No. I'm not trying to be a wise guy. I've been kind of unnerved that silver has been steadily increasing. A price change implies that the market was wrong about the previous price. So the market's been systematically wrong for like the last 2 years. How does such error persist?
Obviously there are asymmetries in the market leading to this outcome, but people who undervalue silver sell it, and are no longer in the market. But I don't believe this can really persist for TWO years because anyone who valued silver (correctly) at $35/oz would have just bought all the silver they could below that price. I'm just confused. EMH isn't working. I don't buy Keyne's line that "Markets can remain irrational far longer than you or I can remain solvent". Hurr durr financial groups with very deep pockets exist partially for this reason. Thoughts? Why can't we iron out the price of silver? ><
Sieben,
Well I think as you get more information, the price adjusts accordingly. Once there's no new information the price should level out. The constant and steady increase in price over a long period of time implies that marginal investors are constantly having to re-evaluate silver because their previous prognosis was wrong. Why are they always wrong over and over again in the same direction?
I'm still not sure why you assume that the underlying "information" is static, given, and/or unchanging. I think we've already discussed how the factors that influence price formation have constantly been changing. This, in fact, is one of the insights of disequilibrium schools of thought, such as the Austrian school (and some extreme arms of the Keynesian school, such as G.L.S. Shackle) — equilibrium is unattainable, since the underlying factors of price (or this 'information') is always changing.
Agreed. But I don't believe everyone would just get blindsided by changes in underlying factors over and over again, especially if they are all in the same direction.
They actually aren't always in the same direction. In the commodities market there is a general upward trend, but that general upward trend is marked by periodic increases and decreases in price. The commodities market is typically very volatile, because it's a highly active market. Furthermore, even if the underlying changes did cause a constant increase in price, it doesn't mean that speculators will be able to accurately speculate on the degree of these changes, or even on when these changes will occur. You cannot assume the factor of uncertainty out of entrepreneurship.
He wanted to buy a house and I'm like WHY. The expected profit will already be built into its up front cost. No one will sell it to you at a loss just so you can make a gain.
Again, the pivotal concept is: uncertainty. Maybe the seller does know that the house will be worth more in the future, and maybe he does factor this into his selling price, since he knows that your father will still be willing to buy it as long as the price your father expects in the future is higher than the price which the seller expects (or maybe the seller doesn't care if your father makes a profit in the future; he's not selling it at a loss just because it will garner a higher price in the future). Tackling with this uncertainty is the job of the entrepreneur, as he directs capital into avenues of investment.
Slowly:> There is nothing easy about speculation. Of cause not, you certainly know the failure rate.
Of cause not, you certainly know the failure rate.
I don't actually know the success or failure rates. I am takling about the epistemic issues related to trying to predict the future from empirical data and historical trends.
In addition to what Jonathan said. The marginal investor also is not always the same person, its different people who are wrong over and over again..
JMFC:I'm still not sure why you assume that the underlying "information" is static, given, and/or unchanging. I think we've already discussed how the factors that influence price formation have constantly been changing. This, in fact, is one of the insights of disequilibrium schools of thought, such as the Austrian school (and some extreme arms of the Keynesian school, such as G.L.S. Shackle) — equilibrium is unattainable, since the underlying factors of price (or this 'information') is always changing.
JMFC:They actually aren't always in the same direction. In the commodities market there is a general upward trend, but that general upward trend is marked by periodic increases and decreases in price. The commodities market is typically very volatile, because it's a highly active market. Furthermore, even if the underlying changes did cause a constant increase in price, it doesn't mean that speculators will be able to accurately speculate on the degree of these changes, or even on when these changes will occur. You cannot assume the factor of uncertainty out of entrepreneurship.
JMFC:Again, the pivotal concept is: uncertainty. Maybe the seller does know that the house will be worth more in the future, and maybe he does factor this into his selling price, since he knows that your father will still be willing to buy it as long as the price your father expects in the future is higher than the price which the seller expects (or maybe the seller doesn't care if your father makes a profit in the future; he's not selling it at a loss just because it will garner a higher price in the future). Tackling with this uncertainty is the job of the entrepreneur, as he directs capital into avenues of investment.
Even if everything's complicated and changing the market rewards people who can predict the change. Some people will overestimate, some will underestimate. I don't see any plausible way for investors to systematically underestimate the market. But obviously its happening and I am confused.
