Tuesday, 20 May 2008

Information Asymmetry & Inflation: Have the inmates taken over the asylum again!?! [Part 2: It's the market, stupid!]

Posted by: Ash Khanna

Part 2: It’s the market, stupid!

I was disappointed by a recent Martin Wolf - FT column. Disappointed because I do give serious consideration to his opinions, but this time it was regurgitation. On the issue of commodity and energy prices he seems to have lost his (seemingly independent) voice and joined the salesmen in their sales pitch - i.e. the rise in (essential) commodities and energy is primarily (or at least suggests a trajectory) reflecting ‘the fundamentals’ – supply and demand – implying - learn to live, with these inflated prices! As made explicit in Part 1, I acknowledge that fundamentals have been playing a significant role, but the current prices in no way can be justified based on ‘fundamentals’ – Especially when reliable demand figures are not available!

Readily available supply side information, too, is biased. In fact we are bombarded with ‘analyses’ of (relatively micro) supply disruptions as reasons for the recent increases in the price of oil. How come then the supposed mammoth Alaskan, the more recent (and quickly disputed) Brazilian discoveries and super deep wells in Russia, don’t bring down prices, equivalent to the ‘size’ of the potential find? How come we don’t hear much about new discoveries and advances in extraction technologies? This bias of information is ‘broadcasting’ an ‘asymmetric bet’. George Soros attributes such events to the “manipulative function” of the ‘reflexive market’. In less than a year we have been, ‘regularly’, told, first, that the era of ‘cheap energy’ and (more recently) ‘cheap food’ has ENDED! Is it me or does this smell like “Propaganda” - Edward Bernays (one of the fathers of the field of ‘public relations’) called this scientific technique of opinion-molding the “engineering of consent”. Sounds conspiratorial, well it’s not. Have we forgotten the Enron traders (i.e. Californian power cuts), already?

“Markets are inefficient!”

On the 16th of May, 2008 we got to know (from FT.com & Reuters.com) that:
US industrial production fell 0.7% in April 2008, reflecting the biggest drop in the US manufacturing sector since September 2005. Common sense suggest – if less industrial production less consumption of energy – meaning reduced demand from the world’s largest consumer! Further, the Oil Cartel’s Monthly Oil Market Report says – world demand 40,000 bpd less than its previous forecast due to high oil prices – seems to corroborate common sense.
But guess what? –
The 16th saw a surging demand from China, helped bolster heating oil prices. According to Reuters.com oil “re-bounds” near $125 on heating oil supply strain, as China & Europe “scramble for barrels, thinning global supply.”

Excuse me - Aren’t we in the middle of cataclysmic global warming?
HEATING Oil in the SUMMER, at those prices?????

Further, this ‘demand’ somehow overshadows the largest fall in industrial production in the US since fall 2005 and completely rejects demand figures from the most significant conglomeration of oil producers!

But it gets even more confusing; US Energy Information Administration said natural gas storage rose 93 billion cubic feet last week, above ‘expectations’ for an 87 bcf build. Does this suggest reduced consumption, increasing reserves at exorbitant prices (!?!) or ‘hoarding’?

Anyway, a couple of days after that -
Saudi Arabia declared it will increase production (some analysts suggest - against its own better judgment but under pressure from the US President):
Oil prices surge…..Cross $128 because of “speculation” that this will increase the US strategic reserve!!!!!??????

Information asymmetry and panic may tactically work in the favor of such “speculative pressures”, but this is not sustainable, indefinitely.

The markets are NOT always right!

Part 1: http://ianangell.blogspot.com/2008/05/information-asymmetry-inflation-have.html

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