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Sunday April 27, 2008

A Different, More Inclusive, Look at the Situation

More than twenty years ago, on my second year of college, I took a linear algebra class. I was fine with the vectors, the matrix multiplications, the works. But I remember clearly that one day, one of the students asked the professor, Bernard Schwartz, what do four-dimension vector mean? Professor Schwartz, not surprisingly, gave a long and very interesting answer to the question. So much so, that it changed my mind completely and formed a new perception on the observed versus the perceived and the real world (whatever that means). The answer was along the following lines.

Our world is three dimensional (yes, you can throw in time, but lets leave it alone for the time being). If, for example, someone places a pencil in front of you, you would know right away, by the shape, and the size, that it's a pencil. If that someone wanted to play a visual trick on you, and place the pencil perpendicular to your eye, so that you can only see the precise circle of the eraser (or the blade for that matter), there's a good chance that you would still know it's a pencil. The same if you were shown a cross section. Our three-dimensional eye-sight and our developed brain can overcome the cheap visual trick, and identify the object nonetheless.

But what if we only had two dimensional eye sight, like some animals? Placing that pencil in front of our eyes in different ways, may be perceived by us as a completely different phenomena. In fact, when looking at a pencil from five different directions, we may think we're actually looking at five different phenomena, with no connection whatsoever.

Same with vectors. Being a three-dimensional animals, we understand easily length, width, and depth. We can add direction and force, and even time.

But is it possible that we are actually seeing various presentations of the same phenomenon, but our limited senses indicate them to be different phenomena? I think absolutely. Does it happen that occasionally someone knows just how to look at the data and interpret it in a way that shows more than the eye can see (literally)? Yes, indeed. Just read the book Freakonomics (http://en.wikipedia.org/wiki/Freakonomics) and you'd see how many things that are apparently not connected at all, are virtually one and the same.

Now just a thought. A few phenomena are currently watched closely by the entire (media connected part of the) human race. The sub-prime crisis of the US economy (aka recession, depression, slowdown), the sudden rise in food and oil prices, terrorism as a means to accomplish a political agenda, global warming. I'm stopping at that to allow for the probable conclusion that not ALL phenomena are connected, and some are after all independent.

So lets see. The sub-prime crisis in the US caused the stock market in the US to change direction and go down. Real-estate prices are driven down as well. These are facts. The dollar has depreciated in a very significant way. Fact. Unemployment up. Consumer mood index - down. Facts. Now the speculation part.

Are the following possible outcomes of the financial crisis in the US?

People around the world who have lost fortunes in the stock market and in betting on the dollar are resorting to "lower" foods, like rice, wheat, corn and soy?
The data points that there's enough rice to feed the world. The data suggests that the rise in the prices of food is a financial one, and not a large sudden change in demand/supply chains.
OPEC proposes that increasing production of oil will not drive the prices down. The data suggests that the rise in prices of oil is also a financial one.
Huge amounts of money looking for an investment home, staying out of the real-estate and the stock market, are being redirected to the commodities market - driving the prices up? (keep in mind that deals in the commodities market must be backed with future contracts on the commodities themselves).
Energy prices have extremely increased in the last year or two making the production cost of food higher, driving prices higher (keep in mind: the growers aren't getting more money for their crops).
Interim conclusion: increased demands for basic foods, followed by increased production costs and the drought in Australia and the diversion of some corn to ethanol rather than food, followed by the new fashionable place for investment - the commodities market, have caused the price of food to skyrocket.

Is it really so far fetched? Are these phenomena connected? You bet. Will it get worse before it gets better? Probably. But hear me out on this. The short conclusion is the following: investors, looking for a new bubble (after being deprived of the high-tech one and the real-estate one) are bubbling up the commodities market with billions of dollars, driving the prices up, and on the way causing millions of people to starve. Far fetched? I think not.

What will possibly follow? Food riots? Increased terrorism - now stemming from hunger? Another bubble burst? The commodities bubble won't take much time to burst. It's far too dangerous, and volatile. It's time to think about the next bubble. Gold? Diamonds?

Are we really looking at independent phenomena? I think not. Global warming caused droughts, and diverted production of corn to ethanol. Burst of a bubble plus a serious financial crisis in American and global stock markets diverted huge amounts of money to the commodities market driving the prices up. Political unrest, food riots are starting. Connected phenomena? Absolutely.

Posted at 10:05AM Apr 27, 2008 by Amiram Hayardeny in Personal | Comments[0]