Change Work May 2013

Wheeling and dealing

I got very interested in commodity trading a few years ago. I was seduced by the "leverage" concept: you could buy a quantity of some commodity with a contract to take possession at a future date but only needed to deposit your "margin", maybe 10% of the value.  As long as you sold the contract to someone else before the deadline you never had to pay the full amount.  Of course you gambled on prices increasing during the time you held the contract so you could sell at a profit.

"Fundamental" traders use knowledge of crop yields, market demands, stock levels etc to predict future prices.  "Technical" traders watch for trends and patterns in the prices themselves to predict future changes. The latter always struck me as a massive psychological experiment.  Prices depend on trades and if all traders are responding to price movements then there's a feedback loop that ought to be possible to model.  Of course, that's the Philosopher's Stone of all financial markets and, as far as I know, no-one has yet cracked it.

The "system" I was attracted by depended on looking for particular shapes in the commodity price graphs.  And experience showed (apparently) that certain features preceded certain movements - not every time, but better than random chance.  That small edge meant you could expect to win more then you lost - if you had enough money to continue for long enough.

The fact that the graphs reflected human behaviours (decisions to buy or sell) made it all quite plausible to me.  I could believe that patterns would repeat themselves because people would respond to each other in a consistent manner.

In the end I never made a trade.  It was all a bit too scary.  And there was the very real risk, if I mis-timed my sale, of having several thousand bushels of cocoa dropped on my drive!

These days computers do much of the trading - in commodities, equities, currencies - using algorithms that refine the simple rules I once studied. So I suppose these automated systems are responding to each other, as much as to human traders, which is a really scary thought!

The markets are built on confidence.  Traders have to be confident that they won't be defrauded, that past trends are good guides to the future, that there will be a buyer when they want to sell.  In fact, the whole economy depends on confidence.  Even if banks have money to lend, business people who don't have confidence in their markets won't borrow to invest.  And the banks wouldn't lend to them under those circumstances anyway.

At the individual level we talk about "self-confidence": that sense of comfort in our abilities and our value.  And I think that, just like traders, we need to feel that the world we live and work in is stable and predictable: that other people will mostly continue to behave as they have in the past.  We can adapt to changing circumstances - as long as they don't change too quickly or too much.

But aren't we now faced with some very big shifts?  Economic power is moving away from the old "first-world", banking is in crisis, global population may be approaching critical levels and resources are stretched.  Our comfortable assumptions about ever improving living standards based on continual economic growth are being challenged - and seem to be finished.

These changes may have been a long time brewing but they seem to have hit us quite suddenly.  And they are massive.  Too quick and too much - so we can't adapt.   We look backwards and try to re-establish the old conditions.

Confidence has gone.

Gandhi said, "Be the change you wish to see in the world", and I think that's a useful way of looking at things.  If you're not in a position to influence world events, you can still influence the people around you.  And probably a lot more than you think.  Being a little more generous and supportive of each other would be a start, and if that change happened in the world then many other things would become possible.

(Apologies if you already are "being the change" - please take encouragement from this!)

It seems obvious now that we need a lot of cooperation to solve the big problems.  Competition in business certainly drives innovation, but it doesn't seem to be a very good basis for global politics - or for everyday life.

The market isn't everything.