Upturned Values in Market Purchasing Decisions
While we’ve been discussing recently about market clearing prices, price matching, individual buyer values and the related phenomena, the large majority of that has occurred in regards to concrete items being bought & sold. Well, that is to say that we assume when there’s a match between Seller A and Buyer X, something tangible is trading hands. However it’s quite interesting when one looks at markets that don’t directly involve tangibles, in this specific case commodity markets as they are discussed in the article from The Economist that I read (linked at the bottom). The reason why I felt commodity markets are a particularly good topic to look at are the fact that they can act as somewhat of a bridge in our understanding of markets & trading, where yes there are no longer actual physical goods being exchanged each time someone buys or sells in a commodity market, but they are still by definition affected by the value & willing to buy/sell a physical good.
To that effect, while it hasn’t made as many headlines recently, there have been few commodities as discussed, fussed, and fought over as oil. And in fact, those headlines often have a direct impact as well. As the article goes on to examine, there has been an interesting development as of late in the oil commodity market between two competing forces. Large oil producers, as one might imagine, are the ones strongly in favor of rising prices, and at the other end are speculators who are via shorting are betting on the market prices actually falling. I found this interesting in light of some of the discussion we’ve had in lecture about how buyers have their individual values and that is a main determinant in their purchasing decision. However, in this case it’s actually an inverse because the so called ‘mice’ in the article or the speculators betting against the market aren’t buying shorts based on their valuation of the oil commodity in and of itself, but instead buying based on their valuation of its likelihood to become LESS valuable. Since it’s relatively general understanding that in most stock/commodity markets, you may want a lower price when YOU yourself invest and then for whatever you’ve invested in to rise, that seems like it feeds into the standard notion of buyers, sellers & values but to have that flipped on its head is what I felt was noteworthy. Particularly because if you look at it from a certain point of view, if you’re a speculator/mouse that is looking to short the market, what is your ‘buying’ decision based on, is it even related to price at that point, or has your value become completely disconnected from price and is solely based on the perceived likelihood of market decline? While commodity markets do bridge the concrete and abstract in discussing markets, in this case it seems like it’s not even the buying of commodity that is occurring, but similar to the U.S. Presidential Election Markets that we saw a number of lectures earlier, it is the buying of your belief in an outcome, simply projected through the price of oil commodity. This might seem like it would lead to an unstable market, because if your notion of value isn’t actually directly stemming from the commodity you’re trading, but from your idea of the possibility of its value declining, the latter of those two changes much more easily and per individual basis. The answer is that, yes in fact it does lead to instability, which is also discussed in the article and the graphing of raw quantity of short contracts purchased shown in the article, pointedly demonstrating a volatile spike and fall and spike, is worth a look if you’re further interested in the topic.
Article:
Of mice and markets (The Economist, Sep. 10th, 2016)
http://www.economist.com/news/finance-and-economics/21706512-surge-speculation-making-commodity-markets-more-volatile-mice-and?