John Tierney is looking to bet that oil prices will fall. He can find some willing opponents here, and they will offer him the best odds available. I’ve been urging Alex to short real estate investment trusts; if he has already done so I fear for his ruin. Brad DeLong discusses Google. Jane Galt warns against such bets, on the grounds that timing is everything and no one knows when the bubble will burst.
It remains an open question why markets don’t sell long-term bets for those people who have "price knowledge" but not "timing knowledge." The longest-term NYMEX crude oil futures sell for 84 months ahead; admittedly a forward contract can stretch longer. But why can’t you make a 30-year bet on organized markets? I see a few hypotheses:
1. There are few if any people who have real price knowledge but not timing knowledge.
2. The disagreement in the market is about timing, so shorter-term contracts attract the attention and volume. You might disagree about whether something will happen this month or next, but you can’t argue about whether it will happen ten or eleven years from now.
3. Long-term contracts make economic sense and someday we will have them. Right now we are out of equilibrium. We await tolerant regulators and heroic entrepreneurs.
4. You can replicate long-term contracts by trading short-term contracts in successive fashion. The informed traders have enough liquidity and borrowing power to make this work. (But hey, if that is so easy, why not have even fewer oil futures contracts?)
5. Liquidity is scarce, and involves significant economies of concentration. Intermediaries limit the number of contracts, just as we have limited trading locales and trading hours. (Admittedly many of these limits have, for better or worse, broken down.) Remember when the French used to trade stocks just a few times a day?
Take your pick or add to the list. Unless you opt heavily for #3, the market is saying that a general knowledge of price — without a knowledge of timing — simply isn’t worth that much.
My bet on oil prices will be restricted to buying another economy car, next time around. It is better to spend the money on books anyway, no?
Thanks to Tim Bartlett for the pointer.