Friday, May 10, 2019

Kyle Bass's big nickel bet


In 2011, hedge fund manager Kyle Bass reportedly bought $1 million worth of nickels. Why on earth would anyone want to own 20 million nickels? Let's work out the underlying logic of this trade.

A nickel weighs five grams, 75% of which is copper and the rest is nickel. At the time that Bass bought his nickels, the actual metal content of each coin was worth around 6.8 cents. So Bass was buying 6.8 cents for 5 cents, or $1.36 million worth of base metals for just $1 million.

To realize this 6.8 cents, Bass would have to sell the copper and nickel as metal, not coin. But liberating the actual metal from each token isn't so easy. Since 2006 it's been illegal to melt pennies and nickels down. As a regulated hedge fund manager, Bass probably isn't willing to break the law. Which means he'd only be able to realize the metal content of nickels indirectly, by on-selling them to a buyer who is willing take on the risks of melting nickels. That wouldn't be me, mind you. Five years in jail sounds like a long time.

At the right price, would-be smelterers will surely emerge out of the woodwork to buy Bass's stash. Say the prices of nickel and copper explode such that a nickel now contains 20 cents worth of metal. Bass should have no problems finding someone who'd pay him 12-15 cents for each of his nickels. Bass wouldn't be doing anything illegal, he'd just be selling nickels on to a stranger at a premium. And given that he only paid face value for each nickel, he'd be more than doubling his bet. 

So Bass has upside exposure to the next bull market in copper and nickel prices. The neat part of this trade is that he has no downside exposure. That's because a nickel can never be worth less than its face value of five cents. For example, consider that the price of base metals has fallen by quite a bit since Bass bought his stash of nickels. And so the melt value of a nickel has tumbled too, currently registering at around 4 cents, or 41% less than when he bought them. But Bass needn't worry. His nickels can still be taken to the Federal Reserve where they can be exchanged for twenty to the dollar, or five cents each.

Huge upside and no downside—why isn't everyone doing this trade? There's a catch. Carrying costs. Bass's trade has yet to pay off. A bull market in commodities hasn't developed. Which means that Bass has had to store 20 million nickels for eight years. But storing stuff isn't free. What follows is an estimate of the cost of doing so.

-------

The first big cost that Bass faces is storage. His nickels take up a lot of space. Stacked one on top of the other, would twenty million nickels fit into a standard 20 foot freight container? Given that a container measures 8 x 8.5 x 20 ft, it has enough space to fit around 32,700 nickels per layer, 1,328 nickels high. That's room for 43,480,000 nickels—more than enough for Bass's hoard.

Stacking individual coins on top of each other isn't a realistic storage technique. Imagine the amount of time this would take. The industry standard for storing and handling large amounts of coins is using certified bags. According to the Fed, the standard bag size for nickels is $200, or 4,000 nickels per bag. In addition to bags, it also typical for banks to sell customers boxes filled with $100 worth of rolled-up nickels. Either bagged or boxed, there will be plenty of 'honeycombing,' or gaps between coins and packaging material.


Bass's hoard would be extremely heavy, far exceeding the capacity of a lone shipping container. Twenty million nickels weighs 100,000 kg, or 220,462 pounds. But a 20' container is only rated to hold 25,000 kg (55,120 lbs). Both the weight of the coins and the honeycombing effect mean that it could take as much as four freight containers to handle $1 million worth of nickels.

Bass could find a farmer who would be willing to store four freight containers in his field for a few hundred bucks a year. But he probably wants something more formal than that. One option is a warehouse. Warehouses charge by the pallet. A pallet can hold up to 4,600 lbs worth of goods, which works out to around 417,000 nickels, or 104 bags per pallet. Which means Bass will have to store 48 pallets of nickels. 

I searched around a bit and found that warehouses generally charge a monthly fee of anywhere from $5 to $20 per pallet. There are a lot of variables that can affect this amount. If the pallets are stackable, and thus take up less floor area, then the monthly fee will be less. Location of the warehouse is another factor. Securing space in the vicinity of New York costs more than Des Moines.

