IT’S ALL STILL HAPPENING:
GOLD, US STOCKS, GLOBAL STOCKS, COMMODITIES AND A FEW CURRENCIES ARE SEEING INFLOWS. REAL ESTATE IS SEEING OUTFLOWS.
The global liquidity bubble is in the process of gradually shifting from real estate to commodities and stocks. In the last few weeks, most stock markets that are connected to reasonably good economies, and some financial transparency, have gotten new cash infusions from investors.
Investors, by definition, people with money to invest. They are not stupid in the long run, although in the short run they can be remarkably shortsighted. They have come to realize that the real estate markets in many parts of the world are overpriced, and that real estate is too large a portion of their investment portfolio. Therefore, they are diversifying their portfolios into commodities and stocks.
GREENSPAN’S PARTING WARNINGS
Let us be realistic and wise and listen to Alan Greenspan as he gives the final polishing to his legacy. He has clearly and repeatedly warned in recent speeches that the U.S. balance of payments and budget deficits are a serious and long lasting problem. He has stated that Congress must address them now. Not later, but now!
With astounding shortsightedness and lack of statesmanship, Congress has chosen the easy and foolish way of spending by providing giveaways to the electorate. They have not focused on the unpleasant medicine that must be taken to correct the nation’s deficit problems. The two solutions to bring the balance of payments back from huge deficits are either a lower dollar, or the even less pleasant, major recession or series of minor recessions.
We are cynical enough to expect that politicians will never do the wise thing, when the expedient thing will work. They have not disappointed us. Both parties continue to ignore the problem.
The Republicans, which traditionally represented fiscal conservatism, have abandoned that approach. Now, they are trying to outdo the Democrats in a battle of the free spenders. Mr. Greenspan’s warnings must be heeded for the good of our children and grandchildren. If Congress and the President will not do anything about the fiscal deficits, then the markets will do their usual. Eventually, the markets will substantially depreciate the dollar versus other currencies and gold.
STOCKS THAT FLOURISH IN A LIQUIDITY DRIVEN MARKET WILL DO WELL
The three areas that benefit from liquidity:
1. Commodity related companies like energy and gold.
2. Financial companies
3. Technology companies.
Today’s liquidity driven markets are pushing up the same stocks that usually benefit from liquidity infusions. Commodities like energy and gold benefit from economic expansion and personal investment, which are driven by increased liquidity. Financials benefit from more lending and financing. Finally, technology is an industry that is always in need of capital. Because of technology’s cutthroat, competitive nature, and short product life cycles, new capital is needed to nurture new companies with new technologies.
CURRENCIES AND GOLD
The dollar is nearing the end of its one-year appreciation. We think that in 2006, the dollar may decline and provide further impetus to the run up in gold prices. Gold is money. If people don’t want the local money (dollars, yen, euros etc), they often buy gold.
There are many reasons for the dollar to decline not the least of which is the balance of payments deficit. The easiest way to solve that problem is to decrease the value of the dollar. Since the deficit is big, the depreciation must be big. This is, admittedly, a very simplistic explanation of the problem and the solution. There are two other ways to solve the problem:
1. Recession (not politically acceptable).
2. Large purchases of U.S. assets and companies and by foreign interests, especially Chinese and Indians (also not politically acceptable because the Chinese and Indians would want resource related assets, or financial services companies, not dieing industrial companies with high labor costs like General Motors).
A lower dollar appears to be the only option. Jim Sinclair is a genius. He has been calling for higher gold again and again, as have yours truly and a few others. Now with gold near $530, who can doubt it? Gold will move higher in coming years, it is a good buy on dips.
U.S. financial stocks, commodities stocks, capital goods stocks, and some technology companies are in good shape. The demand for these companies will increase in the coming months. If you own U.S. stocks, stick to the areas that benefit from liquidity infusions.
We like Japan, which we still believe is very undervalued.
We like Hong Kong, where many of the property stocks have been ignored for a long time, and have become grossly undervalued. Plus, you get good dividends while you wait.
We see opportunity in European and Asian financial stocks, Russian telecom companies, some Latin American commodities producers, and some Indian tech companies. In summary, we see a lot of opportunity developing in the world, as the liquidity begins to flow into stocks and commodities and out of real estate.
ENERGY AND ENERGY SERVICE
For several years we have been advocates of energy and energy service companies. Nothing has changed in our long-term positive view of energy companies. The stocks have done well as the price of energy has risen. 2006 is an election year. It would be an obvious year for the U.S. government to manipulate the energy price down in order to provide a better economic environment leading up to the November elections.
We plan to take profits in many of our energy stocks in the mid-winter time frame (early 2006), and wait for an opportunity to buy them back after the elections in November 2006.
THANKS TO THE COLLEAGUES
I would like to thank several friends and colleagues who have been exceedingly helpful, wise, and insightful in the markets of 2005.
Steve Emerson, my brilliant friend, with ice water in his veins has mastered the art of buying wisely. This and his extremely thorough analysis have made him hugely successful. We have visited thousands of companies together in the last 30 years.
Gary Mintz, longtime friend, researcher, and wise investor who I have worked closely with to visit and value energy stocks.
Earl Gould is another wise and successful energy investor friend with a global perspective.
These gentlemen are three gems that needed some light cast upon them. There are others who will be thanked in future letters.
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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.
Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.