Bryan Caplan  

Was Julian Simon a Technical Analyst?

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Tyler has an especially edifying post on resource scarcity. Most interesting point raised:

It's amazing how much, on this issue, some people resort to what can only be called technical analysis -- inferring future price movements from past trends -- when they would scoff at that approach in almost any other context.
This is an interesting point, but what it really shows is that there are plenty of markets where technical analysis is very useful. For example, we use technical analysis to predict that Chinese wages will sharply rise during the next decade. We use technical analysis to predict that real estate prices in California will fall during the next year. We use technical analysis to predict that the price level will rise over the next ten years. Etc.

Technical analysis of stocks isn't wrong because projecting the continuation of past trends is generally wrong. It's wrong because there is a narrow class of assets where technical analysis does not apply. Technical analysis is least useful when there are:

a. very low costs of storage,
b. very low costs of buying and selling, and
c. roughly constant costs of production during a given time period.

And even in the stock market, technical analysis has not been entirely useless. People who said that tech stocks were overvalued in the late 90s were completely right, probably because the transactions costs of repeated short-selling were too high for most of us.

Tyler's problem is once again that he spends too much time reading the newspaper. There have been lots of large spikes in commodity markets during the last 150 years. All of them probably seemed like the end of history to the people who lived through them, but none of the spikes lasted. This one won't last either.

P.S. Will I put my money where my mouth is? Well, I'm not betting in futures markets, because I don't know how to do what Tyler and Arnold suggest (and I'm not convinced they know how to do it either). But I will make bets about commodity prices ten or more years in the future. For starters, I will bet $100, even odds, that the U.S. price of gas (including taxes) in the first week of January, 2018 will be $3.00 or less in 2008 dollars. Want to take my money, Tyler?

P.S. Tyler Cowen and David Balan have accepted my bet in the comments. Consider our bet on!

P.P.S. At risk of looking like an idiot to readers in 2018, I think the exchange rate alone will win the bet for me.


Comments and Sharing





COMMENTS (10 to date)
Tyler Cowen writes:

$100, it's a deal, write it into the book!

David J. Balan writes:

I will definately take that bet if you're offering!

botogol writes:

Including taxes?
Seems to me this bet is more about government taxation policy than commodity prices. In Europe we pay more than $3 a gallon in tax alone.

aaron writes:

Is the $100 in 2008 dollars too?

aaron writes:

I'm with Bryon on this... unless there's some obsene tax or regulation to muck things up.

Jesper writes:

I think current prices has shown that there is demand for oil even at $140/barrel. Considering that world GDP may very well rise 30% or so over the next 10 years, while oil production likely won't increase much at all, I think you are placing a bold bet, Mr Caplan.

Also, I think you'll get used to higher oil prices. Gas prices are now about $8.70/gallon in Sweden and similar in the rest of western Europe due to taxes. As prices has been going up lately, this still hurts a bit, but we'd consider $7 very cheap and would be quite happy if prices reverted to that level. Two years ago, $7 would have hurt. It's all relative to expectations; enough purchasing power is there in spite of all the teeth-gnashing.

Dan Weber writes:

All of them probably seemed like the end of history to the people who lived through them, but none of the spikes lasted. This one won't last either.

As several commenters pointed out at the other blog, oil may be expensive, but that doesn't mean that energy will be expensive.

Whale oil is probably pretty expensive these days, but that doesn't mean that the people who were relying on it for home heating are spending a zillion dollars.

mk writes:

If you are still reading comments and offering to take bets, I would like to make this bet.

benids writes:

Haven't you said before that if people are sure of something that they should accept any odds on a bet? Why aren't you offering 1:1000 odds?

Dezakin writes:

1. I don't see his post conveying that kind of confidence.
2. This isn't entirely rational from a mercenary perspective. You want to squeeze the best odds you can out of your opposition.

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