The World as We Don’t Know It

As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.

Donald Rumsfeld

So here’s what we know … the price of oil has hit a new record above $121 a barrel (gulp). According to the Lundberg Survey of 7,000 gas stations nationwide, the average price at the pump for unleaded regular is $3.62 per gallon, up $.15 in the past two weeks alone. In California (always a leader), more and more stations are starting to post their prices at $4.00. Yikes!

Everyday seems to bring more reasons why the price of oil is skyrocketing. Last week, prices were affected by uncertain domestic inventories. Today, oil reportedly surged because of damage to a flow-station in violence plagued Nigeria, Africa’s largest producer. Next week the prices could spike because the “moon is in the seventh house and Jupiter is aligned with mars.”

Call me “Captain Obvious,” but nobody seems to know how high we will go.

Now there are predictions of a “super spike” ranging from $150 up to $200 a barrel!

Oil prices have reached this point without additional global turmoil. Granted, we still are fighting two wars in the Middle East and the threat of Jihadist terrorism persists. Additionally, there is no debate that Asian demand has ballooned and the dollar has cratered. But, in reality, there have been no new major events justifying this tectonic shift in prices. Yet here we are.

Two years ago when oil was trading below $50 a barrel, famed trader/raider T.Boone Pickens projected oil prices above $100. Analysts at noted investment bank Goldman-Sachs echoed Picken’s call. Rational thinkers (yours truly among them) scoffed at these predictions. Color me wrong.

In a recent press statement that would make master obfuscator Alan Greenspan proud, the folks at Goldman said: "The core of our 'super-spike' view is that oil prices will keep rising until demand declines globally on a multiyear basis, resulting in the return of excess capacity and a lower cost structure. Given this view, once excess capacity returns, we think prices can move sharply lower."

Huh?

The causes of the relentless climb in oil prices have been repeatedly chronicled -- demand from China and India, the falling dollar making oil an inflation hedge, speculation, OPEC supply restraints, supply threats in Iran, Iraq and Nigeria, and refinery bottlenecks in the U.S. … and the list goes on.

But what do we really know … let’s be honest … we don’t know, because we really don’t know.

If you’re in business or in the business of investing, how do you plan five-years in advance, let alone five-months? The watchwords are diversity and flexibility. As we have seen over the past three years, only the nimble will survive.

If you’re going to take your cues from anyone, you have to look no farther than Harvard and Yale. Their endowment portfolios have grown exponentially over the past several years because of their willingness to embrace diversity, flexibility and risk. Last year alone, David Swensen, Yale’s investment manager posted a 23 percent gain, and 16% annually over the past 10-years. Harvard’s endowment has seen similar results.

The key to success by these two Ivy League giants has been a mix of assets which are inversely correlated or non-correlated to one another. In their model, risk is ameliorated through this form of diversity. They trade everything from stock indices and commodity futures to real estate and currencies. If they're losing money in one sector, they quickly re-evaluate and shift to another. At one point, Harvard even hired several professional foresters to assess potential in the domestic timber market.

So here’s a simple survival rule for the current marketplace … When you don’t know what you don’t know, don’t get stuck on what you think you know, because you really don’t know what could happen. In other words, keep an open mind and be willing to change your strategies to fit the conditions of the shifting global economy.

If that makes sense to you, then you’re ready to face the unknown or to fill the job as our next Secretary of Defense.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.