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Illusion of Occam's Razor Oil Pricing Model
1. Today's stronger employment report led to a stronger dollar.
2. The stronger dollar pushes the price of oil down.
3. Stronger employment will also cause more people to burn more oil.
4. More people burning more oil pushes the price of oil up.
5. The price of oil is therefore pushed down and up.
This model is also known as the Main Stream Media Oil Pricing Model. It's not a true Occam's Razor model though. Fewer assumptions would not allow financial TV's airtime to be filled.
Occam's Razor
Occam's razor states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory.
Iterated Prisoner's Dilemma Oil Pricing Model
1. Oil hits $40. Play game. Buy.
2. Oil hits $140. Defect before others do. Sell.
3. Oil hits $40. Play game again. Buy.
4. Oil hits $80. Defect earlier this time. Sell.
5. Oil hits ___? Play game again. Buy.
6. Oil hits ___? Defect even earlier this time. Sell.
Prisoner's Dilemma
Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal.
In the iterated prisoner's dilemma, the game is played repeatedly. Thus each player has an opportunity to punish the other player for previous non-cooperative play.
Murphy's Law Oil Pricing Model
1. If you are not invested, the price of oil can always go up another dollar.
2. If you are invested, the price of oil can always go down another dollar.
Murphy's Law
It is used as either a purely sarcastic musing that things always go wrong...
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
12 hours ago
15 comments:
Nice Oil scheme!
Bloody nose day for gold and silver. I will have a short post up in a bit, I have dinner plans tonight.
You are right about that volume though, WOW! Certainly not the "buy and hold" types that usually populate the gold/silver scene.
Still, hard to say the macro view has changed, but one day wonders never cease to amaze.
GYSC,
That macro view still looks mighty fuzzy to me. At the risk of endlessly repeating myself, what would we expect to see when we start with tremendous overcapacity and then attempt to destroy our currency to counter it?
I really don't want to take either side of that trade if I can help it. However, one must do something obviously.
1. You can bet that tremendous overcapacity will win and stick with deflation.
2. You can bet that tremendous currency destruction will win and stick with inflation.
3. You can bet that the two forces meet each other perfectly and just pretend nothing has happened (other than high unemployment).
4. You can bet that the two forces meet each other imperfectly and we toggle between the two in unpredictable ways.
#4 is probably the safest play. Just look for the current "sure thing" and avoid it like the plague, then wait for something unpredictable to happen. It's a betting against the herd theory.
There is SO much leverage being applied to sure things these days. I do think GLD shows that. That chart only goes up. Right? How much borrowed money is repsonsible for 79 million shares trading today? That's the biggest problem with sure things. If investors know for sure something will make them money, then they also know that borrowing money to buy even more is an even better plan.
As a gold investor, and I know because like you I was one once, it turns my stomach to think that my fellow investors would borrow money to buy it. That's the VERY thing I was trying to avoid. Owning gold and having it in your hand SHOULD be a way to protect yourself from massive leverage. Right?
Gold may do very well for investors but I really don't think it should be considered a sure thing by anyone, especially with unleveraged toilet paper prices remaining tame.
All that said, I do think today's employment report optimism is overdone. I do not think it is a sure thing that we are now on the path back to a healthy economy. So pack some gauze in that nose of yours. Next week is anyone's game!
All I know is that I want the price of TIP to fall so that I can get out of this pesky cash and into something with at least some chance of protecting my nest egg long-term.
Mark,
I luv ya and your points are valid.
There are a few key differences in our thinking however.
GLD is a paper product, 99% of GLD buyers will never see an ounce of real gold except on their wife's fingers!
The hyper mania on those shares does scream "bubble" but soon the 15% of gold price will move on. Good riddance!
Deflation will not be allowed. Hyperinflation is a gold bugs dream. Your name of Stagflation is perfecto going forward, and I had always hoped you would see that!
Gold is great in stagflation. In a year US bonds will not be the most wanted thing in the world. As Mauldin says, it's "muddle through" time. Get comfortable.
All my best.
