A reader replied enthusiastically to my 2-week-old post when logic and proportion have fallen sloppy dead giving me credit for calling that a strike on Iran would lift oil prices 14%.
He wants to know what I think now.
Slow down. This is a great example to clarify:
I don’t know anything material about geopolitics, military strategy, the supply/demand response function for light, sweet crude slated for delivery at Cushing, Oklahoma. I don’t have an opinion now or when I wrote the post.
I only have eyes to see the present. To look at a price and try to reverse engineer how it could make sense. The details are in that post, but the specifics matter less than the approach. In fact, I even mention why my approach is probably exactly wrong, but what a more correct one could look like.
This cuts to the heart of what I think trading is. It’s something pretty light on “opinions”. That’s for VCs and crystal ball investors, me, I’m a donkey.
I try to invert prices to reason about what the point spreads are, then try to find a contradiction. The whole “measurement not prediction” thing*. Measurement is hard enough. Prices tell you things if you can measure. You can separate probabilities from magnitudes. You can know what the consensus is for how correlated assets are to each other. You can divine when the market thinks we will attack Iran. This is all just sitting there.
You can protest that prices are dumb and wrong, but you are only allowed to make such pronouncements from your private jet otherwise, I can’t hear you.
So as oil goes, I have no opinion, but I can pull up a few screens and tell you what one of the smartest, most efficient markets in the world might think. Maybe there are prices in dumber or less liquid or harder-to-access corners of the world that disagree. Trading means different things to different people. I think it’s the art of turning contradictions into cash.
*Related:
I was listening to Citrini chat with Risk of Ruin’s John Reeder when John said:
I have heard Citrini repeat something that George Soros says, which is, I’m not predicting, I’m observing. Paying attention to what’s happening.
You’ll discover Citrini’s key to observing is how he filters, a skill that is increasingly difficult but always growing in value.