Extrapolation Fever- Catch It!

A few years ago, I saw my favorite  sports fan generated sign. It was at the beginning of the baseball season and the team (Cubs of course) was already struggling leading a fan to flash a sign which read ” Statistical Elimination Fever- Catch it”.  The sign which those in todays Capital Markets might similarly flash would read ” Extrapolation Fever- Catch It”. The action in almost all markets, commodity markets in particular, would suggest that not only will tomorrow be like today, it is almost guaranteed that the trend is your friend and that fighting such a trend is hazardous to your health. We would counter that if the trend is your friend, it is a fair weather friend at best, particularly in the physical commodity markets. We would point to the recent movements in oil as a case in point. The precipitous decline in price that we have seen over the course of the last 3 months was driven by a confluence of events ( Libyan and Iranian production increases, fall in developing world demand, etc.) but the market chatter that currently surrounds the crude oil market fails to take into account the self-correcting nature of physical commodity markets. As we have mentioned before, unlike the value of Facebook and Twitter, the price of a commodity like crude oil is driven ultimately by the very real forces of physical supply and demand. When the price deck falls for various crude slates, producers adjust, albeit with a bit of a time lag. This is where mistakes in forecasting commodity prices  are always made. Short term price action may drive shifts in supply and demand, but these shifts take time thus appearing subtle at first. Successful, proactive investors look at how the action today will ultimately change how tomorrow looks. What do negative real rates of interest across the globe, unprecedented monetary science experiments and a blind reach for yield foretell about the future. More of the same? We don’t think so: BUY STUFF