No oil bubble in 2008

It’s really hard to defend the efficient markets hypothesis.  The theory seems so unrealistic.  I recall that when I began blogging in early 2009 the price of oil had just plummeted from $147/barrel to about $38/barrel.  It was hard to explain to people that the price of $147 was completely rational, given what investors knew in mid-2008.  That demand from developing countries had driven prices sky-high, not nefarious “speculators.”  Thus I had frequent debates with commenters.

But guess what happened.  When output recovered in the developing world prices shot right back up.  Not all the way to $147/barrel; after all, output is still quite depressed in the developed world.  But well over $100 for the so-called Brent crude (West Texas prices are currently distorted by pipeline limitations.) So now we know that speculators weren’t the cause of high prices in 2008, it was actual demand for oil.  James Hamilton is one of the world’s leading experts on oil prices, and he is very concerned about where we are going to get the oil to meet rising demand in countries like China:

In any case, the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. But I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we’re talking about an oil price above $100/barrel in the first place.

Never sell the EMH short.  No matter how wrong it seems, no matter how irrational markets may seem, there is usually a rational expectation.

NGDP expectations: Falling like a stone

Date            S&P500       WTI oil     5-year TIPS spread

May 3        1202.26         86.19         2.00%

May 4        1173.60        82.74          1.94%

May 5        1165.87        79.97          1.89%

May 6        1128.15        77.11          1.79%

May 7       1110.88         75.11          1.75%

May 10    1159.73         76.80          1.85%

May 11     1159.75        76.37          1.86%

May 12    1171.67        75.65           1.92%

May 13    1157.44        74.40           1.89%

May 14    1135.68        71.61           1.83%

May 17   1136.94        70.08           1.81%

May 18   1120.80        69.41           1.77%

May 19   1115.05        69.87           1.70%

May 20   1071.59        68.01           1.60%

May 21   1072.58                            1.56%    (as of 10:30am)

The oil and stock prices (plus falling metals prices) are telling us that real growth expectations are probably falling.  TIPS spreads are telling us that inflation expectations are probably falling.  Anyone want to guess what is happening to NGDP growth expectations?  We can’t know for sure, but I’d wager that if we had an NGDP futures market, NGDP futures prices would have fallen significantly since May 3.  BTW, it is a disgrace that the government hasn’t created one.  It isn’t just me, Robert Shiller has been calling for an NGDP futures market as well.  We are flying half-blind, when we could have extremely valuable market data on NGDP expectations at a trivial cost to the Federal Reserve.  I wish more macroeconomists would speak out on this issue.