The “Risk on, Risk Off” Danger is Down on the Farm


Today’s chart shows an unusual example of how the big “risk on, risk off” trade is leaving many investors with dangerously concentrated portfolios…

Many investors take a position in commodities with the idea that they are “diversifying” their portfolios. And sometimes, it’s a sound idea. But as we’ve pointed out many times, it’s a dangerous idea right now. Stocks and commodities are both moving according to investor beliefs about the global financial system. It’s either “risk on” (stocks and commodities rising) or “risk off” (stocks and commodities falling). Rather than owning diversified portfolios, many folks own “super-concentrated” portfolios.

#-ad_banner-#To show you how this idea is turning up in all sorts of markets, we present a “performance chart” of the popular agriculture investment fund DBA, plotted with the benchmark S&P 500 stock index. DBA is a diversified, “one click” way to own a basket of agricultural commodities like cattle, coffee, corn, wheat, soybeans, and sugar. The S&P 500 is a broad measure of U.S. stocks.

As you can see from the two-year chart below, both assets soared in late 2010 in response to the big Federal Reserve “goosing” of the nation’s credit supply. They’ve since backed off from their highs… and spent this year “waffling” together. Their two-year returns are almost identical. So… to the question of whether one should own crude oil… or agriculture… or stocks? The market replies, “What’s the difference?”