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Should You Take Market Jitters about European Debt and a China Slowdown Seriously?

Should You Take Market Jitters about European Debt and a China Slowdown Seriously?

Investors worry too much.  Each spring season, as we reported recently, fears about a world economic slowdown sprout forth and bloom just like the perennials in your garden.  Stocks retreat and commodities decline.  In recent years, the fear has involved foreboding that one or more of the weaker countries in Europe may go bust.  There is, to be sure, no doubt that several countries in Europe are hemorrhaging fiscally as a result of too many irresponsible socialist programs.  However, there is also no doubt also that the more financially-robust German and French governments will infuse liquidity into the financial system to keep the economic union together as long as possible.  These infusions, new loans and pump priming, are sufficient to keep the weak economies alive, but not restore them to health.  More importantly, though, these infusions add to long-term inflationary effects being created in Europe that will surely have repercussions for the rest of the world.

The oft-predicted world economic decline failed to appear in 2009, 2010, and is not likely to materialize this year.  Remember all the anxiety in 2009 that there would be no recovery from 2008?  In 2010, fears revolved around a double-dip recession and deflation caused by Europe’s money mess.  Both times the pessimists were wrong.  This year fear has surfaced about China not manufacturing enough goods, which, in turn, might lead to low raw material imports by China and low economic growth for the world.  We believe this new variation on the fear theme will not materialize into reality.

Expect to see Chinese manufacturing growth and exports slow down.  But imports will still rise; there will be more Chinese consumption of autos, appliances, and many other goods.  The Chinese are very intelligent.  They realize that the rise in the value of the Yuan as well as higher salaries and transportation costs are making it less profitable for them to manufacture low value commodity products.  Wisely, they are moving up the value chain and making more high-tech and engineered products as well as machines for Chinese domestic consumption. GDP growth will be strong again in 2011.

India, meanwhile, is following in the Chinese footsteps and announced it will copy China’s long-time policy of pursuing resources in Africa.  India announced a $5 billion line of credit to African nations over the next three years to fund economic development.  You can be sure Indian companies will be scrambling to get in on the opportunities that will ensue.  This development bodes well for investors.  After a hiatus of a few weeks, or possibly slightly longer, we expect a superb buying opportunity to appear.  This will be the same kind of opportunity that arises whenever short-sighted investors ignore the long and intermediate-term problems faced by the U.S. and Europe as a result of fumbling, irresponsible banking systems.


U.S. & European Banking Systems – Will Restructuring Work?

On both sides of the Atlantic, bank regulators are making an attempt to restructure parts of their banking systems.  However, European and U.S. bankers are “overdrawn” in several basic banking fundamentals.  Their institutions are poorly administered.  They practice poor risk control.  They are over-leveraged.

Of course, they will be bailed out by the authorities at the behest of the political powers. 

While their attempt at restructuring is admirable and long overdue, politicians have historically only interfered with true bank restructuring, and therefore it’s doubtful they will help with it in the future.

Politicians are dependent on political contributions.  Bankers have money and do not want to be restricted.  It’s a codependent match made in heaven.  Many politicians are arguing against curtailing the power of the banks and thus are paving the way for the next crisis.

Here’s how we think the crisis will develop: liquidity will be pumped into the banking system in Europe, the U.S., Japan, and other parts of Asia.  The lubricant for this process of restructuring the financial system is liquidity, which can be created in various forms.  Once this liquidity creates problems, the central bankers will be forced to make the best of a bad situation in some way or another, probably by allocating current or future taxpayer dollars to the banks to keep them from collapsing.  That will drag the economies in these developed countries further into the muck.


Think Ahead

As these crises unravel, those who have thought ahead—who own gold, oil, and other real asset-based investments—will fare much better than those who do not.  We remain strongly positive on gold and reiterate our prediction of $1,600 to $1,700 per ounce in the not-too-distant future.

Watch and wait.  Many asset prices will fall over the next few weeks or months.  That’s the time to step up and buy gold, oil, strong currencies, and stocks of strongly-growing nations.