But the "constant change" can itself be constant. If silver is always getting more scarce for some reason - I don't know maybe a silver factory explodes every month - once you know that the price of silver gets bid up accordingly and stays there.
I don't understand your point. Why is the degree at which the factors change the same each time the factors change? Where are these assumptions coming from? It's exactly the volatility in the changes that may occur in the future which create the always present uncertainty in entrepreneurial decision making. There is no constancy, and it's an error to assume that there is constancy in any way.
The task of entrepreneurs is to try and predict the constant change. To be sure they will always have errors, but they shouldn't be systematic in one direction, because that implies that there's a persistent profit opportunity no one's taking advantage of.
No, the entrepreneur makes investment decisions in uncertain environments. He knows that the fundamentals change, and has to predict how they will change. This doesn't imply constancy in the change itself.
I think daily fluctuations can be thrown out of the analysis because it just makes a tiny dent in my complaint. Marginal buyers have always been right because silver increases above the market rate of interest. The fact that there are daily fluctuations makes some marginal sellers right too, but only insofar as they buy low and sell high very quickly.
This doesn't really address what you quoted.
That's just it. There's always a catch. Maybe its uncertainty. Maybe its a difference in time preference. But that shouldn't systematically cause the market to reward buyers, over and over again for decades and decades. People's preferences get revealed and coordinated with physical reality.
When you have a steady increase in the quantity of money in circulation then this does call for increasing prices of the goods the new money is bid towards.
Even if everything's complicated and changing the market rewards people who can predict the change. Some people will overestimate, some will underestimate. I don't see any plausible way for investors to systematically underestimate the market.
Because an entrepreneur doesn't know where the price of silver will be in thirty years. It could be that six months from now the Federal Reserve decides to tighten the money supply and the price of these commodities will suddenly fall. It could be that in ten years the dollar will face hyperinflation. Entrepreneurs are not omniscient, and the changing factors are not always predictable, which is why market prices don't change perfectly.
JMFC:I don't understand your point. Why is the degree at which the factors change the same each time the factors change? Where are these assumptions coming from? It's exactly the volatility in the changes that may occur in the future which create the always present uncertainty in entrepreneurial decision making. There is no constancy, and it's an error to assume that there is constancy in any way.
JMFC:This doesn't really address what you quoted.
JMFC:When you have a steady increase in the quantity of money in circulation then this does call for increasing prices of the goods the new money is bid towards.
JMFC:Because an entrepreneur doesn't know where the price of silver will be in thirty years. It could be that six months from now the Federal Reserve decides to tighten the money supply and the price of these commodities will suddenly fall. It could be that in ten years the dollar will face hyperinflation. Entrepreneurs are not omniscient, and the changing factors are not always predictable, which is why market prices don't change perfectly.
> I don't actually know the success or failure rates.
About 80% to 90% of all traders fail within the first 5 years of trading.
After reading all comments in this thread I conclude, it is not about trading. I got a wrong impression from the title line.
Here http://www.marketoracle.co.uk/Article26826.html
is a possibility, how a trader might make a prediction for hinself. Like in an business, he has not to be absolutely right. It suffices to be probable right.
So there's a price. There's a change in the price. There's a change in the change of the price. Etc. Entrepreneurs are supposed to sort it out in a way that eliminates profit opportunity. Even if they're all just blindly guessing, there's an automatic weed-out function of the market. And even if there weren't, entrepreneur's guesses wouldn't systematically fall all on to one side. I guess my problem is that you're explaining how mistakes get made, not why they're all routinely and perpetually underpredicting.
I'm not talking about making mistakes. I'm talking about the causes of changes in price, and the entrepreneur's role related to these changes and the uncertainty that surrounds the future. I'm still not sure why you think entrepreneurs are making "mistakes". The best way to model it, although not entirely accurate, is in a dynamic equilibrium model, where over time span x the underlying factors cause a change from equilibrium price P1 to P2. If the underlying factors remain unchanged then real prices will tend towards the new equilibrium. What happens, though, is that suddenly the equilibrium price changes to P3 and it does this on a continuous basis, so that equilibrium just does not become attainable, because the underlying factors are always changing.
It's not about "underpredicting". It's about having the underlying causal factorsbehind price formation change again once you've responded to/predicted the last change.
