The blog has worried for some time about the growing dominance of super-computers in financial markets. Their activities are based on arbitrage between markets, not on fundamental analysis. And their power means that no financial market now knows what it is actually pricing.
The headlines above, from today’s Bloomberg Energy page, highlight the issue. Even Bloomberg’s experienced editors and reporters are now totally confused by what the markets are doing. Thus they report that:
• Oil prices retreated 0.6% on worries of lower Japanese consumption
• Oil prices increased 1.6% on hopes of higher Japanese consumption
All that has really happened is that the super-computers had spotted a brief opportunity to make money by forcing prices down for a nano-second or two, after forcing them up previously.
This is a very dangerous situation for anyone, like the chemical industry, who depends on markets for price discovery.
UPDATE: This afternoon, a leading US Fed Governor, Richard Fisher, said he thought the Fed’s actions had produced “extraordinary speculative activity“, and added that “there is an enormous amount of liquidity sloshing around the US economy.” Its just a pity he only recognises this now, after the damage has been done.