GYSC,
I've been stagflationary for 5 years and all I got was this lousy t-shirt, lol. ;)
"The hyper mania on those shares does scream "bubble" but soon the 15% of gold price will move on. Good riddance!"
Just keep in mind that prices are set on the margin. It isn't the typical homeowner that the real estate market needed to fear. My home was not leveraged at all, nor did I ever sell it.
It isn't just GLD. Here's an article from yesterday.
"UPDATE: PRECIOUS METALS: Comex Gold Continues Run On Momentum"
http://online.wsj.com/article/BT-CO-20091203-712863.html
NEW YORK (Dow Jones)--Gold futures posted another record settlement Thursday, recovering from a slight swoon early in the session, as the metal continues to benefit from investor appetite for assets other than the U.S. dollar.
Further, 99% of oil speculators never saw a barrel of oil in their wife's garden either. That didn't stop oil's price from falling from $140+ to $30+ though.
Hey, just playing devil's advocate. That's about all I could be since I'm bullish on the US dollar right now.
I do not fear Satan half so much as I fear those who fear him. - St. Teresa of Avila
GYSC,
I should also add that I would be VERY surprised if gold fell to $500. I'm not trying to imply that it will do what oil did.
That said, I was VERY surprised when oil fell from $140 to $30+ though. So what do I know?
GYSC
"Deflation will not be allowed. Hyperinflation is a gold bugs dream."
You know GYSC if I was a central banker and my greatest fear was deflation I think I would probably buy gold.
LOL
There are three sides to every coin: the seen, the unseen, and the side.
Kevin
Kevin,
indeed, good point.
I am just thinking out loud, and I never pretend that I know everything. That is why I like the kind of open dialogue here, plenty to think about.
I am still firm on the "Bernanke will not allow deflation here" theme but I need more info to judge timelines. Economics take so long to play out!
Kevin & GYSC,
If I am wrong about gold being too expensive at $1000 (which I clearly am so far) then someday we may hear Bernanke say the following.
Reporter: Is the gold in Fort Knox part of a massive bubble brought on by unsustainably low interest rates and if so will the gold bubble turn to a bust?
Bernanke: Of course not! There is NO gold to go bust!
Reporter: No gold?! Don't you mean no gold bubble?
[The sound of a pin drop fills the conference room. Fade to black.]
No gold but plenty of Tungsten!
Remember when gold is at 0 and so is sliver I am buying it ALL!
GYSC,
There's a chance I can buy all the gold and silver at today's prices. I just need to find a lender too big to fail that's willing to work with me and a Fed that REALLY wants to see some new "lifeblood" activity.
Loan Application
APR: 0%
Payments: $0 per month (interest only)
Loan Amount: 25% of income
Stated Income: Infinity!
How do I justify the income? I'll be hyperinflating everything I touch! Here's an example of my haggling skills. Give you a trillion dollars for some advice on what to do with all my inflationary profits!
What was your cut of Halo 3? Surely you would have to disclose that kind of capital base? HA.
Mark do you have a timeline of when you think Halo 4 will be coming out?
Its all aluminum all the time:
"Rusal, the world’s largest aluminum producer, which is struggling under $17 billion in debt, is close to an agreement with about 70 banks to restructure its loans on terms considered favorable to the company and its billionaire owner, bankers said on Wednesday."
http://tinyurl.com/yh2gn8v
A pay as you "can" loan? HAHA could not help it.
Wow! It isn't even an Ameri-can loan.
Just doing my part to "recycle" the puns!
As for Halo, I'm just going to pretend the topic wasn't even brought up. I figure if I ignore Halo then people will give up teasing me about a game I never worked on.
This is me putting every last ounce of energy into ignoring Halo. This problem needs to be contained before it turns into a systemic risk that requires massive goverment bailouts. Some might argue that Halo has become my subprime. Don't you believe them! Nobody is going to panic on my watch!! It makes no sense!!! SELL! SELL IT ALL! I don't care what the price is!!! Get me out!!!! This IS not me panicking!!!!!! It's the only logical choice!!!!!!! Bah!!!!!!
Mark,
great job on Halo 3, you are too humble.
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