$250 OIL AND DOW 16,000? REALLY?
I came across this headline on Drudge this weekend: Dull Market Could Get Rocked if Oil Keeps Rising It's a CNBC article that I didn't read for fear of turning into a mouth-breather, which seems to be what happens when overexposure to certain financial media outlets occurs for more than a few minutes.
The title of the article says it all, without having to read a single paragraph. There seems to be a vast consensus that believes rising oil prices means that stocks HAVE to go down. There is no going around it. If crude oil gets above $120, a bear market will be upon us. Above $150 is Dow 9,000. And above $200 is guns, caves and canned food time.
This traditional thinking with respect to negative correlations of the past is going to be challenged in the months and years ahead. Just as we learned recently that major financial institutions can go under and the markets can be at multi-year highs a relatively short time later. We've also learned that consumer spending can thrive without home equity loans serving as a piggy bank for Wal-Mart happy individuals. And only recently are investors beginning to realize that $1,400 gold doesn't necessarily mean the end of the world.
Let's pretend that it's 2006. I'm a psychic. You come to me for financial advice and ask about the state of the world markets come 2011. I tell you the following:
- Home prices will be down 30% from their peak
- Lehman Brothers has been vaporized...bankrupt
- Bear Stearns no longer exists. Roughly the same fate as Lehman...just a different road to get there
- AIG is effectively a shell of its former self. Down 90% plus from its peak
- Gold is nearing $1500
- Crude oil is over $100
- Unemployment is near 10%...they say
The first thing you would do is go buy firearms. This would be followed by a shovel and cement in order to fortify your bunker against rabid mutants of the former world we once knew. Then you would gather your family and tell them that in 5 years, the world has effectively come to an end. You would take your kids out of school. Then you would quit your job. To this day you would still be in your bunker, thinking how wise you are to be surviving Armageddon.
All the meanwhile, your neighbors are getting rich off of silver and gold investments. The Dow is nearing an all-time high. The Nasdaq is nearing a 10 year high. And your new nickname around town is Loony Larry.
The point I am trying to make is that the financial markets are in a constant war to remain as mysterious and unpredictable as possible. They do this by constantly readjusting what we see as "normal". Expectations and comfort zones you have today will not exist 5 years now. Normal price ranges and the corresponding reactions of an index or asset class will be turned on their heads over time.
With that said, you must be able to imagine a world where crude oil is at $250 per barrel and the Dow is at 16,000. You have to be able to envision what seem impossible at this moment. The limitations of your mind are a hindrance to your wallet.
This doesn't mean that you should go out and buy call options on oil futures with a $200 strike price for next year. It simply means that you should be flexible in your ideas. You must be willing to change your opinions. Admit when you are wrong. Keep an open mind and allow the markets to tell you what is real and what is not.
