It is always nice to start a letter with some light comment. Although it may not be as easy in turbulent times, we would like to extend our warmest wishes for your present and future health, happiness and prosperity
A recession in the U.S. is the most likely outcome of the current problem in the mortgage and debt markets. We also believe that recession pressure has intensified in Europe, Japan and several other developed nations.
Thus far, it seems that the subprime and “Alt A” mortgages were mainly purchased by the developed countries mentioned above. Therefore, we can expect the mortgage contagion to be mainly felt by these countries.
The Chinese bought very few compared to their liquid capital, and the Indians bought even less (the Indian banks needed the money to finance their own high paying consumer loans). Russia and the Middle East countries have so much cash flow from energy sales that they can easily write off any current losses.
The following charts are of China’s Shanghai Market Index, Hong Kong’s Hang Seng Index, and India’s Bombay Sensex Index.
THE CENTRAL BANKS OF THE U.S., EUROPE, JAPAN AND OTHERS EFFECTED WILL BE PROVIDING A LOT OF LIQUIDITY TO ALLEVIATE THE PROBLEMS
The liquidity that they provide will most likely create pressure for a new series of liquidity bubbles in coming years. Yes, they will probably avoid a global economic meltdown at the present time, but they will be sowing the seeds for more and bigger bubbles in years to come.
SOME SHORT-TERM EFFECTS OF THE CURRENT CRISIS
1. Less demand for real estate and consumer goods in the developed world.
2. Much slower economic growth in the North America and Europe and somewhat slower growth in Asia.
3. Lower valuations on stocks which serve the developed world’s demands for real estate, consumer products (especially high-end consumer products), and for stock markets in the developed world.
4. More demand for stocks in regions like Asia which are growing rapidly and where mortgage loan purchases were minimal.
5. Even in the fast growing Asian countries demand will be variable depending upon a company’s need to export in order to grow. We are sticking with companies that are involved in providing local services like utilities, toll roads, Asian real estate development and Asian raw materials.
6. For the first time in several years we are less optimistic for the short-term about the demand for base metals. Although demand should continue to be strong from the fast growing countries, demand from developed countries could dry up making the industry temporarily less attractive. We will stay away from this industry in the near future. In the long term, we remain bullish as a new wave of liquidity will certainly make base metals more expensive.
SOME LONG-TERM EFFECTS
1. We see the U.S. dollar continuing to decline, and continue to like precious metals and non U.S. currencies very much. We believe that these groups are beneficiaries of a declining U.S. dollar.
2. Asia will continue to grow but at a less rapid rate.
3. Energy consumption in the developing world will remain strong. We remain bullish on oil, but will focus on those oil producers and equipment suppliers who produce in and provide services for energy consumers in Asia.
Our favorite sectors for investment continue to be:
1. Non U.S. currency denominated government bonds.
2. Precious metals in bullion form or in the form of royalty companies who do not have an association with derivatives.
3, 4, 5 Growth companies in China, Hong Kong and India.
6. Energy companies who serve the fast growing Asian markets.
7. For those clients who have the ability to sell short we are short selling homebuilders, consumer stocks and mortgage insurance companies in developed countries. For the accounts that do not sell short, our holding a lot of cash, Tbills and/or short-term government notes in foreign currencies has been helpful during this period.
Thank you for listening, and we hope you are enjoying the closing days of the summer season.
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