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We received the following query from a thoughtful and
hopeful Mr. R.:
It seems as if commodities
have continued doing extremely well. Do you still think that
stocks will outperform them the next decade? I sure think
stocks will get pounced by commodities, at least through
2010 or so… Commodities and stocks have seemed to run in
20-year trends historically, is history changing?
Victor Niederhoffer replies:
I believe that the average stock has gone up considerably more than any inflation index since I wrote you. And that this differential relative to any funds based thereon will continue. I refer you again to Julian Simons' work and the Triumph of the Optimists by Dimson et al.
Mr. R responds:
I'm actually not referring to just inflation indexes, but rather commodity indexes... Please see this Reuters CRB Weekly Chart (PDF file). The average stock hasn't come anywhere close to where commodities have gone! You mentioned about a year ago: the fundamental picture which over the last decade has led to 1000 fold increases for stocks versus commodity would seem to override any ideas that shrewd investors might share.
Do you still think that the above response is valid and that stocks will outperform commodities???
Dr. Castaldo Responds:
Julian Simon's Bet With Paul Ehrlich
In 1980, economist Julian Simon and biologist Paul Ehrlich decided to put their money where their predictions were. Ehrlich had been predicting massive shortages in various natural resources for decades, while Simon claimed natural resources were infinite.
Simon offered Ehrlich a bet centered on the market price of metals. Ehrlich would pick a quantity of any five metals he liked worth $1,000 in 1980. If the 1990 price of the metals, after adjusting for inflation, was more than $1,000 (i.e. the metals became more scarce), Ehrlich would win. If, however, the value of the metals after inflation was less than $1,000 (i.e. the metals became less scare), Simon would win. The loser would mail the winner a check for the change in price.
Ehrlich agreed to the bet, and chose copper, chrome, nickel, tin and tungsten.
By 1990, all five metal were below their inflation-adjusted
price level in 1980. Ehrlich lost the bet and sent Simon a
check for $576.07. Prices of the metals chosen by Ehrlich
fell so much that Simon would have won the bet even if the
prices hadn't been adjusted for inflation. Here's how each
of the metals performed from 1980-1990.
(Prices expressed in 1980 dollars)