Well, Labor Day has passed here in the U.S. and its back to work and school for the populace in general. I hope that the coming end of the summer season will find you well and happy.
THE CURRENT CRISIS
The news may seem awfully confusing to many of you, especially stories about the demand for commercial paper and the inability of companies to fund their ongoing expenses in the commercial paper market.
When experienced analysts like Jim Sinclair and myself talk about a freeze up and a derivatives problem of huge magnitude it is because companies who have been financing their operations by borrowing in the immense commercial paper market can no longer do so. This problem, plus the creation of many irresponsible (but profitable for their creators) derivatives have overwhelmed the banking system of the world.
The effect has been to create an unregulated shadow banking system that is in fact much larger than the official, regulated banking system.
A little history…until recent years, banks funded many of the day to day operations of companies. More recently, companies saw that borrowing in the commercial paper market was cheaper, so companies switched and began to fund their operations using commercial paper.
Now, banks are going to have to pick up that financing again, as those pools of capital that funded commercial paper are no longer willing to do so. Thus, banks are hoarding liquidity, and much of the available inter-bank loan capital has gotten expensive. This is why LIBOR (London Interbank Offered Rate) has gone up so much. Banks know they are going to have to keep their customers operating without the commercial paper market’s help, so they are hoarding capital to do that.
WHAT THIS MEANS FOR THE WORLD MARKETS IS…..THAT A FLOOD OF LIQUIDITY IS COMING
The Federal Reserve and all other central banks will make capital available through the discount rate and other mechanisms under their control to provide liquidity to banks over both the short-term and the long-term.
Central banks have become increasingly pressured by political events, and that pressure will cause them to create a huge liquidity response to the current crisis.
THE ECONOMIC OUTLOOK
Due to the lack of credit availability in the developed world, there will be a recession in the U.S over the short-term and world economic growth will slow from its current torrid pace to a moderate pace.
However, the long-term effect of the liquidity that will be made available to correct the credit crisis is that more bubbles will be formed in many asset classes; gold, other precious metals, some well-managed (read non-U.S.) currencies, commodities and probably in stocks in fast growing sectors of the world. Asset prices in these areas are likely to go very high in the next cycle.
WE HAVE A BACKGROUND IN PORTFOLIO MANAGEMENT AND ECONOMICS, AND WE LOOK FOR THE LONG TERM ECONOMIC EFFECTS….AND HOW THEY WILL AFFECT MARKETS
FROM A PORTFOLIO STRATEGIST POINT OF VIEW….GOLD IS A HUGE BENEFICIARY
All of the above is good for gold in the short, intermediate and long run.
More liquidity means more inflation, and bubbles in a number of markets will be the consequences of the forthcoming actions. This is the long term effect.
Short term, the effect is a flight to quality. The dollar will likely take a continued drubbing, as the lower interest rates in the U.S. and the irresponsible fiscal actions of the U.S., will lead more and more investors to abandon the U.S. dollar. This will increase the demand for strong currencies and gold.
We continue to believe in the few themes that we have espoused for many years, and we have invested accordingly.
• The dollar will decline. This will cause non U.S. currencies that are well managed to rise.
• The Gold price will rise.
• The world is growing very rapidly as billions of new entrants join the global economic system.
• Oil and energy prices will continue to rise.
• India and China and other parts of the developing world will continue to grow very rapidly.
• Base metals will be in demand long term to expedite the growth of infrastructure in the developing world.
• Transportation will be in demand to transport goods and people as the world grows rapidly.
Thanks for listening.
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