Category Archives: Complexity

Commodity price, Commodity risk, Complexity, Economics, Expertise, Hedging, Market psychology, Market research, Market trends, Oil market, Risk management, Trend following

Market fundamentals, forecasting and the groupthink effect

Last month I had the privilege of meeting with Jaran Rystad of Rystad Energy to discuss strategic cooperation between our companies. On the occasion, he gave me a rather detailed presentation of his firm’s energy intelligence database. I must say, in my 20+ years trading in commodities markets this is by far the most impressive product of its kind I’ve ever seen. Even from the software engineering point of view, I was very impressed. For full disclosure, nobody asked nor encouraged me to write this. Much as you’d recommend a restaurant where you ate well or a doctor you respect, I wholeheartedly recommend Rystad Energy as a provider of energy market intelligence as a matter of giving credit where credit is due.

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Monaco, June 2019 – with Jarand Rystad

However, even with top notch data on economic supply and demand fundamentals, divining the future remains difficult and unlikely. John von Neumann rightly said that forecasting was “the most complex, interactive, and highly nonlinear problem that had ever been conceived of.” Continue reading →

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Asset management, Behavioral finance, Commodity risk, Complexity, Hedging, Market psychology, Market research, Market trends, Psychology, Risk management, Something completely different, Trading, Trend following, Uncategorized

Speculation in the natural world

Nature has … some sort of arithmetical-geometrical coordinate system, because nature has all kinds of models. What we experience of nature is in models, and all of nature’s models are so beautiful. – R. Buckminster Fuller

Nature’s survival strategies that bear the most similarities to activities of market speculators are those of predators. To live, predators must hunt and this activity includes elements of speculation. Like trading, predation requires knowledge, skills, judgment and decision-making. It also entails risk and uncertainty. A predator can’t be sure where her next meal is coming from. Each hunt is an investment of resources; it involves the risk of injury and loss of energy expended in failed hunts, which tend to be more frequent than successful ones. To survive and procreate, predators must consistently generate a positive return on this investment. Too much of a losing streak could turn out to be fatal. In his book, “The Serengeti Lion: A Study of Predator-Prey Relations” George B. Schaller painstakingly documented the details of hundreds of hunts by large cats in the Serengeti National Park in Tanzania. We have all seen wildlife television programs showing lions and cheetahs hunting, but Schaller’s work offers a much richer account of the life of predatory cats including their hunting behavior.

The anatomy of a hunt Continue reading →

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Asset management, Behavioral finance, Commodity price, Complexity, Economics, Expertise, Hedging, Market psychology, Psychology, Stock market, Trading, Trend following

The illusion of expertise in financial markets

Participants in financial markets have to deal with uncertainty on a daily basis. Their need to research and understand markets has given rise to a massive industry delivering security prices, reports and expert analyses to traders and investors seeking to make sense of the markets and predict how they might unfold in the future.

The need to understand stuff is innate to our psychology: when something happens, we almost reflexively want to know why it happened. But the compulsion to pair an effect with its cause sometimes gets us jumping to conclusions. If such conclusions turn out to be mistaken or irrelevant, they could prove useless – or something worse. Consider two recent titles from the ZeroHedge blog, published 89 minutes apart: Continue reading →

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Asset management, Commodity risk, Complexity, Economics, Expertise, Hedging, Market research, Policy, Risk management

Economic forecasting is exercise in futility

“Economists can’t forecast for a toffee… They have missed every recession in the last four decades. And it isn’t just growth that economists can’t forecast; it’s also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.” – James Montier

Forecasting commodity prices and economic indicators is demonstrably an exercise in futility. Our markets and economies are complex systems and as such, their future unfolding is impossible to predict with any degree of certainty. Concretely, let’s take a look at how the leading economic analysts did at predicting oil prices, GDP growth, unemployment and stock market indices. Continue reading →

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Complexity, Market research, Stock market

Why we can’t predict the behaviour of complex systems (markets, economics or climate)

Over the last century or so, science has made immense progress in understanding natural phenomena like the weather and social phenomena like markets and economics. Unfortunately, we still fall well short of being able to successfully predict their behaviour. In spite of the mindboggling leaps in knowledge and computing horsepower, systematically successful prediction continues to elude us. This is largely due to the difficulty in modelling complex systems in sufficient detail. An aspect of this problem, called “sensitive dependence on initial conditions” might well be altogether insurmountable. Continue reading →

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Complexity, Energy crisis, Policy, Psychology, Social development, Truth

Dear Leonardo, …about that 97% consensus…

Yesterday I saw a brief speech by Leonardo di Caprio imploring people to vote – not for the candidate who ignores science. He was talking about the scientific consensus on global warming and mentioned that 97% of all scientists agree that global warming climate change is a man-made phenomenon. This 97% consensus figure is so compelling, it is only fair to explore where it came from.

Where “97% consensus” comes from

One Margaret Zimmerman conducted an opinion survey in 2008. The “survey” consisted of a two-question online questionnaire sent to 10,257 “earth scientists” (?), of whom 3,146 responded. Continue reading →

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