June 06, 2008
My Inner Julian Simon: Putting My Money Where Their Mouths Are

Futures markets are one of my favorite subjects to teach in econ 101. There's some new terminology, but the basic principles are familiar (or they should be) by the time we get to that part of the semester. It's also a great exercise in deciding what we should and shouldn't worry about and who we should and shouldn't believe. A few weeks ago, I read a round of prognostications about $150-a-barrel oil and resolved to test the theory by putting my part of our "economic stimulus" money in oil futures. After all, if the doomsayers are right and we are "running out of oil," then the price has nowhere to go but up. I haven't actually bought the contracts yet--I'll get to why not in a second--but July futures are at $138/barrel right now.

I've often said that you can tell whether prognosticators really believe what they're saying by looking at their portfolios (NB: our portfolio is very equity heavy and consists mostly of index funds; we're playing it by the book). Someone who is genuinely, completely, totally convinced that oil will be $200/barrel in December should act on their wisdom, load up on December crude oil futures (currently $137/barrel), make an absolute killing, and then use the money for whatever they want, like alternative fuel research.

I haven't actually bought the contracts yet because actually setting up an account has been a painfully slow process. The transaction costs are pretty high, but we should have all that straightened out over the weekend. The transaction costs prevent some people from entering the market, but the principle still stands: if you've been blessed with information that everyone else doesn't have, you should act on it and move the prices back into line with the fundamentals. I'll have more to say when I've actually bought the contracts.

Posted by Art Carden at 05:34 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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