[steam_cannon]

$this->bbcode_second_pass_quote('mmasters', '')$this->bbcode_second_pass_quote('steam_cannon', 'I') think gold will stray from the pack when the real instability begins and form a tremendous bubble of its own. India should be a real circus act to watch; expect tremendous celebrations on the upside of the bubble and mass suicides on the downside.

[cube]

I've noticed whenever the stock market goes up everybody cheers as if that's a good thing. However whenever the same happens in the commodities market most people complain.

interesting huh?

I think people/ general public should stop complaining and join in on the fun. 5 years from now anybody who didn't invest their money into commodities will look back with regret.

my 2 barrels of oil

[MrBill]

I think you have to distinguish between 'nominal prices' and 'real or relative prices' for commodities and their relationship to other assets - financial or otherwise.

If you buy into peak oil theory, which is actually a geological fact and not a theory at all then commodity prices are not in a bubble.

First of all we are in a super cycle that starts at very low levels. The CRB Index was at 183 in 1999 and again in 2001, roughly corresponding to crude oil at $10-50 per barrel, so this rally is starting from a very low base when you consider non-commodity consumer price inflation over the past 35-years.

This is being driven fundamentally by increased population as well as more consumption of almost everything. And the countries in former communist countries of Eastern Europe as well as Chindia and Asia contributing to international trade in a more meaningful way. This has lead to lower real prices for many consumer goods even if headline inflation increased, which not only stimulates consumption, but has caused their own living standards to rise and that triggers further consumption of goods & services. An extra billion or two of workers and consumers being added to the demand for commodities.

And in terms of peak oil and the search for substitutes like bio-fuels is at the moment not only taking land out of production for food, but as we suspect those lower EROEI levels mean this is making that substitute fuel more expensive and less efficient than the petroleum that it is replacing. Take 25% of your land out of food production and get back a lower EROEI and you can see how prices in real terms go up.

Metals, of course, are not only expensive to find and exploit, but also very energy intensive. This drives up the mine's break even costs. Either destroying the supply side of the equation as mines become unprofitable or fuelling inflation from higher commodity prices that. Either way there is a floor to how low prices can fall in the face of increased demand from an expanding world economy and more people.

Any recession is by its nature temporary and does not affect the long-term demand for commodities, metals and energy that is being driven by population growth and rising living standards along with longer longevity. Crunch time may come around 2030 when populations are still growing even as conventional sources of energy can no longer continue to grow.

However, in nominal terms we may see price swings of up to 35-40%, which would be quite normal within the super cycle. Long-term investors should face less pain than short-term speculators, so long as they are diversified and can fund their positions. But no matter how you slice it, if you buy the wrong asset at a high price you will have to wear it - like it or not.

[halcyon]

Short term (0-2 years): yes (overvalued)
Longer term (5-20 years): no

[cube]

I think the reason why commodities have been frowned upon while stocks are cheered is because most people think of a rise in commodity prices as being bad for the economy.

I can see where people get this idea. If commodity prices rise then that makes finished goods more expensive. And if YOU as a consumer have to pay more money for something then that means your standard of living is going downhill.

As a beginning investor one of the things that I had to learn....or I should say "unlearn" was the habit of thinking in terms of
good vs. bad

Investing is NOT ethics or morality. There is no such thing as good and bad, there is only right and wrong.
right == you're making money
wrong == you're losing money

The problem with thinking in terms of (good and bad) is you're going to always be betting on the long side, the optimistic side, even when things start to go downhill. This is where 80% of the money is lost in the remaining 20% of the time. Humans are naturally optimistic. (I'm talking about the general public and not the people who visit this forum *smirk*) They always like to think things can only go up.

But that's not how life works. In the long run I think the ultimate trend is neither up or down but instead sideways.

my 2 kg of uranium

[Mircea]

$this->bbcode_second_pass_quote('MrBill', 'A')nd in terms of peak oil and the search for substitutes like bio-fuels is at the moment not only taking land out of production for food, but as we suspect those lower EROEI levels mean this is making that substitute fuel more expensive and less efficient than the petroleum that it is replacing. Take 25% of your land out of food production and get back a lower EROEI and you can see how prices in real terms go up.

[MrBill]

Mircea wrote:
$this->bbcode_second_pass_quote('', 'A')s a farmer, EROI is not your concern, but making enough money to repay your bank note on the farm, the loans for all of your farm machinery, the cost to transport your goods to the co-op or market and the cost of seed, pesticides, fertiliers and electricity, gas, and water is a great concern.

[AFO]

http://www.financialsense.com/fsu/edito ... /0606.html

Has anyone thought of what the "oil price impact" would be if stock Market crashes due to sell offs above the 10%, by the end of 2007.

Has anyone done a study on 1929 & 1987 stock crash and how oil prices have responded. Whether consumption & production changed beyond normal means?

I am interested in your feedback

[Tyler_JC]

Oil consumption crashed.
Oil prices crashed.
Oil consumption recovered.
Oil prices recovered.
Life went on.

Or do you want me to go into detail?

[ohanian]

If you don't mind me asking.

What are the normal PE ratio (price/earnings ratio) for
stocks on Wall Street these days?

I think this would give me an indication of whether the stocks are over valued.

[drew]

They're not even 20 to 1 which is still 'healthy' or 'cheap'! Not that that is any help to you.

Drew

[Niagara]

$this->bbcode_second_pass_quote('AFO', 'h')ttp://www.financialsense.com/fsu/editorials/laird/2007/0606.html

[Cobra_Strike]

Gold is a major industrial metal too, don't forget that. It might very well stay virtually flat even as other asset classes go into decline. However I would not expect it too do much to the upside.

