Markets have a strange way of humbling even the most sophisticated and seasoned of investors — whether they are into stocks, bitcoin, or … oil. That’s just how it works. The market lulls you in, gives you a false sense of security, allowing you to keep your guard down, and then it surprises with maximum pain. Complacency is one of the worst traits any investor can have.
This is seen time and time again in all the booms and busts in any cycle over the past centuries. But who can you blame? Central banks have encouraged highly toxic risk-taking, given their modern monetary theory money printing experiment over the past decade, which assured people that equities always go up. The memory of these investors is like that of a gold fish. But on really has to have been around to experience what markets can really do as they did back in the ’70s or ’90s, even. Nothing ever goes up in a straight line, or if it does, it is best to take your chips off the table and move on. Discipline is the No. 1 rule any gambler (oops, investor) is told as they start their journey.
When bitcoin was making new highs inching towards $70,000, every single crypto bull was publishing notes after notes calling for $150,000 or way more. This is not to say that it cannot or may not happen in the future, but timing is important. When any asset gets too one-sided at any given time, it is important to consider the alternative, or what can change that dynamic. Playing devil’s advocate can be a lucrative opportunity, but timing it is extremely important, and at times, the hardest. But investing is about risk vs. reward and when one asset is showing 5% upside vs 20% or more downside, one should know to get out. Bitcoin was a clear example how no one saw any “wobbles” in sight, but as we know all asset classes are inter connected by the Fed quantitative easing, the glue that binds them. When it falls apart, it all falls.
Let’s move to oil. Everyone is long oil, given the current demand vs. supply balance. Now the key word here is “current.” But as we know, commodities are all about timing, especially when the floor underneath them across a host of asset classes is collapsing. The current scenario is awfully similar to 2008, for those who are veterans to have lived through it, not just read about it. Then, it too held up for three months defying the housing collapse, Bear Sterns collapse, only to collapse more than 30% in April after reaching its $147 per barrel level. Today people compare the 2008 levels to $250, or higher, even. But it is not an apples-to-apples comparison, as inflation back then was not averaging more than 8% year-over-year and the consumer disposable income was a lot healthier. Today, the average consumer cannot buy gas, gasoline, or a house, or pay its doubled mortgage rate, nor even see a higher wage growth. How is the U.S. economy to grow?
The problem with the markets has been that the Fed has saved them each time since 2008. But today they do not have $30 trillion-plus in debt and 8% year-over-year inflation showing no signs of falling yet. They cannot just print more money to stem the market decline as that would cement hyper stagflation for life. The other problem, which is very common in commodity circuits is to overestimate demand. At times of high prices, demand is assumed to hold up and they only focus on supply. But it never works that way. It is all connected and we know demand is going to fall as every single measure of Institute of Supply Management, PMI and macro economy data is suggesting. When that happens, prices will fall. It is a matter of when not if.
Newton had it right, what goes up must come down. Shame everyone is holding onto the “One” asset as they feel oil is running out. After all, we are told it is the safest place to be and can only go up. When have we heard that before?
Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.
