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THE NEGATIVES, THE POSITIVES AND THE SOLUTIONS

THE NEGATIVES, THE POSITIVES AND THE SOLUTIONS

This is our latest missive, before I leave for a research trip to China. The purpose of the trip will be to meet with economists, and to discuss the current and projected outlook for economic growth in China. Additionally, I will try to more deeply understand the problems facing the economy.

THE NAYSAYERS ARE WRONG AGAIN AND CHINA CONTINUES TO GROW AT A VERY RAPID PACE

China’s GDP is growing well in excess of 10% and money supply is growing at above15% year over year. This is not the stuff of which slowdowns are made. The rest of the fast growing world is also doing well. For example, Japan is speeding up its growth. Moreover, Russia and Brazil are enjoying consistent growth and India is growing at about 8%. The U.S., Japan and Europe are growing at more rapid rates than one year ago.

SO WHY ALL THE PANIC IN WORLD STOCK MARKETS IN JUNE?

The panic is because the U.S. and some other countries have an inverted yield curve. In other words, short term interest rates are higher than long term rates. Historically this has been bad for economic growth and for stock markets. This time will be no exception. The higher short term rates will slow economic activity in the developed world. Despite increased rates, the developing world will continue to grow very fast.

THE NEGATIVES

1. The world’s stock markets will have a tough time for a few more months, as interest rates continue to rise around the globe. This is because liquidity, which is the influence most causal to the demand for all investments, including financial investments will be diminishing. As liquidity diminishes, new money does not flow into investment markets, and old money may gradually flow from stocks into cash related instruments.

2. The prospect for continued and escalating fighting in the Mid East will discourage any major stock market rallies.

THE POSITIVES

The positive side of the coin is that oil and gold will do well, due to forces that have nothing to do with interest rates. They will rise for several reasons.

1. Emerging economies like Brazil, China and India are growing and growing fast.
2. They are demanding more raw materials in order to grow.
3. Raw materials like oil, uranium, base metals and precious metals are becoming harder and more expensive to find.
4. As more nations enjoy more wealth, they consume more luxury goods like precious metals and gems. They will consume more gasoline, oil and electricity to operate automobiles and labor saving devices. In summary, they will consume more resources, and the richer they become the more consumption will take place.
5. Oil and gold are beneficiaries of the current tensions in the Mid East. Energy is a necessity to carry on a fight, and gold is a safe haven to which investors and governments flock in time of war.
6. The safest oil and gold stocks trade in major counties on major exchanges in the U.S., Canada, Australia, and Europe.

ECONOMICS

Global economies are growing fast. U.S. economy is slowing but still will be growing at about 2.5% for the next 12 months.

CURRENCIES

The U.S. currency is overvalued by any standard. It has risen the last few days as a result of strong military reactions to events, and fear of a conflagration in the Mid East.

SUMMARY

We have long warned of major problems in the Mid East. In our opinion, they are now developing. Global economic growth continues strong, and this growth even if it slows, will lead to continued demand for oil and gold. Interest rates will rise globally for some time more. This will keep stock markets in much of the world unattractive. By October, much of the interest rate fear and military problems may be fading, and global stocks will be cheap. At that time we will be buying, until then we will continue to focus on energy and precious metals which have done well for us this year.

I will be writing again soon with some observations from on the road in Asia.