Stephen Roach On Commodities

Reader Russell120 left this link which is an essay written by Stephen Roach about commodity prices and the extent to which it is a bubble or not, how China is involved, what might be coming next and a few other things.

First things first, whatever happens from here with prices or China or any other related topic I believe the word bubble is inappropriate. The heaviest weight in the S&P 500 I can recall energy growing to was something under 12%. With materials I am less certain but I seem to recall the number being in the fours.

The tech sector maxed out around 30% and energy did something similar about 25 years ago. At 12% this year, energy was smaller than financials, health, tech and industrials. The materials sector may have only been bigger than telecom and utilities.

The price corrections maybe as severe (but I doubt that) but because these sectors, at their height, were so much smaller than tech during its bubble the consequence of a decline just cannot have the same impact on the broad market. If energy, from 12%, cut in half and everything else stayed the same that would obviously only be a 6% hit to the market. When tech went from 30% to 15%, well you can do the math.

That being said, no doubt that there are do-it-yourselfers that have blown themselves up but that does not have to mean bubble.

Roach cites (or maybe derides) a report from Ibbotsons that says "there is little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period."

I don't know the report first hand but even I, as being very constructive on the theme, never at my wildest eyed frenzy (well that never described my state actually) thought something like the above quote could be true.

I have gone out of my way to preach moderation, not only parts of the market I like but also parts I don't like. The very nature of the ascent in prices should tell you that a similar descent is always possible.

I suppose this could tie in with investors only liking volatility on the way up.

One thing I put a lot of time into is trying to make the portfolio somewhat predictable. Not "oh this year I will be up X%" but more trying to know within a decent certainty how volatile the portfolio will be. For example some of the different names I have written about in the past that I describe as low beta high yielding; you see those tend to have a low beta and a high yield. Ahem.

Adding a few of those in, or more than a few depending on your temperament, creates a certain amount of predictability. I own energy stocks for clients, they are down and the result this quarter is the portfolio up less than the market... for the quarter. Same, to a lesser extent with materials.

I believe it is fair to say this is far from a ruinous outcome.