At the start of the year Barron's published a cover on the super bullish future of commodities and tongue firmly planted in cheek I stuck my neck out and tweeted “Short at will."
@carlquintanilla then retweeted me with his own cautionary comment of “Oh boy!” and the whole thing got wide play in FinTwit with most users telling me in no uncertain terms that I was the biggest idiot that ever lived
So how did I do?
Let’s take a look at four trades that I think are a decent representation of the commodity market: Oil, Copper, Lumber and Gold.
Oil was about $80/bbl at the time of the call and then thanks to Vlad-the-Impaler spiked all the way to $130/bbl. So you could legitimately claim I was wrong.
But where is crude now? About $93 so still above my clearly too-early call, but well off the highs and if you added into the spike you'd be well in the money now.
Now let’s look at copper. Copper was trading at $4.60 at start of the year then eked out a final spurt to $5.00 only to crash 40% down to $3.15 before basically finding an equilibrium at $3.50
What about lumber? Lumber was $1250 at the start of year and then promptly swan dived to $400 wiping out about 66% of your money if you were foolish enough to hang on to the bitter end.
Finally gold. Ah gold. The real money. The pinnacle store of value. The great protector as once in a lifetime inflation ravaged our lands. What did gold do? It was about $1850 at start of year, spurted for one brief moment to $2000 (again on Vlad-the-Terrible atrocities in Ukraine) and then lost its shine quicker than a wooden nickel, bottoming at $1680 before settling down at $1750 still below its price at the start of the year even as inflation reached highs not seen since I wore knee high tube socks and drove a Datsun B210 to high school.
Did I short any of these assets? No, of course not. I am an ADD-addled degenerate day trader that never leaves the 1 minute chart so I really did not pay much attention to the trade till now when curiosity prompted me to look at my start of year call. But having traded markets for longer than I care to admit I have learned a few things and one of them is that when everyone is leaning on one side of the boat it is wise to move to the other or you will capsize for sure.
Euphoria and abject depression are generally not great times to listen to the crowd and that’s especially true if you understand the bounded nature of commodity markets. What is that? Commodity markets will always balance themselves out via supply and demand as signaled by price. Malthusians have been arguing for centuries that supply is constrained and prices will soon reach infinity, but so far human innovation has always been able to find new sources of supply or simply invent better substitutes. That’s why the Malthusian view (expressed by every hard money bear ever) has been such a sucker bet and why all commodity price cycles ultimately mean revert.
That’s not true for equities - especially US equities - which is an upward drifting asset class that is decidedly not mean reverting over the long run. To understand the difference just look at copper.
In 1980 it was about $1.50 then by 2000 it dropped to 75 cents and now is above $3.00. Ok that’s not fully mean reverting but look at the S&P in 1980. It was around 380 now it's above 4000.
That is the very definition of an upward drift and why perma bears in equites have their faces ripped off all the time. If you listened to guys like Peter Schiff for the past twenty years you would have bankrupted yourself enough for five lifetimes and unlike a cat you only have one.
So whether you trade or invest you need to know two things - hysteria or depression is not a good time to make a bet with the crowd. If it’s on the cover of a magazine - the big profits are made and you’ll be fighting for crumbs before the reckoning comes about. Two - know the difference between mean reverting and upward sloping markets and try not to chase one while fruitlessly trying to fade the other