I'm choosing to ignore what you quoted because it doesn't change the fact that buying has been a persistently profitable strategy (month to month).
I'm not sure why this matters. The only thing that this means is that the underlying fundamentals are changing in such a way that prices are rising. An obvious causal factor could be the rise in the volume of money in circulation. Or, it could be a steady fall in supply. The possibilities are truly endless.
Could it be that even though the increase in silver price is predictable because of inflation, we only reach it once the new money enters circulation?
People are investing in precious metals because they expect the price to continue rising, probably as a result of the Federal Reserve's actions. The actual changes in price, though, require an actual change in aggregate nominal demand, or an actual increase in the quantity of money being bid towards the specific good/service. This may be new money, or it may just be a larger percentage of the already existing quantity of money.
Regime uncertainty etc. But you can estimate regime uncertainty. Its hard but the market will reward actors who get their forecasts correct. Even still, there's no reason for entrepreneurs to always underestimate the factors increasing prices.
Prices are just an exchange rate agreed apon at the time of exchange. They can't be wrong by definition as both parties agreed to the exchange.
The only time you could argue that prices are "wrong" is when it deterrs exchange from occuring(Priced too high). At which time there is already an inherent incentive for adjustment. The error argued is that a retail owner, for example, keeps a surplus of goods on his shelves because he refuses to lower prices. But even in those cases it's not clear that the price is "wrong" as the retailer might be speculating that supply on the market will dwindled in the near future. At which point his higher prices made perfect sense.
[EDIT] So what can we pull from this.
Prices are not vectors.
They are historical static individual points of data, they do not move. Historical points of data can and will influence future points of data. But the error in thinking here is that prices are vectors, as opposed to individual points of data.
Right, Sieben is saying that the "wrong price" is any price that isn't the equilibrium price. He seems to understand that market prices tend to equilibrium, assuming static causal factors, but doesn't consider the fact that the theoretical equilibrium price (or market clearing price) is always changing.
Jonathan M. F. Catalán: Right, Sieben is saying that the "wrong price" is any price that isn't the equilibrium price. He seems to understand that market prices tend to equilibrium, assuming static causal factors, but doesn't consider the fact that the theoretical equilibrium price (or market clearing price) is always changing.
Ok, but even as far as the pricing mechanism is concerned it's not aware of any such "Equilibrium". The whole concept of "Equilibrium" was just created by us to assist in understanding markets. It's not applicable to real world situations, much like the ERE.
The problem is when you take these objects with an understanding that they are real world phenomena and must exist somehow somewhere. So you come into these incredible dilemma's that something must be wrong! The truth is they are not real and cannot exist. It just helps us understand why prices bounce back and forth. So I don't believe the pricing mechanism operates with any knowledge of an equilibrium price. It's not that the pricing mechanism has some concious thats always aiming at "Equilibrium". Instead the whole concept of "Equilibrium" was created by human's for human's for expand understanding, just like the ERE.
Furthermore if your assessment of Sieben's critique is true then how would we ever know what the "wrong" price is? As we would have to know what the equilibrium price is to detirmine that. Whats the equilibrium price?
[edit]
theoretical equilibrium price is always changing.
Note my point above that I added after you responded. I believe it's a fallacy to classify any type of pricing as a vector. It's not always "moving" but instead it's new data points differing from historical data points. For a price to move, and be a vector, we would be referring to the exact same object. However when discussing prices we are discussing seperate events that occur at seperate times and are completely unreleated to one another.
I doubt my point about vectors is what you mean, but I thought it was an interesting point for Sieben to contemplate. Prices aren't ever "Moving" in the direction of error correction. Prices don't move but instead are historical data points and are static. There just happends to be an incredible amount of individual instances of price data points. Superficially we can say that the price of grain moves. But in truth it does not move. The price of grain for BOB on Nov the 14th at 2PM was at XXX rate. On the other hand the price of grain for Billy on Dec 5th at 8am was XXX+1. This doesn't mean that grain is a vector and that it's positioned to move a certain direction. These are two entirely seperate data points. Out of convenience we might say that the price of grain is "rising". But all that means is that our expectation of future prices to rise. In our speculation it doesn't mean that historical prices were somehow flawed and that future prices are some how more or less correct.
I wonder if that offers anything constructive to the discussion.
Filc,
I never said otherwise.
