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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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President of the Old
Speculators' Assn.
Jack Tierney
3/22/2005
The President of the Old
Speculators' Assn. Notes the Turning of the Elephants
Editors' note: Our creation of the Old Speculators' Association was inspired by Gordon MacQuarrie's Stories of the Old Duck Hunters, particularly the doings and sayings of the Old Duck Hunters' Association president, who is the mythical embodiment of all the duck hunters who ever lived. Jack Tierney is a down-to-earth Tennessee philosopher whose pronouncements are always weighty..
Yes, indeed, the elephants once more reverse course and threaten mayhem to the witless souls unaware of the iron law of commodities: "Thou art dreck and shall be pummeled into submission."
For the past several years this incantation has been repeated lustily and frequently by the true believers. And much like the old man who shows up on Miami Beach everyday in a pea coat, watch cap, and hiking boots, predicting snow, he will eventually be proven correct.
But there's another ancient axiom, this one from Ecclesiastes: "For everything there is a season." And for the past several seasons the elephants have demonstrated a reluctance to return home. Perhaps the mileage is discouraging; the signpost up ahead reads $2.70 to silver, $170 to gold, and $22 to oil. While there's little doubt the final journey will eventually be undertaken, perhaps this is not the season. Astute Specs have pointed out that much of this can be attributed to inflation; on the other hand, it has been noted that a number of Specs have bought into the Panglossian Chairman's suggestion that inflation has been throttled over the past 5 years or so. An interesting dichotomy.
I propose that there are two economies. The first is the one that's populated by the lumpenproletariat (of which I'm a member) whose main expenditures go for food, clothing, shelter, gasoline, taxes, and medical expenses. With what's left over, half is saved and the remainder goes for a 12-pack and several pizzas (at Domino's special prices). For this group, inflation is very real and substantially over 2.5%.
The second economy (much smaller but substantially wealthier) is populated by those who find the above mentioned six items relatively innocuous and, ultimately, claiming a minor portion of their annual budget. The big items for this group are boats, cars, homes, computers, jewelry, and club memberships (not the Elks, but the golf, polo, or croquet clubs). With the possible exception of the last, inflation has indeed been benign. On most, huge discounts are offered before the dickering begins, repayment terms that would have beggared the Rothschilds and Fuggers are common, and down payments...hohoho...what down payments?
Meanwhile, as these commodity bubbles continue their inexorable journey to perdition, thinking Americans are putting their money in a "real asset," their home...and they have been rewarded handsomely. Or have they? In June of '00 the average American home sold for $225,000; five years later it's priced at $285,000...a nice run-up and certainly one that outpaces the Fed's inflationary figures.
However, had our average homeowner happened to purchase his home from a European in '00 and been asked to pony up the cash in Euros, his cost would have been E210,000. Five years later he wishes to sell and that same European shows up, expressing indescribable remorse at ever having sold. The European agrees to the $285,000 but once again will deal only in Euros and buys the home back for E210,000. If one overlooks the taxes, interest, and fees paid over those five years, it's a wash. If he dipped into equity, though, it's a sad story. So over the past five seasons our homeowner, laboring under the illusion he has been participating in wealth creation, hasn't even broken even.
Of course (as I'm constantly reminded), he has had the comfort and security of living in his own home. Which is great for people who enjoy running like hell to stay in place. I don't like running at all. In nominal terms then (from 6/'00), the average American home has appreciated 27%, silver 40%, gold 48%, oil (as reflected in the XOI since I couldn't locate a barrel price) 70%, and natural gas (from the XNG) 83%. Pick any inflation number you believe to be honest, subtract that from the above figures and tell me in what areas are we experiencing a bubble and in which is it merely the appearance of a bubble. After factoring in inflation, have the elephants really traveled that far from home? Or are they really just a couple of fields over and only because we're looking through the wrong end of the opera glasses, they appear so far away? Might they not still have many more outbound miles yet to go?
I certainly don't have the answers to these questions. I realize this doesn't measure up to the Chair's insistence on hard numbers and measurable probabilities. However, as his own research has revealed, the capital markets are overwhelmingly upwardly biased regarding equities and downwardly biased regarding commodities. There are not enough data points to make a case for commodities...ever. But we know that they do have their seasons. Where are they now? All I can be sure of is that they're currently traveling through the county of Schadenfreude.
Tony Corso responds:
Two points: