When I want to give my mind a good bending, I read a layman’s version of theoretical physics. Both the macro and micro stuff. Books like A Brief History of Time by Stephen Hawking and Brian Greene’s Fabric of the Cosmos. The books are written in terms simplistic enough for even one like me – who struggled through high school physics and chemistry and took geology as my science credit in my undergrad years because it didn’t involve numbers and involved the use of hammers rather than bunson burners – to get the (perhaps false) feeling that he understands the basic concepts behind string theory, membrane theory, singularities, etc.
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Producers face the reality of shifting grain price expectations
Significant price shifts have occurred in various grains as compared to what was expected at the beginning of the calendar year. Crop insurance prices can be used as a base for the changes.
What I always find most intriguing about this stuff is the lack of convergence between the large scale cosmology of relativity and the incredibly small scale rules of quantum mechanics. Lots of big brains have been working on topics like string theory for decades in order to bridge the divide, because still to this point there appear to be two completely different sets of rules governing how things in the universe work, and everyone agrees that at a certain point the two must fit together in order for the universe to be rational and not just the product of a pot-smoking teenager’s fantasy. (If, however, we can prove that God is in fact a pot-smoking teenager fantasizing about a universe like ours, thereby creating it in his mind, I guess we’d solve all the problems of cosmology, quantum mechanics and theology, but still have the problem of what to do when he stops smoking the stuff . . . )
As everyone who cares about futures contracts knows, if there’s no convergence, the thing is useless and dangerous.
Economics has the same problem, with ongoing philosophical divergences between schools of theory about how economies function. There are fundamental and furious disagreements between various parties, and little has resolved them over the decades. One of the most fundamental splits is between the Keynesians and the Ricardians, between those who believe wise managers can manipulate the economy for the good, and those who believe the people are always smarter than the policies.
This is a relevant topic today because of the extreme stress the world economy, markets and financial system have endured in the past year and a half. Remember, we’re less than a year and a half past the sudden collapse of commodity, equity and financial markets.
There have been massive government interventions in the economies of the world’s advanced nations, and right now all the wafflers seem to have become neoKeynesians. (These folks were all “rational expectations” types three years ago, so how deep is their newfound faith?) So the folks who believe in godlike government power to shape economic outcomes are in the ascendant.
There’s an excellent discussion of this situation in economics available as a free podcast at bloomberg.com. If you want to find it, go to bloomberg.com, click on the “podcasts” tab, click on the “more episodes” bit underneath the On the Economy section and click on the “De Grauwe Sees Macroeconomics Crisis, Misleading Models.” That’s what I’m talking about. (How’s that for confusing instructions? I couldn’t figure out how to link to it from here. Like high school chemistry, this internet thingy exposes my weaknesses.)
De Grauwe is an economist at the Catholic University of Leuven, Belgium, and he talks with Bloomberg’s Tom Keene for half an hour about the crisis in economics between Ricardians and Keynesians. What I found most interesting, and echoing the problem in physics, was his discussion of when rational market assumptions of behavior seems to work, and when Keynesian assumptions seem to click in. Quantum mechanics work with small stuff. Relativity works with big stuff. Similarly, rationalist assumptions that people and markets quickly figure out the implications of policy action and compensate for it – thereby negating its intended effect – seem to operate in flattish markets, “normal” markets, but don’t work too well in a tempestuous market like the one we’ve been living through. Keynesian assumptions – that government policies can shape economic behavior in the way they are intended – have been out of favour in recent decades of generally rising markets, but all of a sudden seem to apply again.
So, two sets of laws for different sets of circumstances? Is that possible? If so, how do you know when you’re in the realm of the one or in the realm of the other? As in physics, that isn’t worked out yet. And lots of economic fundamentalists would disagree completely with De Grauwe and think he’s rubbish. So I just put this out there for you to think about.
But it does seem to have the ring to truth from what I’ve seen over the years with the commodity markets. When it’s very dull, boring and predictable, supply and demand fundamentals dominate the market and make it seem almost like a rational computational machine. Lots of years have been like that. Market action following news seems “rational” and measured. But in wild periods like the last three years, S and Ds seem to mean squat. Just look at oats prices in 2008. It didn’t matter that the market was drowning in oats: prices shot through the roof anyway, swept up by the commodity firestorm. (Sure, you can blame index funds and “speculators,” but those were more symptoms of a fevered market than the cause, methinks . . . )
So that leaves we who live in the commodity markets – and who bother to think about his – wondering whether we’re living in a “normal” market again, or are still in the grips of a wild one. It’s a big difference, with seemingly completely different rules governing the two, and it’s hard to get a sense of likely market action without deciding on one or the other.
For what it’s worth, I doubt we’re back in a “normal,” S and D dominated market. I think we’re still tied to the back of a raging animal and that the swings will be huge. To me, it still seems like the 1970s, when prices were incredibly volatile for a decade. But we’ll see. If there aren’t astounding developments in the markets between now and November, I’ll have to reconsider my view. Until then, I’ll expect the markets to be wild and unpredictable and far from rational.