Gold & Oil

We cannot predict when upheaval will take place in oil-producing nations, but upheaval is in the air.  As we have explained in these pages, some countries have had upheaval already and others have bought off their unsatisfied populace with promises of more income, services, education, and security.  We do not believe that these approaches will be sufficient to solve the problem.  The reason for this is that the sources of this dissatisfaction are many.  Countervailing political forces within and outside these countries are jockeying for position to support or undermine the stability of individual nations and of the region.  The battle for global strategic positioning and control of important raw materials that it has been for going on for centuries continues in much the same manner.  India has recently taken new initiative to secure the natural resources it needs to continue its path of rising standard of living as described in the following report.  Please click the following link to Bloomberg article: http://bloom.bg/kViJQr  

The upheavals ahead in the oil-producing nations will lead to higher gold and oil prices.  Major nations such as China, India and Russia, as well as many smaller countries, will continue adding substantially to their hoard of gold.  This will evaporate the current fears of no or slow growth in emerging nations.

Oil, has much of its supply located in regions with the potential for intense geopolitical conflict that will be played out over the next few years.  Oil markets may temporarily experience partial removal of supplies from the market.  We continue to predict oil at $150 a barrel.

We have been bullish on gold and oil for years.  In almost every newsletter we restate our bullishness.  Stick to gold and oil.


Currencies

As far as currencies are concerned, historically unprecedented American deficits will lead to big problems for the U.S. dollar.  Shift to strong foreign currencies.  U.S. and foreign stocks may receive some investment capital when investors move out of the Euro and U.S. dollar and move into other assets which can rise specifically because the U.S. dollar or Euro is falling.  For example, exporters in Europe and U.S. may benefit from lower currency values.

In summary, all this is hardly rocket science.  Everyone wants gold for its monetary stability, and for its ability to withstand political crises, inflation and deflation better than other assets.  Everyone wants oil because of the threats to energy security being created by ongoing global geopolitical turmoil. 

Please see below for recommendation table.

Investment

Date

Date

Appreciation/Depreciation


Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations



 


Corn

4/20/2011

Open

+0.2% 

Gold

6/25/2002

Open

+369.8%

Oil

2/11/2009

Open

+181.9%

Corn

12/31/2008

3/3/2011

+81.0%

Soybeans

12/31/2008

3/3/2011

+44.1%

Wheat

12/31/2008 

3/3/2011 

+35.0% 


Currency

Recommendations



 

 

Short

Japanese Yen 

4/6/2011

 

Open

-4.2%

Long

Singapore Dollar

9/13/2010

 Open 

+7.2% 

Long

Thai Baht

9/13/2010

Open

+6.3%

Long

Canadian Dollar

9/13/2010

Open

+5.1%

Long

Swiss Franc

9/13/2010

Open

+15.5%

Long

Brazilian Real

9/13/2010

Open

+5.0%

Long

Chinese Yuan

9/13/2010

Open

+4.0%

Long

Australian Dollar

9/13/2010

Open

+12.5%

Short

Japanese Yen

09/14/2010

10/20/2010

-3.3%

 

Equity Market

Recommendations



 


India

4/6/2011

Open

-11.6%

Malaysia

4/6/2011

Open

-2.3%

Canada

3/24/2011

Open

-2.5%

Colombia


9/13/2010


Half Original Position sold

-0.9%


Australia

2/15/2011

Open

-1.3%

Japan

2/15/2011

Open

-12.3%

U.S.

9/9/2010

3/11/2011

+18.1%

Canada

12/16/2010

3/11/2011

+7.9%

South Korea

1/6/2011

3/3/2011

-2.9%

China

9/13/2010

1/27/2011

+5.0%

India

9/13/2010

1/6/2011

+7.9%

Singapore

9/13/2010

12/16/2010

+4.8%

Malaysia

9/13/2010

12/16/2010

+1.3%

Indonesia

9/13/2010

12/16/2010

+9.5%

Thailand

9/13/2010

12/16/2010

+11.9%

Chile

9/13/2010

12/16/2010

+8.9%

Peru

9/13/2010

12/16/2010

+32.2%

 

Bond Market

Recommendations

 30 YR Long Term

U.S. Treasury Bond  


 

0.0%