A few days ago, I got a call from a commodity analyst asking me whether the explosion in France’s nuclear reactor is going to impact energy prices. On probing, I found that close to the nuclear power station, near Avignon, there was an industrial accident and not an explosion in the nuclear reactor. We have become information addicts. While increased amounts of data and information can be advantageous, it also comes with the feeling... how do I make sense of all this? Can’t we break this down into a handful of simple points? Supplementing the concerns of information overload, there is Wikleaks. Is it gossip mongering or are they genuine leak? Recently, a few interesting insights were revealed concerning the commodity market.
Hear No Evil: When oil prices surged to a ridiculous $147 a barrel, conventional wisdom held that normal supply and demand issues were the cause. US officials met a Saudi minister who expressed his deep concern that high prices would destroy the demand for crude. Adding that the Saudis were having a hard time finding buyers for their oil, he also asked the Bush administration to rein in Wall Street speculators. This brings out a very important fact that while market is sensitive to all sorts of information, the government prefers to keep its ears closed in proverbial the “hear no evil” manner.
See No Evil: An interesting cable (released earlier) by Wikileaks has shown that the US government was acting on behalf of the world's leading producer of genetically modified (GM) seeds in targeting the EU for its stand on GM crops. It certainly revealed to what extent governments can serve the interest groups. US and Spain trade officials strategized how to increase acceptance of GM food in Europe, including inflating food prices on the commodities market.
Speak No Evil: In India, income tax raids were conducted on big diamond merchants when the list of Indian Swiss bank account holders was reportedly leaked. Sticking with the diamond story, Grace Mugabe (Zimbabwean president’s wife) sued a newspaper for carrying reports from Wikileaks which revealed that that Mugabe's family and the central bank governor were directly involved in the illegal smuggling of blood diamonds. While the commodity world often seems to be grappling with information overload, it is clear that Wikileaks cables are not going to have any material impact on prices. While informed decisions are always good, the velocity of information flow in commodity market has distorted price trends.
Short-term thinking can be fatal in commodity markets, especially when they are propagated selectively. Analysts often tend to zero in on small, quantitative short-term improvements when assessing macro, strategic issues. While they may be statistically significant, are they meaningful?
We cling nervously to the melody, but we don't handle it freely,
we don't really make anything new out of it, we merely overload it.
- Brahms
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