Thursday, April 24, 2008

That's Got All The Makings of a Run

"Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the makings of a run." --Ernie the cab driver to newlyweds George and Mary Bailey, "It's A Wonderful Life"
In the movie, as in real life in the 30's, the "run" in question was a bank run. We won't get into the causes of the Great Depression (anti-trade tariffs coupled with tax rate increases) or why it went on so long under FDR (deflation, endless government tinkering/ intervention coupled with large tax rates driving away capital formation) because the focus here is on the psychology of "runs."
In just the past decade we have, extraordinarily, experienced three different runs. The press, even the business press, calls these "bubbles." Bubbles is a really poor choice of words as it conveys something ephemeral or unreal as in *poof* it disappears and was never there. If you sold all of your stock holdings the first week of March 2000 you got out at the top of a climax run. What happened next was not the popping of some imaginary bubble. It was what always happens at some point to climax runs. Sellers overwhelm buyers, the traded item plummets in value, short sellers come in and drive the price lower, and the long struggle to find a bottom begins. This same picture is portrayed in price/time charts over and over again through the history of free trading of any item. Charts reveal psychology.
Following the collapse of the tech stock climax run in March 2000 the NASDAQ sought a bottom until October 2002 when it became clear that the Bush administration was going to get a major tax rate reduction package through. The bottom was made at that point-- the market took off with the invasion of Iraq the following March. But not everyone in the world lost big in the 2000-2002 stock market crash. There was a lot of cash seeking a new place to make money. Which brings us to the second climax run: real estate in certain locales. This was a logical next place because home ownership is the most tax-advantaged place for capital in the US. Coupled with extremely loose monetary policy (AKA FREE MONEY!) the climax run was on.
Sometime around 2005-06 it became clear to those paying close attention that coastal and second home real estate prices were reaching unsustainable levels. And those people started getting out. My particular exit was at the end of July 2005. By the way, at that very time people were driving around Silicon Valley with bumper stickers pleading with God to let them have one more "bubble" in their lifetime. Funny sticker made doubly humorous by the fact that they were in a housing "bubble" at that very time and, for the most part, didn't act. Which leads us to the third climax run of the decade: commodities.
We are getting very close to the top of a climax run in commodity pricing. Where the top is, I don't know. Oil at $120/bbl might be a topping signal. But, maybe oil can run to $140. Just remember, there's more oil on the market than the world can use right now-- there's no shortage. Demand is down in the US and very manageable worldwide. And yet the market drives straight up a wall. Hmmm, late stages of a climax run. Remember, when you talk about a commodity price there's a part of the equation often neglected-- the value of the currency you're using to buy it. The underlying story is "dollar weakness."
Look at some other anecdotal "run" news: Rice prices cause rationing. And here.
To paraphrase Ernie the cab driver: "There's something funny going on there. I've seen a few of these and it's got all the makings of a run." Fearless prediction? The end of this commodity climax run (AKA commodity bubble) comes when the federal reserve signals the end of the current loose money cycle. That could be as soon as next week. If it happens, where does the big money go next? Stocks? Tulip bulbs? That is topic A-1 around many trading/ investing shops these days.
NOTE: Some folks have commented that crude oil is at a price way beyond anything we've ever seen and will continue to climb until, I guess, we all are riding bicycles to the windmill factory. Poppycock. In April 1980 crude oil traded at $101.70 adjusted for inflation. We just recently broke through that top for the first time in nearly 28 years. In fact, just over a year ago oil was around $50/bbl. During the stock market crash in the last year of the Clinton presidency oil was under $20/bbl. The fact that it's bumping its head on $120 today is indicative of a climax run it is not indicative of a price level that won't drop by, who knows, as much as 30%, 40%, 50%, 60% in the next couple years. To use the popular term: it's a bubble, baby.
UPDATE: Friday morning (4/25) finds a WSJ column encouraging Americans to stockpile food. The rationale is that in times of high inflation everything is much cheaper today than it will be tomorrow. This is exactly right for today. But, as the old saying goes, markets continue to go up until they stop. How would you like to have filled your garage with non-perishable items this weekend only to find out that you could buy the same stuff this July at a 40% discount.
UPDATE2: A close associate reports that yesterday afternoon at our nearest Costco she observed that most people in the checkout lines had huge bags of rice and flour. "...that's got all the makings of a run."