There are more and louder warnings of the possibility of a commodity bubble. I honestly don't know if there is a bubble forming or not. However, I have the opinion that the rapid rise in commodity prices has either one of two causes:
- From the standpoint of a technical analyst, as I mentioned in my previous posting, when a market -- any market -- rises so rapidly beyond two standard deviations and continues in such a rapid rise, energy tends to expire and dissipate itself rather quickly. Volume dries up rapidly, as buyers overheat the market and exaggerated extravagance exhausts the available supply of buyers. When this happens, the bubble can burst and prices can plummet from the stratosphere as rapidly as they entered, falling like a dieing satellite back to earth. Commodities are known for price movements that rise and fall like the tide that heaves beyond its bounds and then washes back out to sea. If this is the case, violent contractions and convulsions could cause commodity prices to retract like an over-stretched rubber band in agonizing rapidity, sometimes with catastrophic and uncontrolled transmutations in the larger financial system.
- Perhaps an even larger, more ominous and sinister bubble is forming. This boundless and almost excessive flow of capital into commodities may be the early warning signs of an even more indulgent and profligate response to the growing fear that decades of libertine financial and indebted excess, spurred continually upward by unrestrained fiat currency creation, is reaching its zenith just before its crushing collapse. If this is the case, we may in the beginning episode of a hyperinflationary phenomenon that American history has never before seen. This virtual flood of capital into the commodities markets, some are saying, is a flight to something solid that will have value even as the American economy collapses in upon itself like a self-imploded building. This could be a phenomenon manifesting itself as the beginning of the end of an empire.
I genuinely have no idea which of these scenarios is being played out. Perhaps it is just another heaving and huffing action in the global financial tides, that will quickly vanish like mist in the morning sunshine. In all frankness, perhaps it doesn't matter. I will simply watch and respond, giving the market what it wants, whether that be a paroxysm of price heights or a convulsion of price depths. I will give the market what it wants!
To me, the commodity bull is simply a trend -- today's trend. And when it ends and tomorrow comes, many will cry, "Bubble, bubble. Another bubble!" So be it! If it's a bubble, then we'll recognize it, learn the lessons of today, and the caravan will move on. My job, as a trader, is to merely recognize that trend -- bubble, if you will -- and give the market what it wants. Tomorrow, when another trend emerges, it will be my job to recognize that trend and give the market what tomorrow desires.
This requires a great deal of mental discipline and a willingness to forgo the taste for indulgence in bias. Bias creates blindness to reality and results in losses. I must learn to recognize my bias and countervail its effects. Subliminal advertising, it has been proven, has its greatest effect on those who don't recognize it. When we recognize its concussion, it is annulled. By acknowledging and admitting our biases in the markets, we begin to see more clearly, and our judgment is improved. By domesticating and regimenting our market inclinations, we bring orderliness and acuity back to our investment choices. Give the market what it wants, not what you want to give it.
If you give the market what it wants, then the market will give you what you want in return.
