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Should One be a Pessimist or Realist In Todays Economy?

Commodities / Commodities Trading Sep 16, 2009 - 06:09 AM GMT

By: Andrew_Abraham


I would say I would like to be the “Realist”. As a trend following commodity trading advisor I am not one to make predictions. Everything that I have ever learned about trading is follow my system make low risk bets and look to manage risk.

I nor anyone know the future but regarding the US dollar, Bonds and even the stock market I have serious misgivings. I do not put out of the context there can be the potential for shocking falls in stock markets, in the US dollar or even in bond markets. These falls could create major opportunities for trend following commodity trading advisors as well as a way to protect net wealth from inflation.

I would never want the name “Doom and Gloom” but for those people who want only good news I strongly suggest that you listen to politicians or watch CNBC or Bloomberg. Close this site down. Do not read it…put your head in the sand.

My proverbial question is, Where were all the experts before the economic crisis hit? These “optimists” whether they are politicians, world bankers or speakers on CNBC/ Bloomberg make their living based on good news and this is why they will continually tell you lies and never warn you about the risks. There were only a handful such as Nouriel Roubini, Jim Rogers, John Paulson and a just a handful of others that expressed their concerns. In all truthfulness I was very uncomfortable in 2006. I sold my house for almost 3 times the price I paid in 1999. This was not normal. As well I cut back the majority of my real estate holdings. The last 20% has been a nightmare. I feel the same level of extreme nervousness …maybe even more now. My job as a commodity trading advisor is to manage risk. However I think I have entered a new level of responsibility.

I feel it is my responsibility not just to understand risks but warn investors when risk is unacceptably high. in my opinion the risks seem extremely high! The fact is that credit & debt have grown exponentially over the years. The next fact is that bank leverage is 50 times or more, how can this not be very high risk. The next fact is the un-regulated derivatives that reach countless $ 1trillion( AIG) with almost no counter party or no reserves against them.. There is one word..” RUN”. The question “Run” where? What is safe? Are the banks safe with all the non performing residential mortgages? Or possibly up coming commercial real estate problems.. Or not to mention credit cards with no actual collateral other than a person’s good credit at risk.

The problem is the investing public has gotten spoiled. It has been easy in the stock market since the early 1980s.. Real estate has been easy with the low interest rates and the easy credit. I remember investors complaining about only making 20%. Today investors are happy to get 2% if that. I can not remember ever when governments in the world expanded deficits and credit to the extent that we are seeing now. Too many countries are running budget deficits and have tremendous debts too pay that are virtually impossible to repay. Just the US will need at least $3 trillion..This does not include Spain…the UK…Eastern Europe and countless other countries.

These budget deficits do not take into account more bailouts… more rescues of banks, upcoming corporate failures, pension fund failures, insurance company failures, cities bankruptcies or even states bankruptcies ( California). How much longer will China just sit back? They are one of the largest funders of the US debt. The Chinese have been leaking to the news about floating the Yuan or expressing their concerns about the US dollar. Both the Chinese and the Americans know that there is no way whatsoever that the US can reduce their deficits and dollar printing. True catch 22!

The Chinese how ever have been buying gold and encouraging their citizens to buy gold. For some reason, I have not heard anything like this coming out of the states. So will all these great news (fear) what should one do? As I stated in the beginning of the post, if my fears come to fruition I would expect commodity trading advisors who are trend followers to do well. Trend followers do not predict. They react. Commodity trading advisors that trend follow ride the fear and greed.

I can be totally wrong about the current debts and deficits. I do not trade my beliefs but rather my trend following system. It might be worthwhile to consider trend following as a way to protect your assets if potentially the scenario I see unfolding comes to actuality.

Andrew Abraham

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

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© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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