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IN SOME AREAS, IMPROVEMENTS ARE TAKING PLACE

IN SOME AREAS, IMPROVEMENTS ARE TAKING PLACE

THE WORLD ECONOMY IS WEAK AND GETTING WEAKER, BUT LET US FOCUS ON THE POSITIVE IN THIS MEMO.  IN SOME AREAS, IMPROVEMENTS ARE TAKING PLACE.

LAST WEEK WAS THE G-20 MEETING

The primary new event was the creation of 250 billion dollars from nothing via Special Drawing Rights (SDR’s), 250 billion dollars in all.  These SDR’s can be used as reserves by the countries that are granted this fantasy money.  Over 30 percent, about 85 billion dollars, of this fantasy money is meant for the emerging world.  This is enough to keep optimism increasing in developing world.

OTHER MAIN POINTS FROM THE G-20

1. Even though protectionism was evident in the agendas of the many of the large developed countries, a one trillion dollars package of financing and loans was enough to get commodity producers like Brazil and others to agree to the total package.

2. Smaller, weaker economies will benefit from more trade finance, and spurring international trade should help to thaw the world financial freeze.  Altogether, this is a positive event for the global markets.  The event was filled with bogus PR to be sure, but it did produce some consequential liquidity improvements for the small countries of the world and their banking systems.  This should benefit share prices in emerging markets.

EMERGING MARKETS STOCKS WILL DO VERY WELL AS A RESULT OF THE G-20 LOANS AND HANDOUTS

Mexico was the first to take an interest in the new IMF loans, and more countries will follow.  This can help backstop weaker emerging countries like South Korea, and is good for demand from China and India.  We like China very much here, and we will continue to buy Chinese stocks during periods of price weakness.

MONETARY AUTHORITIES OF MANY COUNTRIES HAVE CAVED IN TO QUANTITATIVE EASING (PRINTING MONEY)

We believe it is just a matter of time until the Western Europe’s European Central Bank goes for quantitative easing (QE).  Then, the gloves are off.  Lately, it seems central banks around the world are abdicating their responsibilities as stewards of the world’s monetary system.

Thus far, Japan, the U.S., Britain, Switzerland, and many small countries, such as in Eastern Europe have opted for some form of QE.  The rest of Western Europe has been more responsible and has not done so.  When the European Central Bank joins the party, we expect gold will take off.

It appears that the IMF is being groomed to be the world’s central bank, taking this responsibility from the other major central banks, which have failed miserably in their role.

Poor management coming from the central banks of Europe, Britain, the U.S., and Japan cannot be excused.  It is good that the IMF is being groomed.  The world is searching for an alternative to the U.S. dollar.  For example, currency swap arrangements organized by China and Russia with some of their trading partners (allowing the countries to bypass the dollar as the settlement currency for their international trade), argue for regional currency blocks to facilitate trade.

While it is clear that the world has no current substitute for the U.S. dollar as the world’s reserve currency, the day the dollar loses that status inches closer.  As the U.S. continues to bumble the banking system recovery, and continues to enrich the failed bankers at the expense of the taxpayers, the rest of the world will press for an alternative to the dollar.  Even if a few sacrificial bank CEOs are fired, the institutions which provide so much money to politicians’ re-election campaigns will continue to grow richer.

A CALL TO ACTION

A group of experts assembled by the Wall Street Journal came up with twenty very thoughtful principles for rebuilding the financial system.  The piece titled A Call To Action helps explain what went wrong and why it behooves us to make sure that the principles are implemented.  In our cynical moments, we imagine that many of these principles will receive no more than lip service as they will be perceived to decrease the profits of those who have been successfully manipulating the system to their own advantage…and who make large donations to politicians.

Here is the link to the top twenty principles as developed by participants in The Wall
Street Journal:  http://online.wsj.com/public/resources/documents/Recommendations.pdf

LONGER TERM, WE HAVE A BIG PROBLEM IN THE U.S…BANKS, INSURANCE COMPANIES, AND THE REST OF FINANCIAL SERVICE INDUSTRY THAT WIELD TOO MUCH POWER

Just as President Eisenhower warned about the military industrial complex, many wise writers (often financial, academic and non big bank types) believe that the banking system has too much power, and the current bailouts are being done in a way that emphasizes the big banks’ power.

We will paraphrase a major article on this subject in our next email.  In this letter, we want to focus on the positives, and explain why the current market environment will result in a continued stock market rally.

SUMMARY

Emerging economies, especially China and India have been benefited by the recent IMF meeting.

After the recent rally, many world markets are overbought.  We expect the rally to continue after a short rest.  We are buying Chinese and Indian stocks on weakness to add to our existing positions.  We continue to believe that technology in the developed world will rally in the short term, and that oil and gold will rally in the long term.  We plan to use price declines to add to our oil and gold positions.

PORTFOLIO REVIEWS

We have been happy to review readers’ portfolios free of charge, and will continue with this offer for any portfolios submitted before April 30, 2009.  After that, we will be unable to offer the courtesy.
Thanks for listening.


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