Prognostication follows Price

21 Apr

Perhaps its just the explosion in the different venues available to various prognosticators, but it seems like we are being inundated with big picture forecasts based solely on the most recent price action. Witness the following: The end of the commodity Supercycle, The end of peak oil, The end of the gold bull market, The great rotation.The common thread in all of these myopic forecasts is that the fundamental basis for their viewpoints is driven solely by the most recent action in price. We very rarely see these kinds of viewpoints at real market inflection points, because standing apart from the crowd is often initially unprofitable and unpopular. Our point in this missive is not to dispute whether any one forecast is particularly correct or incorrect, but rather we question the basic tenets behind many forecasts which assume some basic amount of stasis in supply and demand which, in the real world rarely exists. Prices send signals to market participants, which then precipitates some action on the part of those participants.  The problem that  capital markets have is that they behave as if the real drivers of supply and demand act in real time. It is this disconnect which often creates opportunities, but one must keep in mind that these “opportunities” may lay dormant for some time.  In a week where commodities markets, metals in particular, experienced a significant selloff we heard increased chatter about deflation. However, juxtapose this same chatter against a backdrop of aggressive Central Bank activity, namely the BOJ.  Our own prognostication: You will not hear a discussion of the great rotation into hard assets until it is well underway.

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