Navigating A Driverless World

The advent of driverless cars has gotten me thinking about the shifts that have occurred in the investment world over the past 9-10 years. The movement towards alternative forms of Central Bank policy perfectly coincided with the movement towards more and more algorithmically driven capital allocation decision making. The “New Normal” not only involved much lower levels of interest rates and market volatility, but also a de-emphasis on  heretofore tried and true historical investment metrics. The global oil market is a perfect example of one sector of the global capital markets where traditional fundamental analysis has been rendered somewhat moot. Prior to the advent of the financial crisis, one might  attempt to project the future price of oil using global supply and demand per barrel numbers combined with some assumptions about rates and relative exchange rates. An analysis of the oil market today however would involve a much different set of underlying metrics. Today, it might not be much of a stretch to say that the price of a barrel of crude is driven primarily by technology and interest rates/relative exchange rates. Therefore, in some sense the price of crude is being less driven by pure fundamentals and increasingly more by what have traditionally been only ancillary factors. Evidence of this can be seen in a number of spread relationships which currently reside at multiple standard deviations away from their historical average.

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