Coins on a pallet at the Federal Reserve (source)

Given that Bass has the flexibility to choose an out-of-the way warehouse (he doesn't need to access his inventory every few days), he should be able to get a cheap deal. Let's assume $5/month per pallet. With 48 pallets of nickels, that works out to around $2875 per year, or 0.29% of the total value of his $1 million stash.

Over eight years, that works out to $23,000. So after storage costs, Bass's $1 million in nickels has dwindled to just $977,000.

Bass probably wants to insure his nickels for theft and damage as well. Commercial property insurance seems to cost around $750 per year for each million dollars insured. Over eight years, that's $6000, which brings Bass's stash of nickels down to $971,000.

The last major cost is foregone interest. Instead of investing his $1 million in Treasury bills, Bass is keeping his wealth inert in warehoused nickels. Interest rates have been pretty low for the last decade, which means that Bass has only given up around 0.1 to 0.15% per year in interest income, or $1500. So for the period between 2011 and 2016, he would have given up about $9,000 in interest. That brings the value of his nickles down to $962,000.

But in 2017, Treasury bill rates began to rise, hitting 1%. At today's t-bill rate of around 2%, Bass is giving up $20,000 per year to invest in 0%-yielding nickels. Ouch. Interest costs from 2017 and 2018 mean that Bass's nickel stash has effectively dwindled to around $930,000.

So as you can see, even though Bass doesn't have to worry about taking a capital loss on his stash of nickels, the ongoing grind of carrying costs means that it's been a pricey trade. In eight years he's down by around $70,000, or 7%. In the end it could still all be worth it. If base metal prices triple, he'll still be able to make a lot of money on his initial investment. And I'm sure they will triple... at some point.

----- 

I've described the nickel trade from Kyle Bass's perspective. But let's view it from the perspective of the taxpayer. The U.S. Mint and the Federal Reserve (and therefore the taxpayer) are providing Bass with the opportunity to win big while offering him protection him from capital losses. In options lingo, they've sold him a put option. Is this a smart thing to do? Bass's isn't an isolated trade. For every Kyle Bass there are probably dozens of others trying the same thing. So the stakes aren't small.

The taxpayer is not providing this put option for free. There is at least some quid pro quo. In choosing to hold $1 million in nickles, Bass is effectively loaning money to the government at an interest rate of zero. If Bass had chosen to hold $1 million in Treasury bills instead of coins, the government would have to pay him 2% a year in interest, or $20,000. Coins don't yield interest, so the government needn't pay Bass a cent for his loan. We can think of the $20,000 in interest as the fee or compensation that tax payers get for providing Bass with downside protection on his speculative bet on metals prices.

But is the government extracting enough out of Bass for the trade? When interest rates were still at 0.1% a few years back, and Bass's yearly interest costs were a mere $1,000, Bass was probably getting the better end of the deal. But with rates at 2%, it's not so obvious who is coming out ahead. Whatever the case, should the government even be in the business of providing principle-protected commodity bets to citizens? Aren't exotic financial bets more Goldman Sach's game? 

One way for the government to extract itself from these bets would be to reduce the commodity value of the nickel. Put differently, it can debase the coinage. The last time the U.S. debased the nickel was in 1965 when it stopped minting them with silver.

The U.S. Mint could carry out a debasement by switching to steel, which is cheaper than copper/nickel. With a lower metal value, the nickel would be much less inviting for Bass and other speculators. He'd need a much bigger bull market in metals prices before he'd be able to break even.

Or maybe the U.S. could adopt plastic nickels, like Transnistria.

Whether steel or plastic, the key is to avoid an possibility of being Bass's dupe.

An even better way to avoid being the dupe? The nickel is monetary pollution. Let's just get rid of it. It made sense to have a five-cent coin back in the 1950s. A five cent coin back in the 1950s would have been worth about as much as a fifty cents, and fifty cents is a meaningful amount of money. You can buy stuff for fifty cents, say a cheap drink. But go to a grocery store today and try to see what you can buy for a nickel. Nothing.

