A couple weeks ago in my "Thoughts from the Frontline" Friday E-Letter, I wrote about Mr. Market and potential bubbles (you can view the letter here). Well one particular asset class, commodities, has had me thinking as of late. Despite sound fundamentals initiating the recent boom in the commodities markets, much speculation has also been exerted as evidenced by the resulting volatility in the sector. Stephen Roach has recently weighed in with his take on the situation which I believe will serve well for toady's "Outside the Box."
Stephen S. Roach is Managing Director and Chief Economist of Morgan Stanley, a leading global financial services firm. He has been widely recognized as one of Wall Street's most influential economists. His published research has covered a broad range of topics, with recent emphasis on globalization, the emergence of China, productivity, and the capital market implications of global imbalances. In his article "Commodities as an Asset Class," Mr. Roach questions the recent popularity of commodities as institutional investors around the globe have sharply adjusted their asset allocation strategies to reflect the sector. In so doing, he points out how much of the "bubble-like" qualities prevalent amongst the equities markets may now be exposed to the commodities markets as well.
I have been involved with commodity funds and managers for almost 20 years, and have seen a lot of fads come and go. I am a big fan of well researched traders and funds who have figured out how to find an edge. That edge is going to increasingly be important if you are going to thrive in the commodity world. Long only portfolios are going to be subject to increased volatility and quick movements, both up and down. You need to think carefully about your exposure in these markets.
This commentary should be read with an objective mind in the midst of vulnerable market conditions. I hope that you will find it to be "outside the box" thinking.