I began the morning by reading this Post, which drew me to this contemplation of arbitrage. It seems quite alien to anyone who is not engaged in the practice on a regular basis. Those invested in the situation utilizing these functions make a marginal bet, or plug numbers into a computer program. Most of the time, there are Profits to be made; as long as backwardation does not function beyond its normal range. This basically revolves around a spiral forward of Inflation, or what is known as a functioning of Inflation in the trenches. Backwardation is only a reduction, or reverse operation of this spiral. One has to understand that technically one cannot expect real Profits from futures betting, if the Inflation spiral is reduced, or reversed in minutia. Most economists would claim this is not necessarily the case, but almost all Traders would agree. Everything centers on the convenience yield; all things discussed or linked to in the two Posts. It is basically a practice equal to Betting in a Poker game, where one bets upon the look of degree of ease in fellow players; all dependent upon the safety of the quality of your own Hand.
Study this work by James Hamilton. It is obvious that the convenience yield has gone up in certain sectors, and that backwardation has dropped back within normal range. This makes Traders happy, because it reopens their normal method for draining Profits from the Inflation spiral; the traditional road of Trader profits. The information in the later Post, though, does not please me as much as it had Hamilton. The Employment numbers suggest a delayed return to employment, as found in the later Recessions experienced. This all means the deployment of a reduced labor market in the US, where a return to Production means a smaller return to Employment. Such Conditions will evolve into a forward-reaching Inflation spiral; probably good for no one but Traders.
Readers likely wonder Why I would study Contango at this Point. The issue revolves around the massive Pay schedules being paid to people engaged in this Trading during the previous year; where such Trading was supposed to have been reduced in Profits drain terms. This can only come through a labor market readjustment lower. Something smells in the State of Denmark–read your Hamlet! It also seems strange that China is buying more than America; a place where the convenience yield would seem to be highest. The economy is very shaky, and I do not like the terms of redeployment. It is all very disturbing! lgl