Worst Case Scenario

We stopped out of DBA today at 34.48 for a gain of about 17%.  I put the stop on as the increasing food price commentary was reaching fever pitch.  Plus USCI is a broader commodity holding that attempts to mitigate contango.  Though I lightened up today, I believe commodity prices are headed higher.  This trade, like most others since we started fiat fantasy, have been favorable, almost too easy.  I dwell on portfolio minutia without giving the big picture the attention it deserves.  And my brother-in-law is talking Citi stock with not much fear in his eyes.  Have we gotten too complacent?  What's the worst that can happen?

One could argue that the worst case scenario to date was the 22.6% drop in the Dow on Oct 19, 1987.  If we suffered that loss tomorrow, the DOW would be off 2763 points.  The question I asked myself was given that size loss, do you still want to be an investor?  My answer was "yes", but it certainly is a sobering contemplation.  Incidentally, my answer in the affirmative is not because I am confident I can avoid the loss, only that I am willing to accept the loss.  Here's a longer term chart of the S&P 500 that gives a perspective much different than all the short-term banter one hears daily.

     














There's been much written about what caused the crash of 1987 but of course no one really knows for sure.  By October 15, stocks were off 12% from their all-time highs.  Thirty year Treasuries had fallen 14% in the ten weeks prior to the crash.  P/E ratios were high.  Sniper lists possibly contributing causes.  Investorplace  blames rash actions and statements by Treasury Secretary Baker and Federal Reserve Chairman Greenspan.  John J. Xenakis, publisher of Generational Dynamics, is a proponent of "reversion to the mean" when it comes to forecasting.  Here's a long-term chart from his website showing that the Dow has been above the "mean" since about 1990.  He states a move below the blue line is a mathematical certainty-- when is the big question.   

We'll never have a repeat of the 1987 crash and the circumstances leading up to it. 

In hindsight, there were hints if you were looking and could recognize them.  We are going to suffer another crash and I suspect it will be quick and ferocious.  Keep your eyes peeled-- no guarantees, but it might help.