Trader’s Narrative

Last summer I showed the inflation adjusted price of crude oil - below is the updated chart:

Source: Chart of the Day

It really puts last year’s crude oil bubble into proper perspective. Not only was it about 30% more intense than the 1970’s oil shock, it towers over the other price spikes we’ve seen.

What is even more peculiar is that this bubble was entirely artificial. It was not due to any geopolitical rationale, nor was it because of a supply/demand imbalance. It was entirely concocted out of thin air by large traders.

The world economy was fragile because of excess credit and speculation. Oil was the first domino to topple and knock the others down by slowing down the economy to reveal the rot under the surface. If it wasn’t the main cause of the worldwide economic slowdown, it was definitely one of the leading reasons for its severity. Although the connection needs no explanation, you can clearly see that every single recession was either preceded by or coincided with a large increase in the price of oil.

The crazy part of all this is that no sooner had the dance ended that the same players started dancing all over again. Hedge funds and large players are once again stampeding back into crude oil and commodities. After bottoming in February 2009, crude oil has doubled in price! That’s a little over 3 months ago!

And once again, there is absolutely no rationale for such a move. What? Have we suddenly lost our previous reserves of oil? is production somehow curtailed by war? or geopolitical unrest? or perhaps the market believes that the world will suddenly consume much more oil than it did before the recession?

As a trader, we don’t really care whether there is a legitimate move or manipulated by deep pockets. But at the same time, if you’re going long and letting the trend take you for a ride, just remember the difference between turkeys that get caught up in a tornado and eagles. One comes down to earth with a thud. The other soars majestically, landing at a time and place of its choosing.

So Iceland is just one giant financial crater. To add insult to injury, someone even put the whole country on eBay. The listing was withdrawn because even eBay has standards.

Here’s a chart of the Icelandic Krona against the US dollar for the past few years:

There is nothing but doom and gloom in this tiny half-frozen nation. Just recently their 90th anniversary as a country was marred by protesters breaking into the Icelandic Central Bank. Things ended peacefully because, well, this is Iceland, after all.

But I can’t shake the feeling that this is actually an opportunity for a vulture-minded and deep-pocketed investor. There are many different ways to play an Icelandic recovery. I would avoid a straight play for government bonds or going long the currency (especially since there is little if no trading taking place).

Real estate would be a good alternative. Land isn’t going anywhere and neither will a building disappear. People still need a place to live, after all. Another possibility would be equities - blue chip stocks.

Argentina went through something similar in 2002 - although alone and unaccompanied by the rest of the world. But their currency did recover. From its deep slump, it rallied around 30% actually. And just recently has started to weaken again:

Of course, Argentina isn’t doing that hot right now. They were just getting back on their feet (or knees at least) when this new worldwide economic storm buffeted them again.

But I just can’t shake the feeling that Iceland will still be there a year from now, 10 years from now, and beyond. And someone will make a lot of money betting on that.

I can’t remember exactly where I first saw this graph but in any case, the source is cited at the bottom:

While it is a valid argument that in the long run the market has only one direction, it is also true that in the long run, we’re all dead.