I have a confession to make: Iâ€™m dying to do a career change. Over time, and over a relatively short amount of time, Iâ€™ve really come to hate finance and anything that comes with it. Generally speaking, I hate the utter incompetence of almost every single person involved in the financial world.
Perhaps the thing that pisses me off more than anything else are misleading, if not blatantly false. articles in finance. Today, it seems that almost every single article I read about the financial world is riddled with bullshit, lies and plain and simply false information. Itâ€™s not even complicated misinformation, itâ€™s the kind of thing anyone who ever studied finance can point out as wrong right now.
Take this extract for instance, from a reliable source if there is any such thing (Reuters):
Trading data showed that managed short positions in WTI crude contracts, which would profit from a further fall in prices, are at a record high, implying that many traders expect further falls.
This is blantantly false on so many levels itâ€™s not even funny. Just because the short positions increase on a product does not mean that people expect it to fall, far from it.
For example, someone might short oil to hedge his bet. He may be holding a lot of oil companies and wants to protect himself from losses, for instance. Letâ€™s say you own a lot of Exxon Mobile, but have started to become concerned about potential losses should oil go lower. Letâ€™s say you do not want to sell your shares of Exxon Mobile for whatever reasons (tax reason, dividend, etc.). You could open a short position on oil and get protection; as oil drops and Exxon with it (presumably), your oil short would return some of your lost money to you.
Similarly, you might short as part of a complex strategy. For instance, you might short oil and go long on gas; if both fall, you wonâ€™t lose money and if both rises, you wonâ€™t lose any money neither. You are basically betting that the gap between the two will widen. In any event, it does not mean that you are particularly pessimistic on oil.
Of course, looking at one product does not tell the whole picture. Letâ€™s say you expect the gap between WTI and Brent to widen; you could short WTI and buy the Brent. If both fall, again, you arenâ€™t losing money and vice versa.
Lastly, the dollar amount also matters; shorting 100 contracts of a $30 product is not the same as shorting 100 contracts of a $100 product. Therefore, itâ€™s normal that there are more positions as the price of the product falls. In any case, the article makes no mentions of any of those elements. It doesnâ€™t even mention, for example, that just because more people take a position, this position will be proven right. Just because people bet that a product will fall has absolutely zero impact on the actual outcome. Imagine if you could manipulate the market that way: you short a product and it falls. While this may work with obscure stocks, it just cannot happen with such a widely product.
In any event, this paragraph from a reuters article, nothing less, is not just misleading, itâ€™s a complete lie.
Next, take this stupid article from CBC, nothing less:
And with oil producers unwilling to publicly make moves to reduce the supply of oil, traders donâ€™t appear to see crude rising back above $50 per barrel any time soon.
On Monday, the first futures contract that shows oil above $50 expires in the second half of 2017. Crude oil for December 2017 delivery (which is more liquid than othe
This is blatantly false.
There is no other way to put it. Itâ€™s just wrong, itâ€™s a basic “Finance 101” mistake.
Futures price never reflect expectation of the underlying asset, i.e. they show absolutely no prediction about where a product is going, whether itâ€™s going up or down.
In fact, a future is priced according to the following formula:
F(t,T) is the price of a future with maturity T, priced at time t.
S(t) is the price of the underlying product at time t
r is the risk-free rate
C(T,T) is the storage cost of the product from t to T, i.e. if it costs $1 a month and you want the price in 10 months, C=$10
As you see here, nowhere in this formula do you see “S(T)” which would be the expected price of the underlying asset at T. A future is priced solely on the price of the underlying asset TODAY.
Say oil is at $30 today (t=0) and costs $1 per month to store. Say r=100%, i.e. the risk-free rate is 100%. In that case, the price TODAY of the future in T=1 year, in 1 year, would be:
F(0,1)=$30 * (1+100%)^(1-0)+12*$1
Thatâ€™s it. Itâ€™s no more complex than that. Nowhere in this equation do you actually consider the spot price a year from now.
I see this mistake made all the time and every time, it pisses me off. Itâ€™s such a basic mistake that anyone who makes it should be banned from finance forever.
Overall, the more I read on finance, the more depressed I get. How come these idiots, with their mistake-filled bullshit, get far more readers and viewers than me? These guys are listed on reuters, CBC, and donâ€™t even get me started on the bullshit Fool.com and the like. They get thousands of viewers yet no one dare to point the gross inaccuracies in their posts? Do they even care?
I spend a lot of time on this website to make sure I offer quality work and research. I do get readers, of course, and I am grateful for it, but far fewer than those guys “Why Canadian Housing is about to crash 75% - or more!” Yes, guys, the safest housing market in the world will plummet for no reason, of course. I wrote an article on clickbait bullshit already, but if you want to know how it makes me feel - it makes me feel furious! These guys make thousands from advertising - hell, they donâ€™t even need to trade - from their rushed crap while my articles struggle to get any visibility. If at least what they posted made sense.
What am I doing wrong, readers? Help me here.