[FoxV]

well from this chart we have GDP dropping by a total of 45% from peak to trough during the great depression

So if 1 additional dollar of oil consumed for every 2 additional dollars of GDP (no link, but I believe it was Chenney that said this), is it fair to say that oil consumption in the US will drop by 20% or more in a 1930's style crash (which I think is a minimum baseline compared to the mess we have today)

[MrBill]

With central banks around the world simultaneously tightening rates to fight global inflation, I think it is safe to assume that many of the bubbles we have seen are peaking now.

However, that is not to say that new ones will not inflate to take their place if governments run larger deficits (smaller surpluses) to counteract slower growth in the real economy.

I whole-heartedly disagree about gold bucking this trend. It is a hedge against inflation. If inflation falls, gold will fall. If bubbles deflate taking liquidity out of the market then gold as an asset will deflate as well. If ‘real’ interest rates go up less money will be allocated to gold and more to interest bearing assets.

Even if the US dollar collapses, destroying demand, the nominal price of gold as expressed in US dollars may rise, but its value as measured in euros, yen or yuan will not defy gravity and rise relative to energy, base metals, commodities and other assets as the price of those other hard assets decrease.

But that is just my opinion.

UPDATE: on global liquidity
$this->bbcode_second_pass_quote('', 'J')une 5, 2007
RISK IS STILL A FOUR-LETTER WORD
Rarely have so many earned so much for so long.

That sums up the performance record for the broad asset classes. By almost any measure, the past five years have been extraordinary. Rarely has everything run higher, year after year, and posted robust gains in the process.

One might think that the party would be showing signs of age after such an astonishing track record. But as our table below suggests, momentum in its upward form remains the dominant force in the markets this year--again. Indeed, red ink has been banished from the list.

Debating how long red will continue to be conspicuous in its absence from the performance tally should be topic number one for strategic-minded investors. By extension, one can reasonably question how long the mother's milk of this bull era will last, namely, liquidity, which has been exploding globally for some time now.

[evilgenius]

I agree with Mr. Bill. Whenever higher rates have been laughed at as an ineffective mechanism for controlling inflation those people's faces have changed expression quickly. The problem here, I believe, is that the Fed has not been looking out for the little people in whose best interests vastly higher rate rises a while back should have occurred. Instead the Fed has kept the game going for those of whom they are most familiar, the rich.

The important thing to ask yourself about the current fury of M&A activity is to whom does the profit stream go? It goes to a small group of people, doesn't it? Therefore the huge organizations now being formed are taylor made for what is coming. The overall size of those organizations can and will decrease, but their overall scope and market size will not. So long as the number of people enjoying the fruits of the large organizations does not grow they are an excellent place for a rich person to park themselves during a depression.

[MrBill]

Dr. Evil Genius,

I think that like Hunter S. Thompson witnessing the top of 'the flower power wave' of the summer of '68 in San Fran, which gave way to 'the winter of dispair' in '69, that each wave has its zenith, and looking back we always say it should have been obvious to everyone at the time?

The hostile take-over of RJ Nabisco; the size of Dot.Con boom reverse take-overs (i.e. equity for cash stakes) in firms like AOL-Time, etc. always, usually, sometimes, once in a while, signal the absolute peak from which there is only one direction.

This current boom of M&A activity lead by hedge funds and private equity will no doubt be one of those crests. They have been fuelled by liquidity by the truck load supplied by your friendly local central bank. And not just the Fed a la Greenspan, but also Asian central banks as well that have kept their own currencies weak with low interest rate for far too long.

This current round of over the top prices paid for public companies by private equity will end soon enough. Either central banks will hike rates or someday, some bank will say, no.

These are not really my own ideas. More like recycled. But reduce, re-use, recycle, eh! ; - )

But it is clear the current round of bubbles have peaked (I think in any case). However, we have to ask what desperate central banks and central governments might cook up to save us 'from the next fall-out'? More of the same?

I feel pretty good about being over-weight cash, which carries its own risk in an asset price bubble; over-weight euros over US dolars; under-weight in equity, except select energy cos. & truly global blue chips with revenue streams abroad; no bonds, not even floating rate or inflation indexed; and my own property, as an inflation hedge, but with only 'some'debt, which makes sense in an inflationary environment as 'leverage', but not enough that it cannot be serviced out of current savings and/or cash flow (in the words of Brillcream, 'A little dab will do you.' ). Sure I could get run over tomorrow. Actually in Cyprus, not unrealistic? But I do not own the shiny stuff. Would of, could of, should of, say, in the past 5-7 years, but then again a lot of assets 'outperformed' during that time frame.

On the other hand, I am not so sure about these leveraged buyouts (LBOs) that have taken on massive amounts of debt, which need to be serviced come high or low tide? My guess that some, but not many, will be high and dry by the time this tide goes out? Even some that thought they had it right...

....Hunter S. Thompson in his own drug-addled, stream-of-consciousness, psycho-political, violent way would have understood that only a few are left-standing at the end of the day.

[vision-master]

[Mircea]

$this->bbcode_second_pass_quote('MrBill', ' ')The hostile take-over of RJ Nabisco; the size of Dot.Con boom reverse take-overs (i.e. equity for cash stakes) in firms like AOL-Time, etc. always, usually, sometimes, once in a while, signal the absolute peak from which there is only one direction.

[MrBill]

$this->bbcode_second_pass_quote('Mircea', '')$this->bbcode_second_pass_quote('MrBill', ' ')The hostile take-over of RJ Nabisco; the size of Dot.Con boom reverse take-overs (i.e. equity for cash stakes) in firms like AOL-Time, etc. always, usually, sometimes, once in a while, signal the absolute peak from which there is only one direction.