Friday, August 15, 2008

Whoddathunk!

Due to the pressure of falling commodity prices the TSX has fallen from 15,000 points only a couple months ago to around 13,000 points today.

Oil has fallen from nearly $150/bbl to $112/bbl today.
Gold has fallen from its lofty heights around $1000/oz to $780/oz today.
Most other commodity prices have fallen dramatically over the past two months.

For anyone unfamiliar with market volatility in a commodity based economy, you just got your first lesson. It's possible to make and / or lose a lot of money very quickly.

For any long term investment strategy, diversification is important, otherwise you need near perfect timing to avoid the dramatic ups and downs. Diversification doesn't mean holding 5 different energy trusts either, I mean truly non-correlated assets.

8 comments:

Tony Danza said...

Now you know Who's The Boss!:

From May 3 2008, Tony Danza writes:

damann, I think your thesis is sound, "sell into greed, buy into fear". Despite all the doom and gloom regarding the US I don't think they're going anywhere soon, if oil falls say goodnight to Russia, China and the EU and the US will be laughing.

The USD is a great hedge against plummeting commodities which are in a fairly large bubble heading into a possible global recession. Where do you think money will flow for safety in that scenario? Canada, Russia, EU, South America? I'd say the US is the favourite here.

I'm long the USD though so take that with a grain of salt.

With the troubles facing the States I would be terrified of holding greenbacks.

Aleks, why are the troubles facing the US any less than what's facing the rest of the world? The EU and GB, Russia, Oceana, India and China are all experiencing commodities, RE and credit bubbles at least if not more insidious than the US.

TD out.

frank said...

If, like myself, you believe that we are at peak oil, nothing looks like a good investment.
Our expansionist debt based economy requires constantly increasing energy supplies.
Lacking constantly increasing energy supplies the economy has no choice but to contract.
One can argue that we will substitute other energy sources, coal, wind, solar, etc., and we will, however when you begin to look at the role of petroleum and natural gas in our civilization it becomes hard to see how it can be substituted for and still maintain the constant growth that a debt based system requires.

Tony Danza said...

Our expansionist debt based economy requires constantly increasing energy supplies.
Lacking constantly increasing energy supplies the economy has no choice but to contract.


What about demand destruction? It's the fly in your ointment, with our still ridiculously high energy prices consumers and industry will find ways to be more efficient as has been the case in our recent past (and our not so recent past).

Now countries like China, Iran and the rest of the world's energy subsidizing countries will really feel pain in the future if they don't change their ways, but the freer economies will see (and have seen) major demand destruction which will alleviate demand going forward.

Also don't forget all those OPEC princes living the high life off $150/bbl oil, rest assured that lower prices will result in increased production to keep (or attempt to keep) the good times rolling. When prices are through the roof where's the incentive to increase efficiency investments?

It's not different this time!

frank said...

Tony;
Yes, one hopes that Jevons Paradox is wrong.
One hopes that the OPEC princes can increase production, although there is little evidence that they can, in fact it seems as though they may be pumping as fast as they ever will.
Isn't demand destruction essentially what we are talking about here? A lessening of growth, reduced economic activity?

Certainly todays prices have caused my personal demand to destruct, I do little discretionary driving anymore.
Interestingly I still see plenty of big trucks pulling giant boats around on the weekends. I guess people are still able to afford to put gasoline in them, I know I wouldn't be able to. (Well I probably could, but I wouldn't.Boats eat a lot of fuel.)

jesse said...

"Interestingly I still see plenty of big trucks pulling giant boats around on the weekends. I guess people are still able to afford to put gasoline in them, I know I wouldn't be able to."

All the more opportunity to destroy more demand. Not to say peak oil isn't here but just realise that by saying there are no good investments out there, you are betting against humanity's ability to innovate.

VanTOVan said...

I know what you mean about diversification. One of my wife's foolish clients insisted on piling all of her $$ into precious metals funds. (Maybe she used to date that Michael Randalbard guy...)
I just shake my head and think of that expression "they don't touch the sides on the way down"

DaMann said...

Tony,

I remember that conversation well. I got talked out of putting our cash into US$. I was going to drop it in there when we were at par. I should have went with my gut instinct. With oil going down the CAN$ has only one place to go. I would already be up a pretty penny already!

Did you ever buy any greenback?

Lesson learned, listen to my instincts from now on. Not too bad though, we did dump our place 3 months ago. My wife thinks I was brilliant :-) Lucky sure, but I was watching the numbers daily for about 2 years and when i saw inventory balloon we pulled the trigger and sold a fast we could. Now we are renting and super happy.

Ryan said...

Huh, apparently I got over my fear. I bought 2 shares of Berkshire Hathaway recently, partly because I figured the C$ would go down vs the US$. And that's started to happen.