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WHY THE SKY IS NOT FALLING

WHY THE SKY IS NOT FALLING

INDIA CAME OUT WITH ITS NEW BUDGET LAST WEEK

The Indian budget is very important to the Indian economy. The new budget is very growth oriented. This year’s budget allocates resources toward more investment from private sources. Historically, one of the complaints about India is that the bureaucracy is unresponsive, and slow to implement new initiatives. I expect this will put upward pressure on India’s growth rate to above 9% this year..

The Budget focuses on:

1. Increasing infrastructure development [a huge need in India] in the areas of transportation, energy and communications using private/public partnerships. More focus was put on private investment to expand national infrastructure than in past budgets.

2. Increasing farm income. As the urban middle classes get richer, the rural farming class is feeling increasingly left behind. Also, increasing farm productivity to control the rising cost of food was a focal point of the budget.

3. The fiscal deficit falling as a percentage of GDP. This will lower interest costs for Indian consumers and companies.

In our opinion, the budget is long term positive for the capital markets in India. The plan should increase corporate profit growth which will send the markets higher.

MONEY SUPPLY IS GROWING WORLD WIDE

Many central banks are growing their money supplies rapidly. This assures that there will be liquidity and demand for precious metals and stocks. The liquidity must go somewhere. These corrections will be scary, but are not long term.

One of the reasons that I am so confident that the corrections will end after just a few weeks or months, and then go on to new highs, is that in the last twelve months money supply growth is very high. The following are the growth rates of money supply measures some major countries. The data was supplied to me by my wise friend Larry Jeddeloh of the Institutional Strategist.

In the United Kingdom M4 was up 13%
In the Euro zone M3 was up 10.6%
In China M2 was up 15.9%
In South Korea M3 was up 10.6%
In Australia M3 was up 13%
In Russia M2 was up 48%

Yes. That is correct; +48% percent in Russia.

Many countries today have the power to expand the global money supply. This is partly due to the ongoing gradual demise of the U.S. dollar as the world’s reserve currency. Many countries create money, which creates liquidity, which creates demand for assets in which to invest the new liquidity, and in the end creates higher asset prices. Sure stocks, commodities and real estate prices can fall in the short run, but in the longer run where does all of the liquidity go? It goes into assets.

Let’s analyze the potential for a major and long-term problem in world financial markets.
If liquidity were to be simultaneously drained from the global economic system by many central banks, we could have a huge worldwide depression.

CAN A WORLDWIDE DEPRESSION AND MARKET MELTDOWN HAPPEN?

Let’s analyze the problem.

Question #1) Who controls most central banks? Answer: Politicians.
While a few like the U.S., Australia and Europe among others are ostensibly non-political, but that is not entirely true. Other central banks make no excuses and admit to being political.

Question #2) Are politicians anxious to slow economic growth and worsen the condition of the voters who are putting them in office? The answer: A resounding NO.

Question #3) If politicians control central banks at least indirectly, then where is the impetus on the part of central bankers to slow down economic growth and cause a world wide market melt down and global recession? The Answer: NOWHERE.

Thus, it is reasonable to assume the central bankers will opt for growth, and the politicians will applaud them.

SO THE ONLY REAL LONG TERM RISK IS A FINANCIAL ACCIDENT WHICH CENTRAL BANKER CANNOT STOP

We do not believe that this is a very probable outcome, for several reasons.

Economic knowledge has progressed a great deal since the great depression of the 1930’s, and even since the major recession of 1973-1974 in the U.S. and Europe. Central bankers are much more sophisticated now and the knowledge of how to deal with worldwide liquidity problems is more widespread throughout the world. So the odds are less of central bankers doing something really dumb and failing to solve a problem.

WHAT IF SPECULATORS CAUSE A PROBLEM?

Let us say the problem is created by speculators who over leverage themselves and banks who allow over leverage, what then?

The answer is that central banks will likely flood the world with massive liquidity and target it to the areas that need help. It is politically unpalatable to let major financial institutions collapse suddenly. So a bail out, or sale will likely be arranged, and after a short term panic the markets will once again regain optimism and prices will stabilize and rise. This is what central banks have successfully done over and over again in the last three decades.

SUMMARY

EVERY TIME THE MARKETS CORRECT, CRIES OF THE “THE SKY IS FALLING” GETS LOUDER

Every time central banks come to the rescue by flooding the system with liquidity. Global Stock Markets and Gold rose nicely in the last few years and last few months. After the current correction has ended they will resume their uptrend, going to much higher highs as time goes by.

What are we doing? We are waiting for opportunities to purchase assets cheaply and trying to determine which prices are appropriate. The trick is to buy after almost the entire decline is finished but before the stocks start to run back up and are good prices are harder to come by. The pullback is giving investors an opportunity, and we have been working on building our list of good quality investments.