The Market is Not That Efficient

If you’ve been listening to this podcast for a while, you’ll know that I’m a junkie for Economics 101. What I mean by that is that so much of the market can be simply understood by watching the balance of supply and demand of any commodity. But markets are not always that efficient. They stumble from time to time and get temporarily out of balance.

Prices can be highly elastic when it comes to short term imbalances of supply and demand. We’ve seen it in all forms of products. We’ve seen it recently in oil. We’ve seen it in surgical masks, some medications and toilet paper.

One of the great illusions is that we operate in a truly free market economy. That’s true part of the time, except when it’s not.

We know that multiple bids for a product result in a higher price. Fewer bids transfer the negotiation leverage to buyer. This is exactly the same in real estate. We know that if a multi-family project has 20 offers, it will sell for more than if it has only one. It’s a true market when there are multiple buyers and sellers.

Increasingly, large buyers like Walmart create “perfect competition” where suppliers conduct a reverse auction bidding down the price to win a contract with Walmart or Costco, resulting in the perfect “free market” monopoly.

We have experienced decades of falling commodity prices as global supply chains, consolidation, and increasing specialization have enabled that reverse auction to bid the price down.

Our commodity economy continues to function as long as supply chains operate without disruption.

But now, we’re experiencing an unprecedented collapse in both supply and demand. But not for everything. The market is operating in a very inefficient way right now. Normal demand patterns are disrupted. You only need to go to the supermarket to see this effect.

People are staying at home and favouring canned food, packaged food over fresh fruits and vegetables. We are at the height of the strawberry season right now. Yet we are now experiencing a surplus of strawberries and a shortage of canned beans.

North Americans consume most of their potatoes in restaurants in the form of French fries. With restaurants closed down, potato stockpiles from last year are overflowing. Farmers are having trouble selling potatoes and they are reducing their planned 2020 crop size.

Naturally, potato prices have dropped.

Markets all over the world are going to be experiencing these kind of disruptions. It means that we may see local price increases for certain commodities.

Today I purchased some precious metals for my own portfolio. The premium for bullion coins charged by the dealers was 35% compared with the normal premium of about 10%. In fact, the licensed dealers in my home were 100% out of stock. I placed the order with the bullion desk at my local bank and the bullion will be delivered in less than two weeks. The dealers are quoting much longer delivery times and are charging a much higher premium. Again, this all relates to supply and demand.

Real estate is no different. I’m starting to see distressed sales on the market. The disruptions here too are creating market inefficiencies.

The big question is how long will the imbalance persist. Is this a short term condition, or a medium term condition? If the surplus is for retail space, it might indeed be a long term surplus.

Look at all these conditions through the lens of supply and demand.