Most nickels are used just once. Cashiers pays them out as change to customers, and from there they go straight into people's cupboards where they are forgotten. Or they get thrown in the trash. Or they're hoovered up by speculators like Kyle Bass. All of this is socially wasteful behaviour. Bass's speculation is no exception: the resources he consumes storing nickels could be put to far better use. Let's put an end to all this waste by ceasing to produce five-cent coins.

24 comments:

  1. I think the Canunkistanians dropped the nickle. Maybe it was the penny. Who knows?

    ReplyDelete
    Replies
    1. We dropped the penny. The kiwis dropped the nickle.

      Delete
  2. I'm reading Silber's book on "Silver" (the pun is unavoidable) and this reminds me of his discussion of the Hunt brothers.
    The United States didn't "debase the nickel in 1965". That happened to the dime, quarter, and half dollar. The last time the U.S. nickel contained silver was between 1942 and 1945, when nickel (the metal) was removed for wartime uses.

    ReplyDelete
    Replies
    1. Thanks for the clarification!

      Delete




    2. *Get yours Magic Atm Card from Crown tecnology today and Become rich
      Whatsapp: +12134218707 I got my already programmed and magic ATM card to
      withdraw the maximum of $2,500 daily for a maximum of 1 year. I am so happy
      about this because i got mine last month I have used it to get $30,000. Mrs
      Christy is giving out the card just to help the poor and needy though it is
      illegal but itis something nice . And no one gets caught when using the
      card. Get yours Blank Atm Card from crown tecnology today and Become rich
      email atm.tecnology@gmail.com

      Delete
  3. Mind-blowing piece. Thankyou and congratulations!

    ReplyDelete
  4. Just goes to show, one should always think things through before acting.

    ReplyDelete
  5. Very interesting, thank you. One note, I would take exception to the notion that Bass is lending money to the Treasury at zero interests. I would suggest the currency / coin is no such mechanism. While it has a cost to the government, er, taxpayer, it does not create a debt.

    ReplyDelete
  6. Isn't Bass also losing money via inflation? This is basically holding cash, which without accumulating interest is losing value, right?

    ReplyDelete
    Replies
    1. Yes. A quick check on the CPI Inflation Calculator suggests he's lost about 13% to inflation from mid-2011 to April 2019.

      Delete
  7. Why wouldn't a smelter just buy nickels directly from the US government for 5 cents? Is Bass's bet also dependent on the US gov debasing the nickel at the same time the metal prices rise?

    ReplyDelete
    Replies
    1. If a smelter bought nickels it would be plainly obvious why they did. The melting of those coins is illegal and the Secret Service would probably be investigating immediately. Bass is not a smelter and therefore can give any reason he wants for the purchase. BTW, when the mint called him up and asked why he was buying one million dollars worth of nickels, he replied (wait for it) "I like nickels".

      Delete
  8. Another thing that coins can do for you in the likelihood of a currency devaluation is to avoid the devaluation (maybe). If the government decided to devalue all it's currency (for whatever reason) by replacing $10 worth of old currency with $1 worth of the new currency, it would certainly be a rude awakening for the public. However, coinage is usually unaffected by this action, since it is difficult, expensive, and of small importance to replace in the scheme of all currency. The government may very well allow the coinage to remain unchanged since they do not see it as a very big loophole on a per capita basis. This means that $10 worth of coinage would retain $10 of value after the reset while the $10 worth of currency would fall to $1 worth of value. Now, how would this affect one million dollars worth of nickels?

    ReplyDelete
  9. I want to testify about United blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how United hackers send them the atm blank card and use it to collect money in any atm machine and become rich. I email them also and they sent me the blank atm card. I have use it to get 90,000 dollars. withdraw the maximum of 5,000 USD daily. United hackers is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode.

    Email: unitedblankatmhackcard1@gmail.com

    ReplyDelete
  10. Hello everyone, I saw comments from people who already got their loan from Jackson Walton Loan Company, honestly i thought it was a scam , and then I decided to apply under their recommendations and just few days ago I confirmed in my own personal bank account a total amount of $29,000 which I requested for business. This is really a great news and i am so happy, I am advising everyone who needs real loan and sure to pay back to apply through their email (Text or Call ) +1-205-5882-592

    They are capable of given you your loan thanks.

    Contact Mr Jackson.