The problem is when you take these objects with an understanding that they are real world phenomena and must exist somehow somewhere.
Equilibrium price, roughly speaking, does exist. It's the price at which the market clears. This doesn't mean we know where it is, or that it's attainable, but it's not just theoretical. We say that the market tends toward equilibrium, because prices tend towards the price at which the market will clear (at which the seller will sell the entirety of his supply with the highest profit [over all sales]). It's an entrepreneurial process.
I don't know why you're asking me. Ask Sieben.
I believe it's a fallacy to classify any type of pricing as a vector.
You misunderstand what I meant when I say that a price is moving. I'm not saying that the price, an object, is moving in a direction. That's absurd. A better word might be "change".
cool blog post quasi-relevant to this thread.
I recently attended a seminar by Agricultural Economist, Brian Wright, in which he spoke on price volatility in storable commodity markets. His major point (and I'm paraphrasing and probably grossly misrepresenting what he said) is that supply shocks alone are not enough to cause price volatility. Supply shocks in times of low storage cause price volatility. The impetus for the recent run-up in food prices may be ethanol mandates or drought or...fill in the blank. But we've seen such supply shocks before. Why the volatility now? Storage. Or lack thereof. http://www.env-econ.net/2011/03/price-volatility-and-excess-capacity-in-oil-markets.html
I recently attended a seminar by Agricultural Economist, Brian Wright, in which he spoke on price volatility in storable commodity markets. His major point (and I'm paraphrasing and probably grossly misrepresenting what he said) is that supply shocks alone are not enough to cause price volatility. Supply shocks in times of low storage cause price volatility. The impetus for the recent run-up in food prices may be ethanol mandates or drought or...fill in the blank. But we've seen such supply shocks before. Why the volatility now? Storage. Or lack thereof.
http://www.env-econ.net/2011/03/price-volatility-and-excess-capacity-in-oil-markets.html
Ambition is a dream with a V8 engine - Elvis Presley
Jonathan M. F. Catalán:You misunderstand what I meant when I say that a price is moving. I'm not saying that the price, an object, is moving in a direction. That's absurd. A better word might be "change".
I think there is some confusion in the dialogue between us. I am not saying your this is your position. My comments were at large directed at Sieben, but I was responding to your comment (which was directed at me I think) and trying to elaborate on my position towards Sieben. Sorry for the confusion.
Jonathan M. F. Catalan:Equilibrium price, roughly speaking, does exist. It's the price at which the market clears.
Is it something that an end consumer tangibly interfaces with? Is it the "equilibrium price" that's influencing prices? Or is it the individual actors which are influencing the hypothetical "equilibrium prices". I'm not arguing against the usefulness of an equilibrium price to expand our understanding of markets. Especially when considering hypotheticals. I am, on the other hand, critiquing the abused application of this(equilibrium price) concept as being some type of driver for the economy. As if the equilibrium price directed the economy and directed prices.
Once we know that it's individual consumers that influence future prices the concept of an "Equilibrium Price" is nothing more then a scholarly activity. Consider the relationship between the fluctuation in prices and the Misesian regression theorum. Equilibrium price isn't needed to understand prices and why they differ from point a to point b. (I know this may not be your position)
JMFC:I'm not talking about making mistakes. I'm talking about the causes of changes in price, and the entrepreneur's role related to these changes and the uncertainty that surrounds the future. I'm still not sure why you think entrepreneurs are making "mistakes".
JMFC:The best way to model it, although not entirely accurate, is in a dynamic equilibrium model, where over time span x the underlying factors cause a change from equilibrium price P1 to P2. If the underlying factors remain unchanged then real prices will tend towards the new equilibrium. What happens, though, is that suddenly the equilibrium price changes to P3 and it does this on a continuous basis, so that equilibrium just does not become attainable, because the underlying factors are always changing.
JMFC:People are investing in precious metals because they expect the price to continue rising, probably as a result of the Federal Reserve's actions. The actual changes in price, though, require an actual change in aggregate nominal demand, or an actual increase in the quantity of money being bid towards the specific good/service. This may be new money, or it may just be a larger percentage of the already existing quantity of money.
JMFC: "Regime uncertainty" is damaging because of how unpredictable it is. I'm not sure why you're so hung up on this notion that entrepreneurs have been "underestimating" anything.