Time to buy oil futures

Several day ago I showed that oil price had fallen below expectation in August. Today oil price has been falling since the very morning  and now  is approaching $80 per barrel. We predicted $70 in December 2011.  Thus, oil price has to grow again and it's good time to buy futures.

Scientists, experts and lay public

Blogger Sean on Discover Magazine compares various types of experts.  Specifically, he answers the question why people trust opinion of experts in physics and do not trust economists.

This is a simple question if to separate firm scientific knowledge and scientific hypothesis.  People do trust well established physical knowledge like mechanics, and thus, they trust physicists in every day activity. For example, aircrafts, ships, satellites, buildings in seismic zones, TV, mobile telephony, etc. is the materialized scientific knowledge. It is beyond discussion of experts and lay public that numerous physical laws deserve absolute trust. (Imagine an expert discussion on the impossibility of mobile telephony as based on the absence of electro-magnetic waves. A hundred and fifty years ago such a discussion would be absolutely reasonable.)   All these physics (or scientific in a broader notation) laws are almost fully justified by laboratory experiments and other types of measurements. Because these laws are now an indispensible part of every day life people forget that this was and is the essence of scientific knowledge. 

However, there are scientific topics which have no reliable scientific solutions (yet or forever) and are characterized by a higher uncertainty in both theories and experiments. In my view, these new horizons in the hard sciences, which are formulated as hypothesis, should not be presented for the broader audience (lay public) as robust scientific knowledge. They do not have robust solutions or materializations yet. When positioned as well established scientific knowledge these hypothesis ignite severe discussion between experts and lay public. They use the uncertainty gaps in experimental justification and put forward own interpretations with various applications in real life.

I would treat “global warming” (as induced by human activity) as one of such hypothesis which should be better experimentally justified. There are so many gaps in  the estimates of major sinks and sources of greenhouse gases that the relative inputs in the final balance is not clear yet. Notice, I do not say that this hypothesis is not scientifically void. I just say that a Nobel Prize for it was a premature and political decision which has changed the terms of the scientific discussion.    

Now we come to economics and economic experts. It is well known that economics (I do not include finances, business, etc.) is a science without experimental or observational justification. When one judges by the prediction of large scale outcomes like recessions economics does not show any result at all. (Many economists are proud of that, however.) It is in drastic contrast to the predictions of the hard sciences - we foresee that our airplane will land with a very high probability in line with actions of many physical laws, staring with Bernoulli one, which creates the lifting force. Otherwise we would never use the plane.  Here the term “economic experts” comes. These are people who discuss measured macroeconomic values without any quantitative justification.  That’s why I do not like the term “expert” as applied to physicists. When I hear it I usually see a round table with several economic experts discussing a problem without any solution in scientific terms. As a rule, they can explain any process or phenomena with the same words and arguments they used to explain the opposite process and phenomena two years ago. For me its enough to decide that they are worth nothing together with their words. Economic experts use a very limited agrument base to explain everything.

In turn, the possibility to explain everything attracts the lay public. People like the illusion of understanding. In many economic blogs one can observe how readers repeat the arguments from economic experts without understanding that these experts have explained nothing. Emotionally, it is better to trust experts than scientists, who usuall do not have ready answers to all questions.

As a remark. Some physicists propose a scientific revolution in economics (Bouchaud, J.-P., (2008). Economics needs scientific revolution, Nature, v.455, 30 October 2008). I would start with a simple data analysis in line with classical mechanics (Ivan O. Kitov, 2009. “Does economics need a scientific revolution?, Quantitative Finance Papers 0904.0729, arXiv.org). Actually, economic data do not match even basic requirements of physics. They are usually incompatible over time. One needs lots of efforts to recover major time series like inflation, GDP per capita, rate of unemployment, etc. (http://mechonomic.blogspot.com/).

Therefore, a researcher in the hard sciences is hardly an expert explaining all observations and usually knows what s/he knows and what s/he does not know. The latter is the matter to investigate. When a researcher works as an expert and brings to the unprepared audience (almost any place except specialed seminars, workshops, conferences, etc.) some hypothesis with a large uncertainty it usually has a negative result. At best, nobody understands and forgets.

The worst case, politicians use one of many possibilities under the higher uncertainty for their dirty profit. As an example, I recall a long discussion in the USSR about the necessity to turn nothern rivers to the Caspian sea, which had been losing water and thus area before the 1970s. The reason is clear – money and resources, i.e. power, and this project was supported by many (specially selected) experts who forecasted the sea to disapper according to their linear models. The Soviet government was ready to start. In terms of long term observations, for an inner lake oscillations is a natural regime (as was argued by many scientists, chiefly, physicists) and the Caspian sea has been growing since the 1970s and has already inundated many small villages. The conclusion - do not give any chance to politicians to use your knowledge in their interests. In other words, do not be “experts”.

In reality, it was not the strong scientific opinion but the disintegration of the Soviet Union that stopped the project. Nobody is able to stop the greater political project “global warming”.

On the evolution of age dependent mean income

I published a dozen papers on personal income distribution between 2003 and 2009. One of the principal topics was the evolution of the mean (median) income and its dependence on age. Specifically,  I have shown that the age of largest mean income increases proportionally to the square root from real GDP per capita. (Actually, the mean income was used instead of GDP per capita because the Census Bureau does not include several important sources in the Current Population Surveys. See Figure 1 for differences.) Using this link I have also predicted that this peak mean income will enter the age group between 55 and 64 years after 2015.  Before 1975, the peak mean income was in the age group between 35 and 44 years. Figure 2 presents the mean incomes in various age groups as normalized to the largest mean income in a given year.  

