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"The Investing Golden Age May be Over" - Robert Shiller

Back in February, Robert Shiller, famed author of Irrational Exuberance was interviewed on Yahoo!Finance where he made the earthshattering claim:  “The investing golden age may be over”. He starts the interview by saying, “a lot of people are holding on to old facts, old presumptions.  For example, the stock market yields 10% a year but its really expensive right now.” 

After making these claims, which I largely agree with, the interviewer asks the poignant question, “Well, what is an investor to do?”  And Shiller can only offer the following advice:

 1.  Save more…live like a college student

2.  Take more professional risks in your career.

During the interview, Shiller quotes John Maynard Keynes which I find curious.  Because Keynes would offer some very different and arguably much more helpful advice than to simply save more (after all, what the heck good is saving money if you're going to lose it in the stock market or to inflation anyway). 

The world of finance is consumed with the macro ideas of Keynesian economics and his theories on how big, formidable governments should handle big, formidable economic challenges.  But what would Keynes offer to the individual?  What does Keynesian micro-economics say to the the little, inconsequential individual who is staring down big, formidable economic challenges? 

I am almost certain Keynes would suggest allocating a sizeable portion of your investment account to commodity futures and in doing so assuming the role of futures speculator.  Afterall, that is how Keynes made most of his investing fortune.  Here are just a few of comments he made about the wonderful opportunity in the futures space:

The most important function of the speculator in the great organised 'futures' markets is...not so much a prophet (though it may be a belief in his gifts of prophecy that tempts him into the business), as a risk-bearer. If he happens to be a prophet also, he will become extremely, indeed preposterously, rich. But without any such pretensions, indeed without paying the slightest attention to the prospects of the commodity he deals in or giving a thought to it, he may, one decade with another, earn substantial remuneration merely by running risks and allowing the results of one season to average with those of others" (emphasis mine)[2]

Later in the article, he is quoted as saying:

The annual value of a mine's production is generally large compared with its free resources; and it is under precisely the same necessity as the cotton farmer to sell forward some part of its current production at some concession of price, (emphasis mine) if necessary, below what is considered the probable future price. The fact that there is a 'backwardation' in the price of a commodity, or in other words that the forward price is below the spot price, is, therefore, not necessarily an indication that the market takes a 'bearish' view of the price prospects." [3]

Here is a link to the article quoted:  http://www.sofer.com/blog/keynes-on-commodities.html

Keynes theory, which was later proven by a study published by The Yale University School of Management was that the futures market would provide the buyer of a contract or the long-speculator a price advantage.  This takes place because the speculator is assuming risk that is transferred from the commodity producer.  And the speculator must be compensated for assuming this risk.    

The mechanism by which the risk premium is paid to the speculator is referred to as “normal backwardation”.  Backwardation takes place when a futures contract is trading below the spot price of the commodity.  And according to Keynes, commodities will normally trade in backwardation in order that the speculator is normally compensated for assuming some of the producers’ risk. 

I'm not sure why Shiller ignores the advice Keynes would offer to the Main St. investor.  Currently, what Shiller and others should recognize is that commodities futures are even more attactive today.   Here are a couple reasons why futures provide an even better option for investors than when Keynes made his fortune:

1)  Price inflation was nill in Keynes day due to the establishment of asset backed currencies.  Today we have FIAT currencies which inevitably leads to price inflation.  Commodity spot prices have increased at a rate of 3x the CPI since 1993 (when the current formula for calculating the CPI was established).  So an investor in futures not only benefits from the risk premium paid to him by the producer, he also benefits from commodity price inflation due to currency debasement.

2)  Commodity prices are currently depressed having just suffered a 3+ year bear market.  So while Shiller thinks stocks and bonds are expensive, commodity futures are priced relatively cheap so an investor would be buying low and selling high if he were to allocate capital away from stocks and bonds and into commodities.  

We believe that while a golden age of investing is coming to an end, a new golden age of investing is being initiated.  And it will provide enormous wealth for anyone willing to take advantage of it.  The last 40 years has been the age of stocks.  The last 30 years has been the age of bonds.  We think the next 30 - 40 years will be the age of futures. 

If you’re interested in learning more about C3 Strategy, you can call our office at 214 | 954 4300.