    E-mail: jacksonwaltonloancompany@gmail.com

    Fax: +1-205-5882-592

    Website: jacksonwaltonloancompany.blogspot.com

    Address is 68 Fremont Ave Penrose CO, 81240.

    ReplyDelete

  11. Invest with 200$ and get a returns of 5,000$ within seven business working days.
    Why wasting your precious time online looking for a loan? When there is an opportunity for you to invest with 200$ and get a returns of 5,000$ within seven business working days. Contact us now for more information if interested on how you can earn big with just little amount. This is all about investing into Crude Oil and Gas Business.

    Email: HappyInvestment-world_inc@protmail.com

    ReplyDelete
  12. Thank you for your blog! It is really worth sharing and I'm glad that it helped me find RapidRupee app which is the best Cash Loans & it is great.

    ReplyDelete
  13. Do you know that you can hack any ATM machine !!!
    We have specially programmed ATM cards that can be used to hack any ATM machine, this ATM cards can be used to withdraw cash at the ATM or swipe, stores and outlets. We sell this cards to all our customers and interested buyers worldwide, the cards has a daily withdrawal limit of $5000 in ATM and up to $100,000 spending limit in it stores. We also have credit cards for online shopping, we give the credit cards details to our interested clients worldwide including the credit card if you are in need of any other cyber hacking services, we are here for you at any time any day.
    Here is our price list for ATM cards:
    BALANCE PRICE
    $2000 ----------------$150
    $5,000----------------$300
    $10,000 ------------- $650
    $20,000 ------------- $1,200
    $35,000 --------------$1,900
    $50,000 ------------- $2,700
    $100,000------------- $5,200
    ,order now:
    You can call or WhatsApp us with this mobile number..+2348130970822 email atmblank65@gmail.com  

    ReplyDelete
  14. I want to inform everyone that H. A. C. is at again in changing people’s life. I have been searching for job everywhere but all to no avail and everything became worse by the day living from hand to mouth. I couldn’t even afford to pay my bills, which lead to my Landlord sending me away from his home. I went to stay with a friend of mine. One faithful morning i was browsing through the internet with my phone seeking for online jobs where i came across a comment of Hackers advertising a Blank ATM card which can be used to hack any ATM Machine all over the world, i never thought this could be real because most advert on the internet are based on fraud, so i decided to give this a try and look where it will lead me to if it can change my life for good. i contacted this hackers and they told me they are from India and also have branches all over the world in which they use in developing there ATM CARDS, and also experts at ATM repairs, programming and execution which i was taught various tips and tricks about breaking into an ATM Machine with a Blank ATM card.i applied for the Blank ATM card and it was delivered to me within 3 days and i did as i was told to and today my life have change from a street walker to my house, there is no ATM MACHINES this BLANK ATM CARD CANNOT penetrate into it because it have been programmed with various tools and software before it will be send to you. my life have really change and i want to share this to the world, i know this is illegal but also a smart way of living Big without the help of the government. if you also want this BLANK ATM CARD i want you to contact the Hackers email on  blankatmhackmechine@gmail.com    and you life will never remain the same.

    Here are the price list for ATM Cards:

    $2500---------------$155
    $5000---------------$255
    $10,000-------------$500
    $13,000-------------$680
    $15,000-------------$760
    $17,000-------------$880
    $20,000-------------$970
    $25,000-------------$1000
    $30,000-------------$1100
    $35,000-------------$1200
    $40,000-------------$1300
    $45,000-------------$1350
    $50,000-------------$1500  

    ReplyDelete
  15. GET YOUR BLANK ATM AND CREDIT CARD AT AFFORDABLE PRICE.....

    We sell this cards to all our customers and interested buyers worldwide, the card has a daily withdrawal limit of $5000 and up to $50,000 spending limit in stores and unlimited on POS. *email blankatm988@gmail.com* you can also call or whatsapp us Contact us today for more enlightenment +44(7440495540.

    *BEWARE OF SCAMMERS AND FAKE HACKERS IMPERSONATING US BUT THEY ARE NOT FROM US CONTACT US ONLY VIA THIS CONTACT * WE ARE REAL AND LEGIT...........2019 FUNDS/FORGET ABOUT GETTING A LOAN *email blankatm988@gmail.com, OR +447440495540, (WHATSAPP ONLY).

