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If There Are Riots In New York, You Can Blame Ethanol And Index Funds

Mayor Bloomberg is on record claiming that riots are caused by unemployment among college graduates. But I suspect that Occupy Wall Street is overweight degrees and underweight 9-to-5 employment, and it’s not taking down the regime so much as it is taking down a lot of pizza. So one might question Bloomie’s conclusions and seek someone with more rigorous statistical training to explain Where Do Riots Come From.

Fortunately we have that in Yaneer Bar-Yam, a physicist, complex systems theorist and general man-about-town with a pleasing CV that includes writing a book called “Making Things Work” and telling Slate that “the shortcomings of the U.N. humanitarian-response system in Haiti have a lot to do with a 50-year-old mathematical theorem known as Ashby’s Law of Requisite Variety.”

He and some friends wrote a paper, released yesterday, arguing that increases in food prices over the last few years can be explained almost entirely by two factors: financial market speculation and the growing use of corn for ethanol production rather than food.

Now these arguments have been made before, and also disputed or minimized. The new paper rejects a lot of those criticisms; more interestingly, it constructs a fairly simple four-parameter model that can pretty closely match the actual trends in food prices over the last few years:

So, neat. Also disturbing. Also also disturbing is this:

That’s from their companion, non-mathy paper that proposes “that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations. If food prices remain high, there is likely to be persistent and increasing global social disruption.” The main graph is food prices, the red dotted lines are incidents of rioting. Charmingly the numbers in parentheses are death tolls. They predict global doom in 2012-2013.

So that’s not great. But what does it mean for your trading book? Well, besides global doom, there’s this. They write:

The question of whether speculators stabilize or destabilize prices has been the subject of a large body of literature, going back to Milton Friedman, who said “People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on average sell when the [commodity] is low in price and buy when it is high.”

But their model, which they at least think closely tracks real prices, is purely momentum driven: “If the price change of the commodity is positive in the previous time step, speculators are willing to buy a quantity mu[P(t) – P(t – 1)] of commodity, otherwise they sell mu[P(t – 1) – P(t)].” Similarly they assume that investors shift from commodities to other investments when those investments’ price goes up, and vice versa. Which suggests that commodity speculation is driven mainly by herd-following momentum chasing – and that when the revolution comes speculators will get burned down along with everyone else.

The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion [NECSI, pdf, via Scientific American]

The Food Crises and Political Instability in North Africa and the Middle East [NECSI, pdf]

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179 Responses to “If There Are Riots In New York, You Can Blame Ethanol And Index Funds”

  1. P the cable guy says:

    Pure crap, it's called the great culling. You got the wrond degree in school kids and now your up @#$% creek without a paddle. So welcome my friends to an automated-economy.

  2. Guest says:

    I am glad that a complex systems theorist and physicist can act all smarty-pants about it but the whole bread an circuses thing has been known for a couple of thousand years.

    – Ceasar

  3. Guest says:

    People dont come to db for fancy charts and theoretical models, we come for trashy jokes, short posts, and to make fun of UBS.

    – Guy who thinks matts next job will be at UBS

    • Guest says:

      +1 for the post i agree that better coverage of this issue is to post pictures of fat kids and make fun of their virginity.

      -1 for the signature. Say what you want about ML (long winded, overly complicated, not really funny ect.) but he's clearly intelligent

    • Matt's grandmom says:

      Apparently some people come here to make/read less witty versions of the same silly comment time and again.

      And if Matt does end up at UBS, make sure to make him feel welcome, k?

      • Guest says:

        "Apparently some people come here to make/read less witty versions of the same silly comment time and again"

        Have you been to this site before? That is exactly the point, its a 5 minute break of mindless repetitive jokes and tabloid stories.

        – Guy who is glad to see some matt supporters come out of the woodwork…. apparently the suggestion of a future at UBS is the straw that breaks the camels back

  4. davidrusso says:

    ugh. another non-market participant opining on the "perfect trader" theory…ignoring the shorts, ignoring the specs who routinely get run over…yo Yaneer., how about I write a white-paper on trending virginity and not bother to spend any time researching with you and your homeboys.

  5. P the cable guy says:

    Golden Boy what's up? I look so forward to reading your comments.

  6. Jasper < says:

    FInally, an academic says what I been thinking, And gets some exposure saying it!
    Thank you, Matt.
    You are now officially blessed to step in for Mommy whenever.

  7. Dumbass from MIT says:

    You're all dumbasses. That chart is the "BOHICA" Pattern: "Bend Over Here It Comes Again…"

  8. Guest says:

    I came up with the Ethanol theory first.

    – Fidel Castro.

  9. Elliot Rosewater says:

    What is the cutoff for a riot? Some only have 1 death, and that ain't no riot!

    I would guess you could put those red lines at any date…

  10. Stupid Daikini says:

    Spurious correlation. Like saying fat kids are virgins because they are fat. If they had better self-esteem and targeted partners closer to their weight they would cease to be virgins.

  11. Dr Livingstone says:

    I actually enjoyed this one Matt……can't help thinking something bad is about to happen….

  12. MrBiscuit says:

    All you need is a soundtrack and Nick Cage palming his forehead as he realizes that the corn based world will end in 2012 as he stands in the forecourt of his Iowa enthanol still.

    "There's still time…I just need to get the word out…"

  13. +1 says:

    charts charts charts charts charts charts

  14. minus 1 says:

    Just fully realized the beauty of reading Matt's posts at work. Best Boss cover ever

  15. Guest says:

    "Mayor Bloomberg is on record claiming that riots are caused by unemployment among college graduates. But I suspect that Occupy Wall Street is overweight degrees and underweight 9-to-5 employment…"

    Am I missing something? Are you not in agreement with Bloomberg's statement?

  16. partythrower says:

    Typical Burundis. Every one of them I know always shows up to my parties like 3 years early. It's like, dude, there's still plenty of food. Trust me, I'll call you before the speculators get here.

  17. Food Suggestions says:

    What foods constitute their food index? Different cultures eat different foods. There are plenty of whales, horses, wolves, squirrels, dogs, cats, pigeons etc in the U.S. that could be used to feed people. Also, a lot of local ordinances ban people from growing food in their front yards. We should repeal these laws.

  18. OhTheIrony says:

    We started running out of whale oil 150 years ago. You can't possibly expect us to eat our energy source, that would be cah-raaaaaaaaaazy!

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  168. Free FX says:

    Which suggests that commodity speculation is driven mainly by herd-following momentum chasing – and that when the revolution comes speculators will get burned down along with everyone else.

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