What do you think of the chart below? Seriously. Can you really believe spot crude oil is up 53% in the last year? The price of oil rocketed up in New York overnight, busting through US$120 before settling just below at US$119.67 by the time trading got going this morning in Sydney.
It’s the great question about oil right now that no one seems to know the answer to. Is the price of oil rise driven by good old fashioned supply and demand? Is it financial speculation? Is it a weak U.S. dollar? Is it a fear and geopolitical premium? Is petroleum exuberance?
It’s probably all of these things. But saying that doesn’t get us any closer to figuring where the price of oil is headed next. It could be $80. It could be $180. Sometimes charts will tell you something that the fundamentals miss. The chart is the language of the market: a picture of what’s happening between buyers and sellers. The chart has no opinions. It is what it is.
We’re going to depart from our normal inductive approach to finance today and do what human beings have done for thousands of years when confronted with the inexplicable: look to the stars (to explain the price of oil).
“As per financial astrology,” reports Major Ajay (a financial astrologer) “the 17th week of year 2008 represents Saturn. Saturn will ensure that it brings highest volatility and profit booking in oil and metals in world futures market.”
“During this week Sun is with Mercury and Venus, Jupiter is in his own sign, Mars will change Moon sign from Mithun to Karak and Rashi. All these combinations and conjunctions may show highest volatility in world stock market.”
You can’t really argue with that, even if you know what it means. However it is now the 18th week of 2008. Mars is now ascendant in the markets, not Saturn. Ajay reports on the new state of the stars, although his conclusion is more or less the same. “Mars is very famous to bring highest volatility, profit booking in Oil and Metals in world future market.”
Mars is the God of War. He brings volatility to the commodity markets and a great deal of uncertainty. Buyers versus sellers…bulls versus bears…inflation versus deflation…this is a market that only Mars could love. But where will the price of oil go? What do the stars tell us?
We reckon not even Mars knows that. And that is precisely the problem. There are so many factors affecting the oil price it is impossible to predict which is ascendant. The guess of a financial astrologer is likely to be just as accurate (or more) than the guess of a professional energy analyst.
In fact, financial astrologers are probably more worth listening to. Their methods are more honest and they proceed empirically and inductively. They gather observations from the sky and then reach a general conclusion based on what they’ve seen. The quality of their conclusions is based on the accuracy of their observations.
You may think we’re joking. And we are, just a bit. But what we’re getting at is the value of modesty in making your investment forecasts. You have to acknowledge what you don’t know.
Inductive reasoning is a lot more modest that deductive reasoning, but deductive reasoning (proceeding from some untried, unproven principle or axiom) is much more common in the financial industry…. stocks always go up…buy the dips…diversification works.)
When you trust your own experience and the evidence of your senses, you’re basing your judgments only on what you really know (or think you know). Your information is always incomplete. But at least the probability of your conclusions is based on historic observations and not on unquestioned axioms or investment clichés.
The trouble with most energy analysts and all politicians is that they make their market forecasts deductively. That is, they already have some assumption about what the price of oil should be. This assumption influences everything else that comes out of their mouth.
The Daily Reckoning Australia