May 13, 2021

Commodity Insight: Rampant speculation is now the norm

A new era of intense volatility and rampant speculation has arrived for the entire Big Four, stocks, bonds, currencies and commodities. Few times in the past 25 years or longer has so much wild investing, reckless gambling, risk taking and adventure been witnessed with markets of all kinds. Some argue that the last time such a scenario unfolded was in the 1970s to 1980s, 40 to 50 years ago.

When markets of all stripes can turn on a dime, rise and fall in the blink of an eye, I am quick to remind everyone about my two main rules when investing or trading.

Over the years I have mentioned those rules before, but feel compelled this week to touch upon them once again because the white-knuckle price swings being seen daily have become the norm.

My No. 1 rule is simple and clear and states emphatically: “No one knows for sure.” When investing or speculating, a certain fact is indeed that no one knows for sure what will actually unfold in a market.

Yes, some have a better feel than others about where a market is headed, but if you ask them up front, they will say, “Gosh, no one knows for sure. It is all a risk.”

And that brings up rule No. 2. My second and most important rule is also simple and clear: “Always use a stop.”

I view volatility as a two-edged sword. It is great if you happen to be holding a market position that benefits from wild and crazy market swings.

It is not so great if you are holding a market position that suddenly causes pain because of volatility. In other words, volatility is great when in your favor, but painful when it is not.

One of my favorite old saws goes like this: “The markets can be irrational longer than you can remain solvent.” The quote is attributed to John Maynard Keynes, English economist, journalist and financier known for his most famous work, “The General Theory of Employment, Interest and Money,” that touted a remedy for an economic recession based on a government policy of full employment. Or, Keynesian economics.

From www.maynardkeynes.org/keynes-the-speculator.html, a few highlights: “John Maynard Keynes began his career as a speculator in August 1919, at the relatively advanced age of 36 years. Keynes traded on high leverage — his broker granted him a margin account to trade positions of £40,000 with just £4,000 equity. His work as an economist led him to be bullish on the U.S. dollar and bearish on European currencies and he traded accordingly, usually going long on the dollar and short selling European currencies. By late May, despite his belief that the U.S. dollar should rise, it didn’t. Keynes was wiped out.”

He had learned a valuable, but painful lesson — markets can act perversely in the short-term. Of this, he later famously commented: “The market can stay irrational longer than you can stay solvent.”

Determined to achieve financial independence, Keynes began trading again. He traded more prudently than in his dramatic early months, using shorter-term trading indicators, and by December he was able to pay back the £5,000 loan to his benefactor.

Had Keynes practiced my No. 2 trading rule, he would have been far better off. Then again, if he followed that rule, he may not have uttered his most famous quote.

An era of intense volatility and rampant speculation always results in the loss of money and, more importantly, the loss of confidence — and the combination of which makes that old saw, “the markets can be irrational longer than you can remain solvent,” something investors, traders and ag producers never forget. And I am very quick to point that out since we are indeed in a period of time where rampant speculation is now the norm.