This is something that I think everyone would say they understand if you ask them and yet its something that everyone will discard at some point in their lives.
When I leave the world of finance I'll be ok with forgetting almost everything I've learned with the exception of one principle.....
Always hedge
Cheap prediction 3 things that are in an unsustainable bubble that will pop in the next 3 years.
1) Hedge funds, way to much money since 2008, huge bull market since 2008 and the sell side closing down their prop trading businesses since 2008 created an unsustainable number of funds.
2) US equity markets, see above
3) Twitter, people will become tired of making excuses for their huge P/E ratio and move their money to somewhere else that will actually make them a return, celebrities will become fickle and move onto the next big communication network.
> Twitter, people will become tired of making excuses for their huge P/E ratio and move their money to somewhere else that will actually make them a return, celebrities will become fickle and move onto the next big communication network.
Twitter wont die, it will get bought by someone (probably Google). Twitter is perfect for celebrities, they don't need another network. It's the common person that doesn't have much use for it.
One thing I don't get about "hedging": If you hedge, how do you make profit? While you get downside on your one bet and upside on other, things cancel out, right? Profits seems to be proportional to risk. Hedging reduces risk and hence reduces profits. I've heard "always hedge" lot of time but being naive in this area, I want to know how do professionals hedge while still bringing in significant profits.
Say I wanted to put my reputation or money where my mouth is with some predictions like this of my own. Are there any online prediction markets that support this?
This was the idea behind Intrade before it folded, no? I remember hearing about it in the popular media all the time during the 2012 US presidential election. Has anything like it arisen in its place?
Eventually we will hit the point at which oil prices do go up forever -- if they are measured as the inverse of EROEI. In other words: we'll reach the point at which every barrel of (conventional geological) oil that we produce takes more energy to extract and process than the last. At that point, oil is a dwindling resource.
This may or may not mean that the price of oil will go up forever in nominal dollars. It may actually have the reverse effect at times, since it could trigger financial crashes that result in deflation. It may also lead to replacement of oil with other resources (gas, electric, etc.) or shifts away from oil-based transport (electric trains, walking, biking) -- and those could lead to decreases in oil price as well if they occur to enough of an extent.
The error in predicting eternal oil inflation is threefold:
(1) Assuming that financial cost always reflects objective physical cost -- that there is a 1:1 relationship between thermodynamics and price. Reality: there's only a soft relationship subject to the next two factors.
(3) Forgetting that money (especially fiat money) is itself variable in value. Reality: deflation can cause prices to nominally fall when nothing has actually changed, and inflation can cause the inverse.
Does that assume that the two Es in EROEI are fungible?
Apparently the largest solar installation in the world is used to generate steam that is used to extract oil. I can imagine (just about) a strange future with a renewable powered oil industry, because oil has certain benefits that electricity doesn't (use as airplane fuel for example). Such fuel would have a lower carbon impact overall, though probably only slightly lower.
I think it makes sense that at some point we'll start leaving oil in the ground, but not sure if that's because its price will keep going up, or if its replacements will keep getting cheaper/better, and what affect that has on oil prices.
For physical commodities, financial cost will eventually converges to physical cost as the contracts reach settlements. If not, those financial contracts will be replaced; by another product that can truly provides physical players to hedge their risks.
This was the same argument that salespeople would use whenever you stepped into a bank between 2005 and 2008 in Spain: "Real estate prices never go down". Then they did, and the most of the banking system in Spain went bankrupt. I'm using the Spanish example because it's the one that I am familiar with, but this happened pretty much in every developed country.
People tend to forget that generally we can't predict the future, specially not by extrapolating the data from the past few years. Ironically I think that economists tend to make this mistake more than any other group except for fortune tellers and weather forecasters.
Related to this I won't get tired of recommending "The Black Swan: Second Edition: The Impact of the Highly Improbable" by NN Taleb [1].
Problem is that these black swans happen only once in blue moon in a given area. For most other times if you look at trends, it's probabilistically correct to say that oil almost never goes down and real estate almost always goes up. I would estimate that there are less than 10 black swans occur during a life time of adult person that violates conventional "wisdom" in oil, stock and real estate. If you run your life believing that they would occur every year, you are likely to be at bigger loss.
BTW, Nasim Taleeb don't suggest that you wait for one big black swan in one field like oil or real estate. His main argument is that you want maximize your exposure to all different kind of black swans in all different kind of places by putting lots of small bets on them. YC is a perfect example of implementation of Taleeb's theory. A bad implementation of Taleeb's theory would be to put a large bet that Apple stock would go down to $10.
I see he is using a typical inflation-adjusted graph to show the historical price of oil. It's interesting to also see the historical ratio between oil and gold prices as an alternative way to compensate for inflation. The oil/gold ratio has been much more consistent, perhaps because errors in our inflation estimates add up over time.
