I can't remember a time when views on the short- and long-term direction of stocks, the financial markets and the global economy were so thoroughly at odds.
One of these views is going to turn out to be very wrong. Either the next 10 years will look much like an attenuated version of the current crisis, or they will show this crisis to have been just that, a crisis, and the major investing themes of the past 10 years will reassert themselves as the drivers of the global economy and financial system.
I'd bet the short-term view of the long-term future, which is so dominant right now, will turn out to be, well, shortsighted. If I'm correct, then long-term investors are going to see a huge pop when the crowd swings in their direction. All they have to do is survive until then. Not an easy task when the turn is so unpredictable and the day-to-day punishment is so unrelenting.
In the short term, everything is gloom and doom. You could see that pessimism recently in the march of the major market indexes to their lows of the 2000-02 bear market -- and in the case of the S&P 500 Index ($INX), through its 2002 intraday low at 768. The Dow Jones industrials ($INDU) aren't far from dropping all the way back to their 2002 bottom of 7,552. The march has been nearly relentless, even for a bear market.
Normally, bear markets are punctuated by rallies that suck investors in from the sidelines before failing and inflicting more losses. Not this bear market. It just goes down and down and down. From Oct. 1 through Nov. 24, the Dow has managed back-to-back daily gains just twice.
Polarized predictionsLong-term investors -- and not just Warren Buffett -- see the current market collapse as a buying opportunity. On Nov. 19, a day the S&P 500 dropped more than 6%, Norway's $300 billion sovereign wealth fund announced that it was increasing its allocation to stocks to 60% from 40%.
"These market circumstances suit us very well," Executive Director Yngve Slyngstad said. "We are a large buyer in a market with more sellers than buyers."
The fund, which invests Norway's oil and gas revenue for the day when the oil and gas run out, is the second-largest sovereign wealth fund next to that of the United Arab Emirates.
But the short-term money is selling, which in this case means hedge funds and their investors. Hedge fund investors pulled a record $40 billion out of the funds in October, the most since Hedge Fund Research started compiling figures in 1990. Hedge fund managers have been selling, too, and some of the industry's biggest funds are now 50% in cash.
How's that for divergence?
Of course, you could argue that that kind of divergence is exactly what you'd expect in a bear market. It's just business as usual in these unusual times.
But it's not just views of the long- and short-term direction of the stock market that so divide investors. It's everything, including the direction of prices for food commodities, the direction of oil prices, the direction of inflation and the direction of interest rates. There's a gulf between the long- and the short-term view in each of these areas that's big enough to swallow an oil tanker, a dry-bulk carrier and a deep-water drilling rig.
Commodities in the short runLet's start with food commodities. No. 2 yellow corn that sold for $6.55 a bushel in June 2008 in central Illinois sold for just $3.90 a bushel in October, according to the U.S. Department of Agriculture. No. 1 hard red winter wheat that sold for $9.19 a bushel in Kansas City, Mo., in June, sold for $6.17 a bushel in October.
No wonder shares of companies that make farm machinery, such as, or that produce fertilizer, such as , have been hammered this year. Shares of Deere were down 68% in 2008, as of Nov. 21, and shares of Potash were down 60%.
In the short term, the logic behind that extreme sell-off is impeccable. Farm income is going to be down this year. In fact, the Department of Agriculture calculates, the average farm could well lose money in the 2008-09 season. Farmers who aren't making much, if any, money won't buy many tractors, and they'll try to cut back on expensive fertilizers. Add a credit crunch that makes it tough for farmers to get loans to buy equipment or fertilizer, and it's only logical to see revenue headed down for Deere, Potash and other farm-related stocks such asand .
Commodities in the long runIn the long run, though, the picture looks very different. Here's the long-term math that Potash cited in its Oct. 23 conference call: Global grain stocks have been drawn down over the past decade as production has failed to meet demand in most years. The global percentage of annual consumption that is stockpiled has fallen to 16.6% compared with a 30-year average of 25.3%. It now takes a record crop every year just to keep pace with rising global consumption.
Any reduction in planting or yield in 2008-09 will lead to another surge in commodity prices, farm incomes and the share prices of farm commodity companies in 2009-10. The food crisis hasn't gone away despite a short-term drop in food commodity prices.
Long-term investors -- I mean really long-term -- agree. Daewoo Logistics of South Korea may have a 99-year lease (I told you this was really long term) on 1.3 million hectares of farmland in Madagascar. (A hectare is roughly 2.5 acres.)
Why "may have"? Because faced with the possibility of huge protests, Madagascar's government is saying that it's only facilitating a "land search." The Daewoo plan is to plant corn on 1 million hectares (the rest would go to palm oil production) and then ship the bulk of the harvest back to South Korea. The goal to provide long-term food security to South Korea, the world's fourth-largest importer of corn.