It Would Have Happened Already, Redux

I went to a set of presentations at Towson University this evening and heard two panels on the investment outlook — one domestic, one international.  What fascinated me was the relative unanimity of opinion.  All or almost all agreed that:

  • Bonds are overvalued.
  • Stocks are slightly undervalued.  Large Cap Value is attractive.
  • Commodities, especially gold, are a bubble.  ETFs are driving that bubble.
  • Interest rates will rise soon.
  • Avoid emerging markets.
  • Inflation is coming.

As I listened to the relative unanimity of opinion, I began to think, “Okay, what can go wrong with this?  If they are all invested to reflect these outcomes, maybe we will see things run more against them before an eventual correction takes place.

I think that some of what I heard at Towson University this evening does express the consensus for a number of markets.  Now the consensus is not always wrong — in the middle of a move the consensus is usually right.  But these calls, aside from equities, call for a change in direction.

Beyond that, a rise in bond yields would increase competition for stock valuations.

Also, some agreed that the Dollar was the best of a bunch of bad currencies, and would remain as the global reserve currency.  But then they said that commodities were a bubble.  Okay, stop.  If you say that all major currencies in the world are bad, what will you do to maintain purchasing power?  Buying commodities no longer looks so bad.  Commodities become what most currencies aren’t — a store of value.

I did not hear one argument for deflation this evening, nor did I hear anyone discuss the overindebted nature  of the American public.  There were many, many comments about the overindebted US government, but few comments on how it would affect other US investments.

Look, I am not saying that those in the panels are wrong — some of those biases are mine.  But when you hear little difference in the spread of opinions, it should make you re-examine your theses, because it is possible that all money has been committed to an idea, and even if the idea is right, we should see a counter-rally the other way before the smart money is proven right.

In closing, remember, if it were certain, prices would have adjusted already.  What this says is that we are not certain.


  • We do indeed have a ‘store of value’ problem.

    What is value, exactly? If the dollar is ‘no good’ how is copper or silver better? All fit into the same context the same way, if one is less useful, so is the other.

    The presumption is that the difficulties we face orbit around the counting- measuring scheme rather than the ‘burning the house to keep warm’- capital as operating scheme. In the latter scheme, copper (or gold or crude) HAVE to be worthless otherwise the incentive to ‘consume’ them vanishes.

    Rather commodities prices short term express unsatisfied demand for crude oil and accompanying credit distortions. All commodities are crude oil derivatives including wheat and S&P futures. With the nominal price upper bound set by the return on economic activity the likelihood of inflation is negligible.

    Once oil prices rise to a tipping point level, the whole shebang comes crashing down … $148 per barrel, perhaps?

  • matt says:

    Just my two cents:

    1. Bonds – there is a leash on high quality bonds because of their impact on mortgage rates. It is hard to imagine long or intermediate term rates rising significantly until all of the mortgage woes have dissolved from the system.

    2. Equities are not undervalued at all. In fact, most of them have unrealistic growth projections built-in and, more importantly, high margin estimates. This is ironic because the high margin estimates are dependent on downward wage pressure (which should retard growth). The only equities that are buyable, in my opinion, are large caps that pay good dividends.

    3. Commodities – some are in a bubble and some are not. The nice thing about commodity bubbles is that they don’t tend to have a negative impact on the economy when they pop (however, they may pop as a result of a weak economy). This is in contrast with financial assets and housing.

    4. Interest rates – see 1. above.

    5. Emerging markets – Some people call them “emerging markups.” There is a lot of overcapacity in EM. Also, their models are still export driven, which relies on demand from the developed markets (as noted above, a prolonged period of sub-trend growth is likely). I think the growth projections for EMs are overstated.

    6. Inflation – It is very hard to see a prolonged period of inflation given the slack in developed markets. The EMs have it now, but they could get rid of it if they stopped manipulating their currencies. Of course, letting their currencies float more freely would contribute to equilibrium (and probably very normal inflation across the globe).

    Based on these views, I am less afraid of bonds than equities.

  • matt says:

    One more note about commodity bubble:

    I think that the last commodity bubble peaked in 2008. One very noticeable feature of that commodity bubble is that the speculative junior mining equities were valued 2 or 3 times as high as they are now (probably about 6 months prior to the peak). I think that if commodities were really in a bubble, we would see a lot of the indirect plays catch a bid. They haven’t. This makes me think that either (1) the short time between bubble peaks has made speculators more careful in selecting commodity exposure or (2) we are not in a frothy stage in this bubble yet.

  • Joseph Baressi says:

    An impressive post, and equally impressive comments.

    No mention of real estate anywhere here.

    Perhaps the time is near — if it has not quite yet arrived — for investing in high-quality residential real estate.

  • Greg says:

    DM: “if it were certain, prices would have adjusted already.”

    Counter argument: if rational market theory was correct, we wouldn’t be in the mess we are in. There would be no housing bubble, dot-com bubble or housing bubble.

    Just because you tell someone not to touch a hot stove does not mean they won’t do it. Just because you tell the public not to drink too much alcohol, does not mean there won’t be thousands of hangovers tomorrow morning.

    Even if people were rational, that has little bearing on markets that are being openly manipulated by a clueless Fed Chairman. Prices right now only partly reflect “the market’s” forecast of future events — many of the items on your list have prices that reflect central economic planner’s well known mistakes

  • says:

    As for the price of oil, we saw a 10x increase in the 1970s. Today’s tipping point mat be very high indeed.

    As for Commodities as a store of value, not all Commodities are created equal.

    Oil or NG – The quality of the fields may be a state or company secret. What is the quality of the Saudi fields after their attempts at enhanced recovery? This may be part of why we have such a wide range of views on the peak oil theory. New technology (moistly for NG) can also change the supply part of the supply and demand equation and hence impact investor return.

    Copper – Just a hole in the ground. We can look at satellite images and see much of what is going on and the mines are in (for the most part) free and open countries. It would be difficult to keep potential hidden. The technology has changed little in 50 years – you move rock and dirt and separate out the copper. New technology will not likely let you recover very much more copper from a given ton of rock.

    So,….. I selected the more advantageous commodity and then the best producer. Now I have a solid underlying stock that I want to own. I have a good IV and am selling close in OTM calls on stock I hold and sometimes selling close in OTM puts on stock I want to own. I often roll month to month, and sometimes let the option expire.

  • Robert Eubank says:

    The only comment I have to make is from a book that I have been flipping through, “Hedgehogging” by Barton Biggs.
    While I certainly don’t agree with everything the book has to talk about, there is one interesting section that discusses being a contrarian and how at times everyone tries to be a contrarian and you really should be a contracontrarion.

    What I mean is that right now, it seems that we are seeing the divide between the views of the bulls and the bears widen–possibly being a moderate is the contrarion approach right now?

    I see a lot of headwinds but there is also a lot of room for improvement. I like holding a decent portion of the portfolio in consumer staples to maintain exposure to the market without forking over for the high valuations (are these record earnings sustainable?) that I am seeing.

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