The following is an excerpt from Pivotal Events -
February 22, 2007.
Signs Of The
"After Subprime: Lax Lending Lurks
Elsewhere" WSJ, February 20
reviewed some research by UBS that notes that the downturn in the sub-prime
mortgage market was "marked by an unexpectedly large number of
early defaults", by which borrowers
stop paying shortly after getting their mortgages.
continues with the increasing frequency of "soft fraud"
whereby "someone takes a mortgage, buys a home, avoids payments
and lives rent-free until the marshals come".
The day earlier,
Reuters carried a review by Barclays Capital. This polled 250 institutions on
their views on commodities. Positions on commodities or, as it was phrased, "assets
under management in commodity products" could reach $120-$150
billion by end-2008.
Of those polled
about this, 52% said that investment would reach this level, while 36%
indicated it would exceed $150 billion.
To our way of
thinking, this seems that some 86% of institutional money managers are very
bullish on commodities with, expressed in a different way, a majority of
planning to reach an allocation of 10% commodities.
Last June, HSCBC
noted that institution commodity exposure would be about US $100 billion by
the end of 2006, which compared to $10 billion at the end of 2003.
The high for the
benchmark index - the CRB - was 366 on May 11, and the cyclical low was 182 in October, 2002.
At the end of
2003 when institutions held some $10 billion, the index had increased to 240.
The point to be made is that when commodities were at their last cyclical
low, the position was less than $10 billion. And closer to the cyclical peak,
institutions own over $100 billion and are intending to own over $150
billion. "Come on in, it feels good - all the lemmings are doing
action must be disappointing since the halcyon days of June, especially with
the occasional expensive rollover, the tout is still on. This reminds of the
establishment's chronic bear raid on gold. This continued well after the real
price began a cyclical bull market in November, 2000.
It seems to take
a long time for the establishment to become disenchanted with the last
investment fashion. This long-term pattern shows up in our study of life
insurance companies since the 1860s.
This was sent
out in June and can be reviewed through the following link: http://www.institutionaladvisors.com/pdf/060616-ACTUARIALLY-DRIVEN_INVESTORS.pdf
At the top of
bond markets, they tend to be fully positioned in high-grade bonds; near the
peak of a boom, they tend to be long hard assets, stocks, and low-grade
when strong convictions are fully employed, a long period of chagrin follows.
We have not noticed any rationalizations that the institutional direct entry
into commodities will reduce the big swings hitherto inherent to commodities.
equities, this reasoning prevailed from around 1966 to 1969 when institutions
were distinctively taking larger positions in stocks.
The tout was
that the research capabilities of the institutions would caution against
over-commitment at cyclical peaks. This, in turn, would provide the ability
to buy going into cyclical bottoms.
Now this all
sounded quite practical, but along came the special reasons about "this
time it's different". One was championed by the towering
influence of Paul Samuelson who had, in the mid-1960s, declared that through
very wise manipulations the business cycle had been eliminated.
recessions" was the tout from interventionist economists and
Wall Street strategists extrapolated the new venture into equities by
institutions into a "shortage of equities"!
through to the end of the 1960s while the DJIA, deflated by the CPI, set its
high in 1966, from which it plunged 75% to a dismal low in 1982.
was accompanied by the usual recriminations when a fashionable asset goes
This time around
on the new institutional infatuation, the "new" policy theory has
been "Helicopter Ben" and the theory that the business cycle has
been eliminated is summed up in one word - China.
once again, that there is no risk of a reversal of fortune - that's despite
mounting carnage in housing and sub-prime mortgages.
policy history of financial institutions suggests that the next big event
will be a lengthy disgorgement of commodities within a climate of boardroom
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