> gold prices as an alternative way to compensate for inflation
The price of gold is in no way an alternative to compensate for inflation. I mean, at least for those countries where consumers don't use most of their money to buy gold.
How can gold be used as an indicator of inflation?
Gold went up by almost 50% during the 2008 crisis and has dropped by 1/3 since it's peak. If we use the price of gold as an indicator of inflation that would mean we a huge inflationary spike followed by a severe deflationary period?
[+] [-] chollida1|10 years ago|reply
This is something that I think everyone would say they understand if you ask them and yet its something that everyone will discard at some point in their lives.
When I leave the world of finance I'll be ok with forgetting almost everything I've learned with the exception of one principle.....
Always hedge
Cheap prediction 3 things that are in an unsustainable bubble that will pop in the next 3 years.
1) Hedge funds, way to much money since 2008, huge bull market since 2008 and the sell side closing down their prop trading businesses since 2008 created an unsustainable number of funds.
2) US equity markets, see above
3) Twitter, people will become tired of making excuses for their huge P/E ratio and move their money to somewhere else that will actually make them a return, celebrities will become fickle and move onto the next big communication network.
[+] [-] seizethecheese|10 years ago|reply
[+] [-] onewaystreet|10 years ago|reply
Twitter wont die, it will get bought by someone (probably Google). Twitter is perfect for celebrities, they don't need another network. It's the common person that doesn't have much use for it.
[+] [-] sytelus|10 years ago|reply
[+] [-] klenwell|10 years ago|reply
This was the idea behind Intrade before it folded, no? I remember hearing about it in the popular media all the time during the 2012 US presidential election. Has anything like it arisen in its place?
[+] [-] api|10 years ago|reply
This may or may not mean that the price of oil will go up forever in nominal dollars. It may actually have the reverse effect at times, since it could trigger financial crashes that result in deflation. It may also lead to replacement of oil with other resources (gas, electric, etc.) or shifts away from oil-based transport (electric trains, walking, biking) -- and those could lead to decreases in oil price as well if they occur to enough of an extent.
The error in predicting eternal oil inflation is threefold:
(1) Assuming that financial cost always reflects objective physical cost -- that there is a 1:1 relationship between thermodynamics and price. Reality: there's only a soft relationship subject to the next two factors.
(2) Assuming infinite demand inelasticity. Reality: increasing oil price fuels substitution and demand destruction.
(3) Forgetting that money (especially fiat money) is itself variable in value. Reality: deflation can cause prices to nominally fall when nothing has actually changed, and inflation can cause the inverse.
[+] [-] ZeroGravitas|10 years ago|reply
Apparently the largest solar installation in the world is used to generate steam that is used to extract oil. I can imagine (just about) a strange future with a renewable powered oil industry, because oil has certain benefits that electricity doesn't (use as airplane fuel for example). Such fuel would have a lower carbon impact overall, though probably only slightly lower.
I think it makes sense that at some point we'll start leaving oil in the ground, but not sure if that's because its price will keep going up, or if its replacements will keep getting cheaper/better, and what affect that has on oil prices.
[+] [-] littletitans|10 years ago|reply
[+] [-] josu|10 years ago|reply
People tend to forget that generally we can't predict the future, specially not by extrapolating the data from the past few years. Ironically I think that economists tend to make this mistake more than any other group except for fortune tellers and weather forecasters.
Related to this I won't get tired of recommending "The Black Swan: Second Edition: The Impact of the Highly Improbable" by NN Taleb [1].
[1] http://www.amazon.com/The-Black-Swan-Improbable-Robustness/d...
[+] [-] sytelus|10 years ago|reply
BTW, Nasim Taleeb don't suggest that you wait for one big black swan in one field like oil or real estate. His main argument is that you want maximize your exposure to all different kind of black swans in all different kind of places by putting lots of small bets on them. YC is a perfect example of implementation of Taleeb's theory. A bad implementation of Taleeb's theory would be to put a large bet that Apple stock would go down to $10.
[+] [-] oofabz|10 years ago|reply
https://www.wolframalpha.com/input/?i=price+of+oil+%2F+price...
[+] [-] danmaz74|10 years ago|reply
The price of gold is in no way an alternative to compensate for inflation. I mean, at least for those countries where consumers don't use most of their money to buy gold.
[+] [-] seizethecheese|10 years ago|reply
[+] [-] refurb|10 years ago|reply
Gold went up by almost 50% during the 2008 crisis and has dropped by 1/3 since it's peak. If we use the price of gold as an indicator of inflation that would mean we a huge inflationary spike followed by a severe deflationary period?
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] washedup|10 years ago|reply