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October 20, 2009



There's also the issue of why buying futures contracts impacts on the price of oil at all. This has never been explained wholly satisfactorily (as opposed say to silver ETF buying, which clearly reduces the availability of silver).


In other words?

The costs of having a noisy, bubbly market (including the net rewards to speculators in that market) may well be less than the costs of carrying sufficient stocks to stabilise prices near levels suggested by the fundamentals.

Tim Worstall

I'm not entirely convinced that it's "neoclassical" thinking. It's pretty much word for word from Smith with "oil" replacing "wheat".

"speculative bubbles everywhere. At the other extreme, we have some free marketeers who deny the possibility of them."

I hope that's not me there as "some". I've been through a couple of speculative bubbles (in minor metals) myself and know very well that they can and do exist.


>>Rational investors can do little to exploit excess volatility.

Nonsense. If the volatility causes prices to move below the intrinsic value, then rational investors can step in and buy, and vice-versa for prices above intrinsic value. The stock market is a voting machine in the short-run but a weighing machine in the long run. The key is that the rational investors have to act like investors rather than traders. The time frame for evaluating a stock market investment is around 20 years rather than 6 months.

The only people who can act like rational investors are individuals investing their own money. Managers of other people's money are not going to be given 20 years to show their stuff. But the amount of money managed by individuals on their own behalf is small compared to money managed on someone else's behalf, and that is unlikely to change in the next 50 years. This opens a huge opportunity for the rational individual to outperform the market. To do this, these individuals must know how to estimate intrinsic value, which is by no means easy, though it isn't that difficult either. If volatility and thus mispricing is extreme, then even a crude estimate of intrinsic value will allow the rational individual to make money in the long run (meaning 20 years or longer time frames), at the expense of the momentum chasing herd.


that may work for equity, but not for commodities which have high holding costs.


But I don't understand the story that the bubbles do no harm. Clearly commodity market bubbles can kill people, particularly if the commodities effected are staple grains.

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