The Oil Drum

13 comments on A gentle cough in the direction of the NYT

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Halfin on November 30, 2005 - 2:21am

The reason these comments about the market are not correct is that if markets worked that way, anyone with some common sense could become rich by investing in futures markets. All you have to do is to look ahead and find a case where the futures price is way off from what you are sure the spot price will be at that time. Take a position in the market based on that difference. The market price must converge to the spot price as the contract expires. If your prediction were right, you'd make money.

Yet we know this doesn't work. Most people don't succeed in the futures market. It is not an easy road to riches.

I believe that the reason is because the story about bad market predictions is wrong. Actually, markets predict very well, on the average. They may be too high sometimes and too low other times but you can't tell which. There is no safe and easy way to say whether a given market prediction is too low or too high. If there were such a way, people would exploit it to make money, and by their actions they would correct the mistake.

That's the great thing about markets: when they're wrong, you can get rich. And by doing so, you make them right. No other institution has this property. Polls and surveys certainly don't, nor do predictions by experts or interested parties. Markets are fundamentally different from polls. They have self-correcting properties which make them the best institutions we have for making predictions.

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TI on November 30, 2005 - 4:30am

Markets are for allocating resources, they are not for predicting anything. They may seem to predict because they can sometimes feel weaker signals of something that is already going on. But this is not really predicting. If the economy has started to weaken the companies adjust their expectations and plan to purchase a little less oil in the future and this shows in the markets. But the markets only react to the changing conditions, they do not predict them.

The markets did not predict the US oil peak, nor the North Sea oil and gas depletion. They will set price for the supply and demand to meet, always.

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mikeB on November 30, 2005 - 6:48am

They may seem to predict because they can sometimes feel weaker signals of something that is already going on.

They also seem to "predict" because marketeers use fallacious "observational selection" in the way they interpret the market.

Another term for this is "filtering." Basically, with any predictions you want to trumpet, you highlight the "hits" and ignore the "misses."

Markets aren't merely "short-sighted." They're reactionary.

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NC on November 30, 2005 - 10:15am

The problem in trying to use market trends to predict the future is this.

Not all players in the market have the same goals or the same amount of cash to invest. A small minority of people, controlling a significant amount of money, can move markets in order to make a profit. A lot of money has been made just selling when prices go up and buying when prices go down. Far seeing, well informed, sustainable minded people are going to loss their shirts in this environment if they can't hold onto investments for years (at no cost) to realize a change in price.

The market has no interest in what the long term scarcity of the resource will be. Traders make money off of choppiness not long term trends. The money has to cycle in and out with profitability on each trade. You have to sell to make a profit. Buying and holding doesn't make you any money. It doesn't matter if the long term trend is up or long term trend is down. As long as there are short term spikes and dips there is profit to be made on relatively short term trades. Consumers don't have this luxury. They only buy once, hopefully at the lowest price they can get.

IMHO this short term choppiness of markets tends to mask all real trends of scaricity of commodities unless a graph of long term (always more than 12 months) is used to put things in perspective.