It is our opinion that retiring Chairman Greenspan and the Fed have done a poor job dealing with asset bubbles.
IT IS OUR INTENTION TO HAVE OUR CLIENTS PROFIT FROM THE FED’S MISTAKES.
HOW WILL WE PROFIT?
We must remember that the legacy of Fed mistakes leaves the US and world markets open to more asset bubbles. First, we will identify these bubbles before they grow too big and profit from them before the public at large jumps on. Then we will exit before the stampede for the door leaves many people bloodied. In other words, we will be early in and early out. Because of our focus on global social, political, and economic events we see trends long before they become common knowledge. Thus, we can make investments that benefit from these trends early and exit from these investments just as the mob is discovering them. We do not like the conventional wisdom. In our opinion, the popular and conventional wisdom on stock investing is not wisdom. It is mediocrity. Investors must look beyond the conventional to do well in the long term.
For specifics about our investment themes, see the last section of this letter.
GREENSPAN ONLY DID A MEDIOCRE JOB—HISTORY WILL NOT BE KIND TO HIM
Greenspan leaves a lot of problems in his wake. He leaves a tradition of handling periods of economic slowdown, and period of liquidity destruction, effectively. However, he let bubbles form, and was slow to drain money from the system when bubbles developed. He was political, and in not wanting to take any chances, he erred on the side of “easy does it”. This is not the job of the Fed Chairman. The chairman must make some unpopular decisions and be ready to be derided and criticized by politicians who in their frenzy to consolidate power and get reelected will sell the country’s future for a vote at any time. Greenspan simply did not stand up to the politicians.
Former Fed Chairman William McChesney Martin once famously stated, “The job of the Fed chairman is to take away the punch bowl when the party gets going.”
Greenspan’s big mistake was not taking away the punchbowl even when the party got hot. My evidence is as follows:
He let the Internet bubble get too big and many unsophisticated players got into Internet stocks too late and out too late. Moreover, numerous Internet stocks went to zero. Even the few big Internet and tech survivors like Amazon, Yahoo, Sun, and Oracle are far below their year 2000 prices today, over 5 years after the peak of the bubble.
My next evidence is the real estate bubble, which is currently in the process of imploding. Residential prices in the hot resort areas of Florida, California, and posh ski resorts are beginning to weaken. Houses are staying on the market longer without selling, and the prices are beginning their inexorable fall. According to government figures 53% of all homes sold in 2005 were sold with no down payment. That is 100% financing. The average down payment in 2005 was about 2%. That is a sure fire prescription for disaster. When a homeowner has no equity in a home, and the home depreciates, what is his incentive to make the payments and keep it?
A statistic to watch is the supply of unsold homes for sale. Since bottoming at 3.8 months in January 2005, it has steadily risen to 5 months supply. In some of the ‘hot’ markets, the supply is much higher as purchase activity has slowed.
My final evidence for now is the mass of liquidity in the world economy that is sloshing from one investment area to another. Now that it is leaving real estate where will it go? It is obviously moving to commodities. This shift is partially due to rapidly rising demand. Real fundamentals are sending energy, copper, zinc, and gold up. However, many other commodities are moving up as well, as speculators drive demand, just like we saw in the real estate and internet/tech stocks before.
HOW WE ARE INVESTING TODAY
We continue to hold shares in global gold mining companies, Japan, Hong Kong real estate conglomerates, Indian sugar companies, other asset rich Indian companies, European financial services companies, global oil service companies, the British pound, Canadian dollar, Australian dollar, and the Swiss franc.
We have made recent additions to our gold, Japanese, Indian shares, the UK pound, Swiss franc, and the Australian dollar. Overall, we are obviously very optimistic about the opportunities outside of the US in 2006.
As we have been saying the US will be volatile, and that has certainly been the case, maybe we will buy in the US, but not for a while. Today we are focusing as mentioned above.
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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.