Pric e action by Rhetoric: Trump and Oil

 

The FT chart provides an interesting insight into the drivers of the current oil market. Of course, oil is driven by the events of the Iran War, yet the impact on oil prices is more subtle. There seems to be a direct connection between President Trump's comments and the surge or decline in oil prices.  When Trump makes comments that escalate tensions, usually before or on a weekend, there is a surge in prices, followed by comments that de-escalate tensions. The uncertainty in prices is associated with rhetoric rather than specific action surrounding Iran. The sample is small yet there may be a link between comments and oil price action. 

Dual role of prices - endogenous and exogenous events

 

...dual role of prices. By “dual role”, we mean that prices not only reflect the underlying economic fundamentals, they are also an imperative to action. That is, prices induce actions on the part of the economic agents. If some actions are the consequence of binding constraints and exert harmful spillover effects on others, then price changes can bring about amplifying spillover effects that disrupt the smooth working of the market, and sometimes shut down the market completely.

Endogenous Extreme Events and the Dual Role of Prices

It is important to appreciate the dual role of prices, although this is a subtle concept. Prices first reflect exogenous events as markets reflect new information that impacts expectations. If inflation increases, for example, there will be a reaction in prices as investors adjust their expectations. However, investor will not just react to new information and adjust their portfolios. They will also adjust or take action when they see prices change. 

The reaction to price movements may be independent of the change in exogenous information. The reaction could be due to uncertainty about what information is being displayed in the price. A reaction to price behavior independent of exogenous information is an endogenous reaction. Investors react to prices rather than to any other information. This can lead to extremes and explain most of the price movement during the day. One of the most important tasks for an investor is understanding the difference between these price moves and appreciating the action that stems from the distinction between exogenous and endogenous moves. 

Neoliberals and the fight between dominium and imperium

 Quin Slobodian’s book Globalists: The End of Empire and the Birth of NeoLiberalism was written before the pandemic and before the uproar about Davos and the World Economic Forum. Yet it is truly relevant to anyone considering the current world order between some form of global government and nationalism. Globalist does a good job of describing the origins and rise of neoliberalism and helps readers understand the differences from national movements or a national focus. 

What I found most interesting was the focus on differences between dominium and imperium capitalism. Dominium refers to the rights of owners to control their property, which is a key feature of capitalist private property. The imperium or public power refers to the sovereign power of the state to rule, tax, and regulate. The intersection between these two forms of capitalism is the crux of how neoliberalism bears on the issue.  

For Slobodian, neopliberalism is not a simple version of laissez-faire capitalism, but a project to, as he terms it, “encase” the market within legal and institutional frameworks to ensure that dominium is protected over imperium. Global capital is protected from democratic pressures, nationalism, and social redistribution that seek to take property away from owners. Thus, dominium is given a higher priority over imperium, and the right to rule by nations is constrained by international institutions. Capitalism is not left to self-regulate but needs oversight and active management to protect the dominium. Neoliberals believe there is a need to constrain democracy in a pure form that will subvert property rights in an effort to redistribute wealth. Neoliberals want an active legal framework to protect property rights and allow the freedom of capital to move and be controlled by owners.  

Sorkin's 1929 - A tale of personality

 

I finally got around to reading Andrew Ross Sorkin’s 1929: Inside the Greatest Crash in Wall Street History - and How it Shattered a Nation. His narrative style is compelling for those who do not want to read dry financial history. The characters come alive with his writing, but I did not come away with any new insights into the stock market crash. There were signs before the October crash, so it was not a total surprise. Excess leverage, margins that were too low, excess greed, and herd mentality, but we already knew that. While I liked reading about the characters, I kept asking why we didn’t hear more about the central bankers. What about some of the surviving brokers? How about some of the businessmen outside of Wall Street? 

Do I better understand the psychology of bubbles and the 1929 crash? I don't think so. Perhaps I am jaded by all my reading on the topic, but did I learn anything new beyond the fact that the same tropes of greed and leverage are always with us?

What does 1929 tell us about markets today? Not much. There is significant leverage, crowd behavior, misinformation on policy choices, and fear of taking action. Perhaps that is the message. Things don't change.