Those darned Algorithms! Turn your back and they'll raise unmitigated hell. Take oil for example. CNBC on-line carries the article: "Algorithms, not demand, driving oil prices sky high?"
My first question is: Why single out oil? The equity markets seem to be on auto pilot as well. Many reasonable analysts and economists without a stock to sell or an apparent axe to grind have argued that stocks are seriously inflated. The self-styled prophets of profits have ingeniously concocted a double barreled deceit, suggesting that:
- oil prices are rising because of heightened market risks; but
- stock prices are rising because they've already 'discounted the risks'. That is, the stock market would be yet higher if not for those pesky energy risk scenarios in Libya, Yemen, Bahrain, Nigeria, Iraq, Japan, Australia,...
When oil rose up from its trough to $70 and then $80, critics argued that price was defying demand. Supporters argued that it was essential to motivating further exploration and development of inherently more risky sources. There was a piece of logic in that, if one assumes that the majors would prefer to finance out of profits than out of the equities market. But did the majors drive the price? The producers? The hucksters? The supply/demand driven 'market'? Or....the Algorithms?
At the same time, stocks were beginning their march back to the promised land of paper wealth. In the past six months, both have taken on a trajectory that is seemingly without intrinsic basis in collateral, real-world events. Gas and oil began rising before Tunisia. Stocks continued to rise in the face of the anemic employment growth; continuing to slash payrolls while hoarding cash in anticipation of possible bad times or government policy chaos or whatever.
Not to worry. It's all good!
So, is it those pesky alogrithms? Or is there a more mindful influence?
In the case of stocks, it is argued that the point of QE2 is to re-inflate the stock market. But is that an end in itself, or a means to a more targetted end? One might suggest that reinflating the stock market, and with it pension portfolios, removes a whole lot of hurt from corporate and governmental balance sheets hammered by pension fund impairment. Mere window dressing. No substance. Corporate profits derived from draconian downsizing are unsustainable, and corporate revenues derived from a market in transition to austerity from anemic wage growth and personal financial deleveraging are also unsustainable. What will be the next financial rabbit to pull out of the hat?
As for oil? The majors have moved into nat gas, taking their positions while it is low. Nat gas will not shake its neurotic price behavior until oil scarcity, and not political volatility, trumps speculation and moves oil pricing into a long term pricing paradigm that will solidify nat gas prices, and reorganize the derivative product prices.
We offer this closing thought for your consideration: It's not about alogrithms. And it's not about market-moving events. It's about control, and who is managing the markets to what ends. Stay tuned for another intriguing episode of The Twilight Zone.
Onward.
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