According to Figure 1, the growth in the mean income practically stopped in 2000 and the real GDP per capita has returned to 2004. Accordingly, the growth in the age of the largest mean income also effectively stopped in 2004. Since we do not expect fast economic growth in the 2010s, the age of peak mean income may move in the 55 to 64 year group around 2020.

This observation is a crucial one for our model of personal income distribution. It is the only model which ties the age dependent income distribution with the level of real GDP per capita. Slow economic growth is equivalent to slow evolution of personal income distribution. At the same time, the age dependent personal income distribution does not depend on other factors: calendar time, education, human capital, taxes, interest rate, etc.  

Figure 1. Real GDP per capita (measured in chained 2009 $) and mean income ( in 2010 $) between 1967 and 2010. The mean income is related only to people with income (211,000,000 in 2010) and the GDP per capita is calculated for the whole population.

Figure 2. Mean incomes in various age groups (“20” corresponds to the ages between 15 and 24, and so on) normalized to the largest mean income for a given year. For example, the largest mean income in 2010 belongs to the age group between 45 and 54 years and thus the normalized mean income is 1.0 for this group.

Mankiw on business investment as the driver of economic growth

Greg Mankiw proposed to reduce corporate taxes in order to accelerate real economic growth, both in the short- and long-run. It is only one of many remedies proposed by macroeconomists. They do have a big problem to give not a silly recommendation based on macroeconomic analysis. But they cannot because of the inherent equilibrium state presumed by macroeconomic models. In short, this equilibrium implies that no internal force can make any change beyond the synchronized evolution of the system itself. Because these internal (economists call them endogenous) forces are well balanced they produce a very smooth growth trajectory. The only explanation of all large fluctuations around the average growth rate given by various schools of macro so far can be reduced to shocks to demand or supply, with these shocks having unknown origin. This is the feature of macroeconomics which makes it soft and worthless for quantitative forecasts. (See Krugman for the failure of the economic profession.) Economists do not really know what drives real economic growth and all their models are superficial in terms of quantities. (As a rule, economists consider the absence of empirical justification as a strong side of their theories and are proud of that. It works well before the next recession.)  

The corporate taxes are external to the nature these shocks. In other words it is not shown that the change in these taxes affects real economic growth.  If to neglect the theoretical impotence of this proposal (again, there is no proof that the tax reduction works in reality and will not be just waste of resources) one can make a thought experiment. Imagine that it works. Then, any reduction to the corporate taxes, as based on the macroeconomic grounds, would induce a positive feed-back and thus several iterations before these taxes fall to zero. This is simple induction – the reduction, supposedly (because there is no quantitative proof), helps – business needs lower taxes. What then? The government will need to make the taxes negative? 

What to do then?  According to our model, the US economy will struggle through the 2010s with the average rate of real GDP per capita growth below 2%. This implies the rate of unemployment near 9%. The slow growth will be accompanied by slight deflation. This situation has been observed in Japan since 1997 and is not too bad for the economy. The US should just be ready to redistribute the overall income in a way to support the poorest groups of population. This does not imply the corporate tax reduction any time soon.

Gold is the only option in the choiceless situation

The gold price phenomenon is in the centre of the current financial and economic turbulence. The role of gold is a miracle for economic and financial gurus who speculate around without any success to explain is in any useful terms. Gold stays above any economic activity and free market rules since it is not really connected to production and consumption. It also cannot play the role of value saving.  Nobody can say why it is growing and when it will start to (free) fall. There is no doubt that the latter event will happen sooner or later.   

Gold is not a normal product or asset. It plays a psychological role inherited from its “golden” past.   I would call the gold rally as the only option in the choiceless situation when everything else is worse. 

Some experts say that gold is a new bubble. In my opinion, it’s right in some sense. However, this bubble, as might be with the previous one, is a game for smart investors who can quickly withdraw money from this Panama affair (remember what happened in 1979-1980). Thus, I would recommend not joining if one cannot withdraw money momentarily when the price will start to fall.

Bernanke on inflation

Our prediction for the 2010s is very low and negative inflation. It has come to Ben as well.

Chairman Ben S. Bernanke  on inflation.

The Outlook for Inflation

Let me turn now from the outlook for growth to the outlook for inflation. Prices of many commodities, notably oil, increased sharply earlier this year. Higher gasoline and food prices translated directly into increased inflation for consumers, and in some cases producers of other goods and services were able to pass through their higher costs to their customers as well. In addition, the global supply disruptions associated with the disaster in Japan put upward pressure on motor vehicle prices. As a result of these influences, inflation picked up significantly; over the first half of this year, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.

However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

Krugman on the profession. The reasons economists have failed

Paul Krugman wrote a relatively short article on the economic profession and crisis. The reader can find it here. There is no big difference with many other economists’ claims on the reason behind the overall failure to describe the current crisis. The profession has problems in “social dynamics” and thus should listen Paul and follow his ideas up. The profession needs consolidation around some “right” ideas and “wrong” idea must be avoided.

There is only one good sentence in this paper

“All of this would have been OK if the triumph of anti-Keynesianism was justified by superior empirical success. “

This requirement of the empirical justification must be applied to the profession as a whole. Economics as a profession needs a measurable accountability. Otherwise, there is no rule how to justify and select between various models and predictions. Unfortunately, the economic profession defends its quantitative unaccountability fiercely. As a consequence, economists will fail again, and again, and again … One can bet the failure without any risk.