Rational Advisor

What we are seeing now is a disregard of the risk of commodities, in particular Oil, and Gold.

Analysts are continually upping their price evaluations ever increasing to higher and higher levels. As if there is no risk attached with that. And I’ve noticed that a lot of investment managers have also begun to increase their exposure into the these areas.

I remember 1987 when the widespread belief that equity exposure could be increased without similarly increasing risk - just like now, that you can increase your exposure to commodites without increasing risk - this led to an unjustified - an unsustainable - expansion of equity allocation (similar to commodities now). And the carefree buying this generated led to elevated stock prices (just liek now a days we get elevated oil prices) from which a retreat was increasingly likely.

When the S&P 500 fell 10% on the Wednesday-Friday elading up to Black Monday, investors had the weekend to think things over, and they realized they had taken on too much risk, and they decided to dump stocks en masse.

So the crash was brought about not by chance, but by an event that the investors themselves had casued - the unjustifiable elevated prices.

Optimistic assumptions add to risk, and eventually proven too rosy, they contribute to losses and failures.

people ask me whether things look familiar, and how this cycle comapres to others I’ve experienced. I tell them this one’s similiar in many ways, just a different story.

We’ve had collapses in the past that we’ve survived and gone on to greater strength. The earlier ones like todays were results of things going on in specific sectors or regions LBO debt in 1990, real estate in 1992-94, emerging markets in 1997-98, and tech/telecom in 2000-02. Todays is centered around financials, and thus is containable, treatable and survivable.

There is no schematic diagram for the workings of the economy and the markets, as in “if we do A, the result will be B”. The working son the economy and markets depend heavily on psychology, which can’t be treated as if it’s hard wired.

I’m no expert, but it makes sense to me that the quantum of pain on the way down has to at least approach the pleasure everyone felt during the boom. So this rise in commodities could be seeding the pain of its eventual collapse. Just liek teh increase in US real Estate seeded the pain in the eventual drop.

When will it End

When I was a kid,t here were a lot of things on TV showing men carrying sandwich boards that said. “The end of the world is at hand”. So far, though, they’ve been wrong. Likewiose people said we had approached the endo of the financial system around Black Monday in 1987, when LTCM melted down in 1998, and when Nortel collpased in 2000. But we’re still here. It seems we muddle through, despite all attempts to screw things up, it’s my guess we always will.

I know its tempting to consider apocalyptic possibilities. But, it’s not productive, so just quit it. The world is NOT going to run out of OIL, CHINA and INDIA are NOT going to rule the economic world (remember when they said the same thing about Japan in 1991). The US Financial system is NOT going to run out of money. The world is NOT coming to an end.