Sloan, MD

My former internist on the mainland and I have a bet.  I bet him Trump will be impeached before the 2020 elections. We frequently try to re-trade the deal. Full disclosure:  this gentleman took $125 from me upon the election of our current Fuhrer.


My dear Dr.

I'm beginning to start to get the giggles every time we posture with that bet.  

We're like two traders in 2001. One is at Enron, betting money the corporation (with his help) conjured from thin air and is not planning on paying back. The other is a little pipsqueak at Dynegy who's just trying to stay in the natural gas business and thus needs to deal with people like Enron.

Or (adding zeros/details):

There are two ways to make money in the trading business. The first is that you're actually so much smarter than your counterparty that he is fucked from the beginning. 

Example: 

The originator: A Thresher Shark who sells a Tuna a financial instrument and then, as soon as he has the Tuna's money, lights the charcoal and gets ready for seared Ahi. He is a Stanford MBA at Morgan Stanley with a $50mm daily unsupervised trading limit and an IQ of 157. He's 52 and is the oldest trader on the distillates trading desk, with about 25 years in the game.  In addition to the aforementioned MBA, he has an undergraduate degree in organic chemistry, a PhD in mathematics and (improbably) is also studying climatology because he's figured out a rock-solid correlation between weather and jet fuel price perturbations.

He's pretty sure the same thing will work for diesel fuel.  They are chemical cousins, but diesel consumption is about twice that of jet fuel (and besides diesel smells nicer he thinks).  Yummy.  Besides, the airlines have been playing this game for years... he can fleece them - but only enough to cover his his 'day job' salary base ($450K) But the bonuses ($3.2M last year) come from  . . . 

The counterparty: a CFO (aka - the aforementioned tuna) who is sitting in a corner office at the Halliburton Bunker on Beltway 8. This guy (whose about as smart as, say, me or you Tom) thinks he's a lot smarter than he is. Just like, say, me. 

Kind of like the Wildebeest who thinks (somehow) he's smart enough outrun a cheetah.

The CFO has been told by his CEO (who had recently played golf w/ the Morgan Stanley CEO) that he needs to begin "hedging our exposure to diesel".  Now Halliburton uses about a million gallons of diesel a week and stores about 2 million.  He gets to figuring (BBA accounting, Texas A&M - GPA 3.2) The Morgan Stanley salesman is showing up soon.  He figures out (fairly accurately because he's not a dumbass - he's just a Tuna from Texas) that his net exposure to the market is maybe $2 million annually.  $5 million if another event like 2014 happened unexpectedly.

$5 million is about the annual cost of operating the CEO's jet.  But he's been told (by the CEO's henchman who is also a Stanford MBA from McKinsey and whom the CFO loathes) that he needs to "do something with the Morgan Stanley guy".

After the deal expires (six months later) and Halliburton has to write a check for $16,000,000 to Morgan Stanley, the CFO is wondering how he got into this fucking mess.  And wondering if they might take him back over at PriceWaterhouseCoopers.

The trader is pricing a new Maserati.  He's getting tired of the his '15 model.

Oh.  What's the other way to make money trading?  God wants you too. In these matters it is generally more useful to have a Stanford MBA than a hymnal.  Otherwise - all the traders would be devout Christians.

In any event, I hope you have had an opportunity to take something with you from this (one-sided) discussion this morning.  And of course, I leave it to you to decipher who's who in the above scenario vis-a-vis our bet regarding the (imminent) Trump impeachment, sir.

***

One thing's for certain, we're certainly trading a brand new commodity.  And it ain't memory chips.

Will Shorts 

-puzzle editor, NYT