The Cure For High Prices Is…High Prices
- Posted by Leigh Drogen
- on June 8th, 2011
There is an important saying in the commodity market, “the cure for high prices is, high prices.” This saying goes back to your economics 101 class in which you learned that market prices are set by supply and demand.
As prices rise, producers are willing to sell more. As prices fall, producers are willing to sell less. For consumers it is the other way around.
Sometimes, due to any number of different factors, commodity prices rise to levels where consumers will just say, no mas. And at that point, prices will fall, simply because the economics just don’t support consumers ability to pay those prices. All external factors can be put aside, it’s simple supply and demand.
This even happens in commodities which aren’t replaceable, like oil or corn. It’s hard for a person or business to completely shut themselves off from consuming either. But we do it to some extent, we drive less, or not at all, we eat less, or in some sad cases not at all, humans are extremely flexible when faced with crisis situations arising from resource scarcity. Adapt and survive, it is a basic human instinct, it’s a basic corporate instinct as well.
Tom Friedman writes a great piece today in which he lays out the argument that we are at a fundamental tipping point when it comes to our resource utilization on this earth. He’s right, there is no way around it, the numbers just don’t lie. But more than the fact that Friedman points this out, because I think at this point any rational person has already realized this, Friedman goes a step further. Instead of just extrapolating into oblivion, instead of just telling us all that we are doomed like many eco-fundamentalists do (yes you have permission to steal that term from me), Friedman looks past the 12 inches in front of his face and sees the evolution of this crisis in market terms.
This is why Friedman is an amazing writer, because he’s not a journalist, he’s a thinker first. Journalist report or give their opinion on the way the world is today and extrapolate their opinions from a direct path between here and tomorrow. The world doesn’t operate in straight lines, neither do markets or people. I love to use the saying, “the market doesn’t care, until it does.” Why? Because it so accurately represents how humans interact with markets. We don’t discount information over time, we wake up one morning and realize that the Chinese reverse merger company we own is fraudulent and we need to dump every share at the open. We don’t manage risk for the fact that Greece is completely insolvent and on the path to default, we act to manage risk, or not, at the very last minute when they default. We don’t drive incrementally less as the price of gas gets higher, we go to the pump one day with an empty bank account and an empty tank and realize we can’t drive anymore.
Humans are terrible discounting machines, we are the frog in the slowly heating up pot.
Friedman is right, we have reached a tipping point in global economics, especially in the developed world, where food and energy prices are growing and employment and wages are falling. This is a dangerous combination.
But Friedman is enough of a visionary to see that things are already changing, that we’ve already crossed that threshold where people are changing their lives.
The cure for a broken system of the consumerist society, an expanding world population, rapidly depleting resources, global climate change, and a rise in developed nation unemployment, is exactly those things. Humans are reaching a breaking point where they are saying, no mas, we can’t buy into the system anymore.
Mix in technological advancement which is accelerating and has hit an important point on the curve (Moore’s Law), and we are starting to see the birth of a new system. It is a decidedly anti consumerist system, it is a system of maximizing the assets we each can afford to own and trading access to them for access to other people’s assets. It is a system where you will work less, make less, live with less, and be more happy due to the fact that the best things in life can not be bought. The best things in life are experiences and connections between people.
We in the developed world, will learn to own less, and access more. And in the process we will stave off our starvation, our depletion of energy, and our slaughter of the environment. We will give the developing world the room it needs to develop without destroying this earth, because they will not need the 100+ years it took us to see that the consumerist setup was unsustainable. Because they still have very little mental and social infrastructure in that way of thinking, it will be easier for them to implement this new regime.
It may not happen tomorrow, the earth is still going to take many more body blows, and there will be a lot of pain felt in the developed world before we get to the levels of consumption that are sustainable, but I can feel that we are on our way. Because people are saying no mas, they have reached their breaking point. The whole Middle East is going through massive revolution right now, many more will take place, and I would not rule out one here in the US if our politicians continue on their path. I’m relatively confident that we will not see massive wars between large developed nations though.
I can see the turn taking place, we’re at the earliest stages of this revolution, we’re in the very first 2.5% of the adoption curve.
The chasm that must be crossed lies somewhere between 13.5% and 34%, that is the tipping point to any system. The question is, what shocks or disasters are going to get us there?
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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