    CONTACT US NOW AND BE HAPPY FOREVER, WE OPERATE ONLY TO ASSIST THE POOR AND HOPELESS WORLDWIDE TO LIVE A GOOD LIFE AND BECOME RICH FAMILY, AND BE ABLE TO
    PAY THEIR DEPT AND START A GOOD BUSINESS OF ANY AMOUNT, THIS IS A DREAM COMES TRUE TO THE POOR AROUND THE WORLD.

    NOTE: this will only cost a little charge for the preparation and the shipment of the card to your various countries, Thank you.

    ReplyDelete
  16. This comment has been removed by the author.

    ReplyDelete
  17. Are You A Business Man Or Woman? Are You In Any Financial Mess Or Do You Need funds To Start Up Your Own Business? Do You Need A Loan To Start A Nice Small Scale And Medium Business?
    Do You Have A Low Credit Score And You Are Finding It Hard To Obtain Capital Loan From Local Banks And Other Financial Institutes?. - Intermediaries / Consultants / Brokers Are Welcome To Bring Their Clients And Are 100% Protected. Interested Parties Should Contact Us For More Information
    Through Via E-mail: quickloan9888@gmail.com.

    I will Like To Inform You That Our Main Goals Are To Help Companies And Entrepreneurs Raise Their Business To better Heights By Investing, Consulting And Raising Capital Without Bank Lending. We Are Qualified In All Aspects Of Financing, Banks And Asset Based Lending. We Have The Ability To Handle All Aspects Of The Financial Needs And Challenges Of Our Clients, Including; Interested Parties or persons Should Contact Us For More Information.
    Through Via E-mail: quickloan9888@gmail.com,

    WE OFFER ALL KIND OF LOANS - APPLY FOR AFFORDABLE LOANS.


    *BEWARE OF SCAMMERS AND FAKE HACKERS IMPERSONATING US BUT THEY ARE NOT FROM
    US CONTACT US ONLY VIA THIS CONTACT *
    WE ARE REAL AND LEGIT.
    Through Via E-mail: quickloan9888@gmail.com,

    SEND US YOUR DETAILS THROUGH OUR EMAIL OR WHATSAPP FOR THE PROCCESSING OF YOUR LOAN, THANK YOU:
    - Your full Name:
    - Loan amount needed:
    - Loan Duration:
    - Purpose of loan:
    - City / Country:
    - Telephone:
    - How Did You Hear About Us:

    NOTE: This loan requires little charges for the processing and trust from our customers worldwide...we have change many lifes and willing to do more, contact us through our office email and somebody will attend to you fast...thank you.

    ReplyDelete
  18. My Name is Mr. Maxwell i am from Egypt, i will advice the world that Instead of getting a loan you contact blank atm agent or customer care through their office email, I got my already programmed blank ATM card to withdraw a maximum of $1,000 daily for 30 days. I am so happy about this because i got mine last week and I have used it to get $20,000. Mr Smith is giving out the card just to help the poor and needy though it is illegal and cost little charge for the shipment of the card, but it is something nice and he is not like other people pretending to have the blank ATM cards. And no one gets caught when using the card. get yours from him i fully recommend him. Just send him an email on (blankatm988@gmail.com ) Thank you Mr smith for granting me the privilege of knowing you and giving me financials assistance, i am happy, now i can live again and set up a good business that can sustain me and my family. rush now and be happy like me.

    ReplyDelete
  19. IF YOU’RE LOOKING FOR THE BEST WAY TO RECOVER YOUR FUNDs HERE IS THE ANSWER. But if you are dealing with an unregulated binary options broker, then you need some expert’s assistance. For losses of 50,000 or more, this would be an option to consider. It actually hurts and bring tears to my eyes when I read comments of scammed victims ripped off by BINARY OPTIONS AND FAKE RECOVERY EXPERT on forums. mail: , Ew5599013 AT gmail.com this information 100% security guaranteed NOTE from klynxx linx

    ReplyDelete