The Big Picture For The Week Of May 28, 2006

There were two interesting articles in the current BusinessWeek. The first article (sub req'd) was about CalPERS' coming rotation into commodities. According to the article the fund has no commodity exposure and the expectation is that CalPERS will put up to 10% of the fund into commodities.

The article includes a little where have they been criticism which is fair but the lead manager seemed unfazed. My take on this is that he is looking at commodities as an asset class with some long term merits in terms of portfolio diversification and some long term demographic demand catalysts that may exist. Regardless of where any of the commodities have come from, price-wise, the forward looking potential is either compelling to you or it is not. For example if you are part of the small crowd that sees $2000 (or higher per this week's Barron's interview) gold coming soon it would be foolish to be worried that the next $100 could be down.

I buy into the demand for commodities and the potential portfolio benefits but I keep less than the 10% that CalPERS is considering. How much to own is clearly a subjective thing but owning some, even after the nice move of the last couple of years, is important.

Especially when you consider the possible underperformance that Jeremy Siegel sees coming for domestic equities written about in the other BusinessWeek article that caught my eye. The general concern is that as baby boomers start to cash out of equities to fund retirement there will not be enough demand from within the US to absorb the supply that is sold. Dr. Siegel believes that the best hope for this problem is the burgeoning middle class that is coming up in places like China and India. These people would have enough demand for the supply he sees coming.

There are two arguments made in the article to contradict Siegel's point. Robin Brooks from the IMF says that 90% of the stocks are held by the wealthiest 10% and those folks can afford not to sell. This would seem to me to be factually incorrect. It ignores the 401Ks and pensions.

The other point made is that people are working and living longer so there will be less need to sell equities. This makes sense to me but is also incomplete. A 60 year old, today, has a very high likelihood of living past 90. And when they do hit 90 where will medical technology be then? This is the line of thought taken in the Barron's cover story a couple of months ago. Today's 60 year old needs equities, more than their parents did, for the long term.

I think a bigger financial crisis could arise from too many investors getting bad advice about keeping too much in bonds. Bonds don't grow. Someone with too much in bonds faces the potential of running out of money as a function of being too conservative.