Glenn Gould and Commodity Prices
September 2006, saw the biggest one month decline in gas prices (down 22%) in recorded history. By October 2006, it was clear that the 'roll yield' -- the returns on holding a futures contract conditioned on spot prices being higher than past futures prices -- turned negative (as of mid-October, -13.35%), costing investors in futures contracts millions in expected profits (Buttonwood, Roll over: Overcrowding is unbalancing the world of commodities, The Economist, Oct. 12, 2006).
One has to keep in mind that this mini-crash (or, perhaps, a full blown crash) in oil prices was -- outside of a few 'Jeremiahs' -- totally unexpected. If we went back slightly further in time, say March or April of 2006, and suggested to a commodities trader that oil prices would drop 22% by the Fall, we would've been openly laughed at. Even as late as mid-August, the notion that there was a 'bubble' in oil prices ripe to be punctured by a crash was dismissed by many experts (see, e.g., Norm Alster, Is a Futures Stampede Keeping Oil Prices High?", New York Times, Aug. 13, 2006, which discusses Ben Dell's prescient report, in July, exposing how the increase in speculative interest in oil had created a bubble that was ready to burst). All of this brings us to Glenn Gould.
For readers of this blog with sophisticated palates (and ears), they may have wondered what Glenn Gould possibly has to do with commodity prices (e.g., the price of oil). Glenn Gould -- besides being a great classical piano player best known for his interpretations of Johann Sebastian Bach -- was an all-around genius who made fascinating contributions to radio broadcasting, studio recording techniques, and the philosophy of music. It also turns out that he was a successful financial speculator.
In the 1993 movie (part docu-drama, part documentary), Thirty Two Short Films About Glenn Gould, one of the 'short films' -- titled "The Tip" -- retells the story of how Glenn Gould profited by betting against rising oil prices during the 1970s oil embargo and energy crises. In that film sequence, to the frenetic strains of Glenn Gould's take on Prokofiev's Precipitato from Sonata #7, we see financial traders riding the wave of rising oil prices justifying their decisions with lines like, "Play it safe. I'm sticking with the big one, oil that is ... Black gold ... Texas tea."
As we see market herding unfolding on screen, we see a strikingly different scene taking place in a booth in a plush Toronto restaurant. In stark contrast to the manic energy of financial trading rooms, Glenn Gould is shown sitting placidly at his usual table in the Fairmont Royal York Hotel Restaurant. Calling his broker, Glenn Gould tells him to sell oil and buy the stock of an obscure oil exploration company -- a contrarian bet that oil prices would drop. By the end of "The Tip," we see that Gould's bet is vindicated; oil prices and stock prices dependent on rising oil prices crashed while the price of the stock that Gould bet on rose. This prompted Gould's broker to tell him, "Maybe you should give up playing the piano altogether and just play the market. That's right, a virtuoso."
The lesson we can take away from all of this is that -- no matter how sure a thing the 'sure thing' seems to be at the time -- a crash can happen in the most unexpected ways and at the most unexpected times. The risk of crashes are particularly high when -- as argued by both the Buttonwood piece (which, when I read it, called to my mind the El Farol bar problem) and by the econophysicist, Didier Sornette -- herding takes place in the financial markets. In those scenarios, Gould-ian virtuosity calls for going against the tide.