The 1,000 Yard Stare

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What is the 1,000 yard stare?

I first learned about the 1,000 yard stare when talking about soldiers returning home from Veitnam. The stare was them constantly scanning the horizon for any trouble, even if there was absolutely no danger where they were at. In this case it was trauma, but the idea of a 1,000 yard stare intrigued me.

In my case, it is the long term view that I consider when looking at economic and financial issues.





Whenever I see a new trend developing, I always ask myself what are the long term consequences if this continues? Regardless of whether the trend is positive or negative, I move my investments to areas that will be positively impacted by that trend.





Using this technique, I was very skeptical of technology stocks as early as 1997. The housing bubble popped up on my radar in 2002. These things were easy for me to see because I knew that the long term fundamentals were out of whack.





I am firmly convinced that most people, not just in America but around the world, are severely nearsighted when it comes to financial matters. I often have told my friends and colleagues that most people are absolutely unable to see things more than 30 days out from today. Why 30 days? Because that's when the next bill is due.





One of my favorite blogs is the Irving Housing Blog. One post that always makes me crazy are the refi and Home Equity Line of Credit (HELOC) abusers that he talks about. Most of the comments are from exasperated readers wondering how someone could refinance their house 5+ times this decade, taking out hundreds of thousands of dollars in additional debt under increasingly onerous terms (the borrowers always move from a fixed mortgage to an ARM to an Option ARM before the house ends up in foreclosure) only to lose everything to a foreclosure.





In my view this was a completely logical choice for them. They were so busy with their distractions: work and family, buying expensive toys, taking exotic trips, plastic surgery, home renovations, etc., etc., that they couldn't see the impossible levels of debt that were building up. As soon as they got in any financial trouble, the easy answer was to refi or open a HELOC and the problem went away for a while. Rinse and repeat until the home is taken away from them.





Lets look at the recent runup in commodity prices, especially oil. When did this start? Oil prices have been steadily rising since 2000, but all of a sudden last September they moved from about $70/barrel to now at $142/barrel. A 100% gain in 9 short months.





What happened? Is this the fault of speculators, as the commentators on MSNBC or politicians are saying? In fact it is not. This was the easiest thing in the world to see, I saw it coming from a mile away. Last August/September Ben Bernake, the Chairman of the Federal Reserve decided to start cutting interest rates in response to the subprime crisis on Wall Street.





Why is that significant? Last year it was very easy to earn 4-5% in cash on your accounts. So if you had $100,000 sitting in a money market you could pocket about $4,000 - $5,000 in interest essentially risk free. Now, after multiple cuts, most money market funds are paying between 1% and 2% (treasury funds are paying even less). So your cash is earning significantly less than it was last year.





On top of that, inflation has picked up. Even the government statistics (which I feel are massively understated) show inflation is running at about 4% right now. So the return on money is lower than inflation. If you keep your money in cash you are losing purchasing power!





So, what is the logical response of people who have their money in cash? The response is that they move their money into riskier investments (also called engaging in speculation) in order to try to earn a rate of return greater than inflation. This is the same thing happened when the Fed lowered rates to 1% in 2003 - 2004, all the cash flowed into real estate causing the housing bubble. This time the money has flowed into commodities causing tremendous hardship because of high energy and food prices.





This will not change until the Fed starts raising rates again. Once the interest rates on cash start going up, people will be less inclinded to put their money in risky commodities. The Fed knows this but won't do it because raising interest rates would kill the housing market and tank the economy.





Unfortunately, the housing market and the economy are not going to be saved by low interest rates. Both are still going into the toilet, all we're doing is prolonging the pain.





I've already given several predictions and we'll see what happens with them. Right now it appears I'm on the right track on all of them, plus I was right on with the gas price call back in February.





One big trend I'm looking at now is a possible crash in oil prices. As I said earlier, prices have doubled in 9 months. We're at $4/gallon gas. The economy is slowing and you can see demand destruction everywhere. Just this week I read an article about how teenagers aren't cruising nearly as much as they used to and Indian truckers are on strike because of high fuel prices.





This indicates to me there will soon be a glut of oil on the market soon. I've been debating whether or not I should be shorting oil at this time. I think it's a solid play, but I'm not sure how much farther oil has on the upside. Everything I'm seeing now suggests to me that we've got a blow off top on oil (think Nasdaq in January - March of 2000 when it moved up 20% in less than 90 days right before it crashed). On the other hand, it looks like oil could push as high as $200/barrel before it pulls back (and Iran is a big question mark, too).





Of course, I'm not giving investment advice and you need to do your own research.