Black Hawk

Metals and Mining, Chaos is Deterministic



WSJ Article "For Mining Chiefs Doomsday Scenario Could Become Reality" Jan 29, 2016
"It isn't just that China is buying less. One reason for depressed prices and declining stock market value is uncertainty among western producers and traders about exact production and consumption figures."

Commodity markets like those of metals and energy, go up and down. Typically, we may be able to estimate what our risk levels are by doing 'what-if' scenarios. What if the market goes up, and what if it goes down. But what will happen to us and our company's Profit and Loss statements are not a function of our risk. The agent that will do it to us is: uncertainty, not risk.

We can only be a part of the world we know, in order to better predict what we do not know we would need use our imaginations far more than we generally do today. Where we get it wrong, in my opinion, is believing paradigms that are not reality. Some of this is caused by wishful thinking in some people during strong markets (likely because they are long and want to sell someone else what they have) perhaps like mining chiefs, other parts of this cycle may be caused by the asymmetry of information during bad times like China (who really wants to tell their customers it's not only bad, but much worse than they think!). Who really wants to tell you how bad it is.

What do I mean? During the past several years, the mining chief's of the world were providing us all sorts of information about why metal and energy supply was not abundant to meet demand. Many company valuations showed improved profits on the commodity run, and consequently at present have given back a fair penny of that over the past year(s). I would say that these folks were asymmetrically optimistic.

And now what has happened?

Today, as China slows we find ourselves on the other side of that paradigm. Only this time, the information we are being fed is that the chinese economy is not that bad. Unlike some of the mining chief's before them, the chinese do not want to tell us how bad it is.....they actually provide just as much support, like the chiefs prior to them, telling us that it is not that bad. Supporting their own cause. The best propaganda is likely that propaganda that those eschewing it actually believe.

So, when the market was good, the chief's told us it was great. When the market is bad, the Chinese tell us its okay. There is a bias to the upside.
While I am not going to digress on why this bias may exist, I am simply going to suggest that it does.

What does this mean for us common folk, perhaps a new hire or a seasoned worker, maybe even a small to medium size business owner, manager, or executive. I believe this means that our lives are more and more subject to an economy that wants to trend to the upside, and it does not have the means to trend to the downside. However, the reality is that the downside is just as probable as the upside, so we can either have mechanisms that allow us to trend down....or perhaps more than likely, because of asymmetric bias, just crash from time to time. It sure will be interesting to see what the balance of 2016 brings.

How many of you know how to sell stocks or futures short? How many of you actually do that just as easily and symmetrically as you are willing to buy something and go long a stock or a future? How many of you bet on the Don't Pass line at the craps table versus the Pass Line? (Even though the Don't Pass odds are technically better for you.) You see. Asymmetry. And it's my opinion that until the world learns to use tools to sell markets just like they buy into markets, we will not be more at risk, or more volatile, it just seem that way because the markets have less elegant means to correct to the downside. The reality is that the markets can go up and down probably about equally.

Evolution theory works in the same way, for long stints of history evolution is proposed to change slowly over time in a manner of gradualism. But every so often, there are abrupt and significant changes that occur over very short period in a process called punctuated equilibrium.

I wish you all the best in creating your own reality and not letting others create it for you. Be it the chiefs, the chinese, or any other calypso that manages to catch your ear. Be well.

Every so often, we need a big change. Don't worry about it, just be prepared for it.