Tuesday, December 16, 2008

The Answer is the Problem

In discussions years ago when oil prices "seemed" high, I recall the first time I heard the statement that the "answer to high oil prices is high oil prices." This glib commodity traders' view of the world is the corollary of what we are now seeing, and I would say the answer to low prices will be low prices.

Eventually lower priced assets will attract new capital. The equity market is priced to provide better long term returns than we have seen in many years. Commodities are retracing to levels that have taken much of the speculative fervor out of the price. Distressed debt is priced at levels that predict armagedon in corporations. US Government debt is priced to provide zero profit in return for the security of principal. Tax Free Municipal bonds that are pre-refunded and backed by US government guarantee are yielding significantly more than taxable debt. Such inefficiencies borne of panic are the stuff that market bottoms are made of.

Most fundamentally important is not that production is altered but that behaviour is adapted. Life is a dynamic, not static endeavor whether in governance or economics. In my corporate experience, every meeting to discuss future strategy contained countless graphs and charts and they generally showed continutity, embracing the idea that the same conditions that got us to the moment were the new paradigm. Always a wrong conclusion.

As we watch dramatic policy adaptations unfurl and the markets' pricing process, the volatile but boring market of the past two months gives hope that the worst of this bear market is behind.

John Barnyak