The last person to catch a falling knife

Catching a falling knife is hard, especially when its covered in oil. Its hard when it covered in sugar too, just as painful if its made out of aluminium and cotton won’t do much to cushion its blow either.

But, the last person to catch it just right however gets all the glory and without getting their fingers burnt (or sliced off to use the analogy to the full).

As an excellent chart from Bloomberg illustrates several organisations have announced that oil prices have bottomed over the past 18 months including the IEA, various investment banks, oil companies and OPEC producers.

2016-03-12_2200

When I posted a question on Quora asking what peoples thoughts were on how commodity price forecasts affect commodity markets and the behaviour of those in the market, one of the answers I got likened commodity forecasters to a car, being driven by a local with knowledge of the roads, driving on a winding road in the fog. The lead driver is being followed by others at a safe distance, the lead driver signaling to those behind where the twists and turns in the road are, acting as a reference point so that they don’t crash into a tree.

I think this is an interesting, if slightly flawed analogy. How do you know the driver in front knows what he is doing? Will you, like sheep just follow him or her over a cliff? The analogy also implies that commodity forecasters have some kind of omnipotent power to see ahead and prevent one or another market from teetering too far away from fundamentals (ie, the road in the car analogy). Commodity markets and the track record of forecasters suggests that this is not the case.

As with following a car in the fog, don’t just follow commodity forecasts blindly and beware of commentators claiming to have caught a falling knife.

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