How does backwardation semantically relate to backwardness?

Solution 1:

I suspect that the term "backwardation" derives from the notion that prices and markets will always rise over time. I can find only circumstantial evidence for this suspicion, however. Hopefully I'm not completely wrong here.

What is backwardation?

It helps to understand what exactly is described by "backwardation." Investopedia has a pretty good definition here, but I'll translate: In backwardation, the price of a futures contract on a given asset is below the expected price of that asset in the future.

For example, let's say the market expects the price of Widgets to be $100 per Widget in January of next year. A Widget futures contract is essentially an agreement to buy Widgets for a certain price at a certain time. A futures contract that lets me buy Widgets in January at $90 (even though the expected price at that time is $100) means the market is in backwardation, because I can buy a contract at a price that's lower than the market expects Widgets to demand at that time.

Note that the relationship is between two future prices, not between the current price and the future price. The relationship between current and future prices determines whether the curve is "normal" (if prices are going up) or "inverted" (if they're going down).

Why "backward"?

The underlying assumption of investing in general is that prices (and other amounts) will always go up, in the long term. I don't have enough of a handle on market theory to explain that easily here, but I will point out that there are a number of investment terms that derive from this assumption:

• The futures curve itself is called "normal" when prices are expected to increase over time, and "inverted" when they are expected to decrease.
• When a market goes down, it is often referred to as a "reversal."
• A stock split in which the number of outstanding shares increases is known as a "forward" split, while a stock split in which the number of shares decreases is known as a "reverse" split.

If we assume that prices are rising (as they are in "normal" futures markets), and we expect the spot price to be, e.g., $100 next January, then a January futures price of $90 is like looking backward to the point at which the price passed that level.

I suspect that this is the semantic connection between "backwardation" and "backward."

What surprises me most about this question is that Etymonline missed Gilbert & Sullivan's 1893 Utopia, Ltd., in which these lines appear:

A Company Promoter, this, with special education,
Which teaches what Contango means and also Backwardation—
To speculators he supplies a grand financial leaven
Time was when two were company—but now it must be seven.