Maybe Twin Peaks is a little off topic for this post. Anywhoo…

There are currently a lot of distortions and dislocations in the capital markets these days and it is important to recognize them for what they are.

For example, the dollar rally. From mid July through Monday the dollar, as measured by the Dollar Index, was up close to 7%.

Regardless of whether the oil decline is the reason, weakness in other currencies, other things, all of the above or none of the above, 7% in less than a month should not be expected to be a sustainable move.

Even if July 2008-July 2009 turns out to be another 2005 (the dollar was up that year) the move of the last month is too big for this market and based on how this market works, it should work back down at some point. This is not a dollar bear argument (I am a longer term dollar bear) but is simply meant to point out that moves that occur with extreme velocity (relative to what is normal) often go back the other way even if just temporarily.

Oil is another one. Many have opined that a part of the decline can be attributed to demand destruction. Maybe this is true but the case for demand destruction would be easier to buy into if the oil price had eroded and no one thought the bubble had popped. But instead oil has panicked down in such a manner that it is difficult to think it has accurately captured a change in behavior.

We could talk about a lot of the commodities, ag stocks and currencies in a similar vein but you get the point by now.

The point from me is not to load up on these things, I am a believer in moderate weightings, but to the extent you use any of them to supplement your equity exposure, but to not get shaken out when they hit an occasional air pocket. If you diversify with some alternative stuff (and again I only use a little) you should realize it won’t always go up but that does not mean it is all of a sudden a bad idea.

I’m not sure what to tell someone who is 25% commodities.

With regard to why you invest, presumably you want to have enough money for some purpose in the future (like not running out of money after you retire), these things are noise. All of the asset classes mentioned, and ones not mentioned, have all had more puke downs or panics up than we can remember and will have many more in the future.

The big run this decade in resource related themes combined with our decade long round trip to nowhere for domestic stocks has perhaps skewed our thinking but from 30,000 feet, markets work a certain way over long and short periods of time and expecting these sorts of things work out roughly the same way is the better bet the vast, vast majority of the time. And for most folks the short term distortions and dislocations can and should be ignored which is easy to forget if you watch and read too much of the wrong thing.

The long term distortions and dislocations do, as a matter of philosophy, need to be heeded but other folks say no. By long term I mean things like the yield curve or exit strategies and so forth.

We are all confronted by short term noise that we need to filter. A big chunk of the filtering needs to be having a plan, sticking to it and knowing your plan won’t the best approach for all times but if it is well thought out, you stick to it and you save properly you have a good shot of getting where you need to be.

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009