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SUMMARY OF POTENTIALLY ATTRACTIVE MARKETS

SUMMARY OF POTENTIALLY ATTRACTIVE MARKETS

OIL, GOLD, AND STOCK MARKETS – EASTERN EUROPE, MEXICO, CHINA AND INDIA

Oil prices are starting to strengthen as the seasonal period for oil strength begins about now. The end of the summer and the beginning of fall bring expectations of demand in the winter, and expectations of increased manufacturing in the fall after summer holidays.

In my experience, gold prices often bottom in August or early September. This year they took a jump up on July 31.

I am not sure if we will have a decline in oil and gold as we enter the traditionally treacherous September/October period, when global stock markets often take a beating.

I continue to expect global stock markets to be volatile until October. I am more uncertain about oil and gold. We may see a rise in them over the next few weeks. We will continue to use dips in oil, gold and some stocks as buying opportunities. These buying opportunities will be viewed in hindsight as gifts in a year or two. Remember natural gas prices maybe unnaturally low if we have a normal winter after two warm winters in a row. Natural gas has fallen from $15 to $7 per mcf.

INDIA, BRAZIL AND SOME CHINA STOCKS ARE GETTING CHEAPER

Recently global stock markets have been highly correlated. A rise in the U.S. means a rise in Japan, Brazil and Europe. Thus the volatility we expect in many countries between now and October may create excellent buying opportunities in a broad spectrum of countries. The countries which have the best macro economic outlook are India, China and possibly Brazil and Korea.

CHINA WILL EXPORT CAPITAL TO THE WORLD

China will be a major exporter of capital. By 2015 it is estimated that China will export about $100 billion of capital to be invested abroad. Much of this money will go into precious metals and foreign currencies. The effect will be to strengthen the long term demand for strong currencies and for the monetary metal (gold).

INDIA WILL REINVEST THEIR PROFITS IN THEIR OWN ECONOMY

India is a different economy from China, with different strengths and weaknesses. India did not open up their markets to foreign direct investment in a big way. Consequently, the Indian economy did not grow as rapidly as China. India has grown at 7 or 8% per annum versus 10% plus for China.

Indian businesses will need to take their profits and reinvest them in expanding their operations. India will grow, but at a 7 or 8 % rate. However, 7% compares very favorably with the 3% or less long term growth seen in every other major country.

MEXICO

The current dispute over the legitimacy of the presidential election creates political uncertainty for Mexico in the long run. Mexico’s stock market may do ok now that the election is over; however, the basic problem remains.

Mexico is a nation run by oligarchic powers. Corruption remains a major influence. A combination of powerful vested interests and corruption makes it hard for the economy to create jobs. Without jobs, it is hard for the poor to progress.

It is small wonder than tens of millions of Mexicans have voted with their feet and immigrated to the U.S. over the last 30 years.

It may be that the oligarchs who control major companies in Mexico will be able to retain power for a long time. I do not know, but it is hard to imagine Mexican stocks getting high market valuations with the potential for political unrest and the rapid depletion of Mexico’s natural resources that is taking place. Both of these events argue for a further impoverishment of the country when the oil runs out as it may be beginning to do.

BRAZIL AND EASTERN EUROPE

Brazil and Eastern Europe may hold promise. Brazil is an economy based upon a strong foundation. Its economy is developed, and it is blessed with raw materials and a reasonably good business climate. Also, Brazil boasts many large manufacturing companies with strength in technology and aircraft.
Eastern Europe has recently become the manufacturing arm of Western Europe and has enjoyed a boom in real estate values as capital has flowed in. With Russia’s move toward reestablishing centralized control of its economy it will be interesting to see if Eastern Europe maintains its focus on western style business. I believe it will. Several eastern European countries have excellent engineering and scientific education programs. This will help them develop.

WORLDWIDE INFLATION WILL IT RESURGE?

INFLATION EXPLAINED

Two forces have been battling one another. On the inflation creating side, world wide monetary expansion and bank lending have put upward pressure on inflation.

Additionally, current increases in interest rates (in the U.S. and worldwide) have thus far raised interest rates to a level slightly below the real inflation rate. Unless interest rates rise further, the current rate increases will not slow down inflation over the long run. They may have the politically undesirable effect of undermining consumer spending and aggravating voters. Thus politicians will pressure central bankers not to raise rates as much as will be necessary to really stop inflation.

On the disinflation side, free trade and low cost production in emerging economies have kept goods cheap, lessening inflation.

Just recently the Doha Round of trade talks has broken down with Europe and the U.S. both unwilling to cut farm subsidies. If these trade talks do not resume and Doha Round talk breaks down permanently INFLATION WILL RESURGE.

INFLATION IS DESTINED TO BECOME A BIGGER PROBLEM UNLESS ACTION IS TAKEN

What action?
1. Higher interest rates worldwide – interest rates must go substantially higher. Although it is possible that this may happen, it is unlikely to happen because of political pressures.
2. Better trade relations between countries to encourage free trade and thus keep product prices lower. This is a politically charged issue because domestic lobbies like the farmers and others don’t want free trade.

WHAT CAN WE DO

1. Monitor actions by central bankers and by trade officials, and be aware of the background noise from the public and the politicians’ on a global basis.
2. Be proactive and own assets that benefit from inflation. Even if the inflation does not appear right away, a pro active approach hedges you against unwise decisions by politicians.

WHAT ASSETS BENEFIT FROM INFLATION?

Gold, common stocks sometimes, commodities and real estate often benefit from inflation.
1. Gold is seen as a store of value and real money by many people.
2. Stocks can benefit if they hold assets which are growing in value, or if they are generating growth of cash earnings at a rate in excess of the inflation rate.
3. Real estate and physical commodities benefit if the cost of borrowing to buy real estate or commodities, is below the inflation rate.