Ander's Market Theories

[AnderL]

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I picked up Jim Rogers’ book Hot Commodities yesterday. I hated to pay for it, but I don’t want to be a critic without having read it. I didn’t have to delve very deeply before I hit on the inconsistencies, misinformation, and use of reflexivity.

The thing you must realize about Rogers, Soros, and a few other of the market royalty is that it’s hard to believe anything they say. They are living examples of the liar paradox. What’s strange is our desire to believe them. Soros has long admitted to practicing reflexivity in the markets.

In the markets reflexivity means that if you are trying to predict the future, then your predictions and actions related to those predictions impact the future. This is somewhat meaningless to us normal people. But when someone managing enough money to move markets says they practice reflexivity, it’s a fancy way of saying they manipulate markets. They make their prognostications come true. If they say they think that there will be a bull market in commodities, they are trying to make a bull market in commodities. What we never know is whether they really think there would have been a bull market in commodities even if they hadn’t used their powers of persuasion and suggestion to help create it.

If you believe that predicting a bull market in commodities will make it actually happen, well then why let the truth get in the way of making money? You’ve got a virtual money making machine. Buffet, the big brokers, the massive hedge funds, they all do it.

One of the first things that caught my eye in Hot Commodities was the following passage citing reasons for higher oil prices: “The U.S. has not built a new oil refinery since 1976—and the number of domestic refineries has actually decreased by more than half since 1982 (from 321 to 149).” Long-time readers of this blog know that I’ve complained numerous times about how the media and analysts were frequently stating these misleading statistics. Now I know where they were getting it. If Rogers says it, it must be true, right?

I’ve been critical and suspicious of Rogers’ intentions. But one thing I’ve not criticized is his intelligence. No doubt he’s extremely intelligent. Now a far less intelligent person with only a modicum of business savvy can see right off what’s wrong with the refining statistics. The problem is two fold. First off is the one I’ve covered most often here, which is the fact that limiting refining capacity limits oil consumption. If refining capacity is limited then refiners demand for oil is limited and there fore demand for oil is capped, which of course should cap the price of oil. I have to give credit to reader Paul Teetor who insightfully pointed this out back in April. The second flaw is a very basic business one. The number of refineries does not necessarily have anything to do with output. You can make a million widgets in one really big factory or one hundred smaller factories. It’s a million widgets either way. This is precisely the case with refining. Refiners have had no trouble whatsoever increasing output from existing refineries. They can increase the output of existing refineries without having to navigate the rigorous approval processes to build new ones. Also, they can just import more. And that’s what they are doing. How difficult is it to get a new refinery approved to be built just over the border in Mexico? Slip the right authorities a few hundred Gs? Seems to me, they’d love to refine our gas, especially at more than $2 a gallon. Obviously, since the hurricanes put several refineries out of commission and inventories of refined products keep building anyway, we don’t have a refining issue and even if we did it should push down oil prices.

This is coming from a book that’s spent time near the top of Business Week’s Business Best Seller list. It’s in just about every major bookstore, even my smallish local Borders, which has a horribly limited and mainstream selection of books on the markets. People read this book. The subtitle says that the commodities market is the world’s best market. Of course you want people to believe that if you’ve got say a billion dollars invested in them.

Like I said this is a very smart guy so I have a hard time believing that he believes any of the nonsense I quoted above. If he does believe it, he’s not as smart as I think. If he doesn’t, then he’s a manipulative bastard and the media, analysts, and investors are bunch of gullible, ignorant, idiots.

When oil prices were hitting the high $60s before the hurricanes hit one of the most common reasons cited by said idiots was the quote above. We heard the excuse over and over again as Rogers’ funds raked in the profits.

Now you’ll never hear me say a guy shouldn’t be a speculator or shouldn’t profit from a change in prices when he can. I’m not out here calling for some idiotic regulations or windfall taxes. But if Rogers has the right to say such things, then I have just as much right to say what a bunch of manipulative B.S. it is.

posted by Mark at 3:14 PM 0 comments