Crowd-Following Will Make You a Victim of Economic Cycles

“You are either a contrarian, or you are a victim,” says our old friend Rick Rule. Rick is thinking of the natural resource markets, where crowd-following is always fatal.

But the idea applies to many other things. You do what everyone else does and you get what everyone else gets. If that is what you want, then by all means, just think what your neighbours think and do what they do. In general, you won’t do any better…or any worse.

In the commodity markets, doing what your neighbours do will not be a very rewarding strategy. Because commodities are cyclical. The price of wheat goes up…farmers plant more wheat…and then the price of wheat goes down. The crowd-following farmer sees his neighbours making money and decides to join them. He buys more land – probably at the very top of the cycle…and then the new supplies kick in and the price of wheat drops. Uh oh.

The length of the cycle, for most commodities, is fairly predictable; it is the time it takes to increase production. Famously, the hog cycle was quoted as 18 months in the old economics textbooks.

There are cycles for everything. And you can be contrarian…and take advantage of the cyclical moves…or you can be a victim and get whacked by them.

But what is the cycle of the US dollar? And when you have answered that question, here’s another one: how does the dollar affect the prices of commodities…stocks…and everything else?

Ah…there’s the rub again. We talk about cycles in commodities…prices going up and down and when you are on solid land, or reading an economics textbook, you can see them clearly. But what about when you are on bobbing up and down yourself – floating on a sea of paper money? Is the price of wheat really going up…or is the dollar going down?

Gold seems to preparing for an assault on its old high – US$835…a peak set 27 years ago. But what does it mean? Is this the gold cycle…or the dollar cycle? What are we looking at? What can we expect?

Against the Canadian dollar, it is at a 33-year low. Against gold, it seems to be heading for a new record. Against oil, it is already at a record low.

But what is a contrarian to do? Buy? Sell? Do nothing?

It is still a dollar-based world. Oil, gold and illegal drugs tend to be quoted in dollars. And when bribes are handed out, anywhere in the world, they are still more likely to be in dollars than any other currency.

If it is a dollar-based world…most people are long on dollars. So, we will be short…Speaking about contrarianism…it is not always a good idea to go against the crowd. Sometimes, by dumb luck, the crowd is going in the right direction.

There are times, too, when you can go along with your neighbours and do fairly well. There are times when everyone seems to benefit – times of peace and prosperity.

But just as birth inevitably leads to death…peace and prosperity inevitably lead to crisis and war.

We saw in Argentina that most people did all right as long as things were going well. General prosperity helped people generally. But then came trouble. That was when you had to know when public officials were lying…and when it didn’t pay to go along with your neighbours. Only the smart…the fast…the well-informed…the few who really knew what was going on…came out okay. Everyone else suffered.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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