Thread: Food Crisis
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Unread 6 Jul 2008, 11:32   #22
Zar
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Re: Food Crisis

Quote:
Originally Posted by Tietäjä
But you're still stuck with reasonably close history of those. This is what implicitly affects the market. I've never worked as a trader, or in an investment bank, but I really fail to comperhend that they'd pick a random good with no particular reason (a bluntly faceless product, say, pencils) and start making tons of options for them for no particular reason. And that tons would jump into a bandwagon. If you could enlighten me with an example of such a product I'd be very interested to read a case study.
I can't think of any 'case studies' because frankly this is a phenomenon that is extremely common in the market. In order to point you into a more recent example, perhaps the aptly named 'dot com bust'. This presided over a period where there was insane speculation and gross overvaluing of companies. P/E ratios where constantly in the 30's and 40's. New dot com companies were literally having cash thrown at them without any real basis or founding.

Another more recent example would be India and China. Both countries saw their major indices shoot up, where both countries had ridiculous p/e ratios, even when the companies the indices were made up of had not grown by that much.

One thing you have to realise is that there are broadly three types of investor.

i) The informed institutional investor. - banks, hedge funds, private equity etc. These types of investors tend to have their own research houses, analysts who do their research on a product/s and investment decisions are usually based on the decisions of their quants and research team.

ii) The uninformed institutional investor - pension funds, corporations, governments etc. These type of investors have very small research houses or none at all. They are completely reliant on the information of the analysts and salesman in the companies they are purchasing/selling products to.

iii) The private investor - individual people, smaller companies etc. Research is limited to reading papers, websites, tips and jumping on the bandwagon.

Investors from ii and iii, especially investors from iii can end up throwing huge amounts of money on questionable research. Pension funds are totally reliant on the honesty of salesman and traders in banks. I probably do not need to remind you that a salesman is motivated by a sale only and rarely stops to tell you their opinion of the product you are purchasing, unless you request it or they consider you an important enough client.


Quote:
Oil isn't good for it. Even if you can't produce any factual evidence on the future of it, even a layman is well aware of say the mentioned crisis at 70s. You can argue till the very infinity that there's currently no reliable signs of oil production/export constraints, but what you cannot do, is get rid of the last 30-40 years of history. Oil is heavily profiled by that.
Fine I agree, history is important and history will have been priced into the market.


Quote:
I'll agree with you that it can partially be speculation. But this speculation did not appear out of nowhere. I'm going to argue that what the United States have done in Iraq for years now has a part to play (to sum up, US foreign policy on the Bush jr. era) in this. Now, the speculation if a symptom of outside influences. Something has triggered it. It didn't just happen out of silly (if it did happen out of silly, could you please point me to a major speculative incident in the history that happened out of silly other than mentioned oil crisis, and provide with a case study). I am going to stick to my side and argue that price increases of this side, even if results of speculation, do not simply happen out of nowhere.
Ok I can understand the point you are trying to make, and in that regard it's probably fair that I agree to an extent. You're correct in that (most) investors do not gamble randomly based on no research or evidence, but the point I’m trying to make and made earlier is that investors often invest on questionable evidence and this more or less is blind speculation and jumping the bandwagon. So as per the dot com bust, if an investor sees everyone making lots of money, and if the investor can loosely justify to his backers that there is lots of money to be made (and quite often this justification can be the fact that other people are making lots of money, and that you believe that people will continue to throw money at the market, on top of loose research that the companies invested in will be profitable) he will get the go ahead to invest.

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Yes. But the 70s case cannot be forgotten when you look for incentives why someone would speculate on oil.
Of course it can't. The market will always price in the assumption that oil supply will be cut. The posturing by Israel on attacking Iran will have been priced into the current oil price. However, once again the point I’m trying to make is that although the above has the effect of increasing the oil price slightly, it isn't the main reason why it is happening at the moment.

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Have you ever stopped to wonder why oil is in the position it is in today's investment market?
Yes it is a tradable product, just like any commodity that is subject to market forces.

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What I'm saying is, that the reason the oil prices are volatile in general is the fact that oil has a very recent history and a current strong status of oligopolistic nature (and OPEC behavior generally), which produces a strong incentive to speculate on it. Now, attacking Iraq, and the war stretching longer and longer (one could argue it's still a war zone there) is another incentive. The speculators are grabbing these excisting issues in the oil market and thus attempting to make money of it, causing the prices to increase. Essentially, it's speculating that's resulting in the prices increasing, but if the oil market wasn't already ill to begin with, this would never happen. While we're at it, we could claim that the fact that Iraq was attacked and is still essentially at war must have had some effect on oil supply.
As above, this is just like any form of speculation on a company’s SP. I might speculate on a company’s SP but this has no negative effects on the company even if the price shoots up to a level which grossly overvalues it. Oil, however, like all commodities are consumed and therefore any increases in prices will affect everyone.
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