Credit crises are answered with monetary easing by government monetary authorities globally.  The Fed and all central banks provide liquidity in various ways as the crisis unfolds in their country or in the world.

Let’s list the crises over the past 20 years and see what the outcome of the liquidity pumping was.  Did the liquidity injections save the world’s economies from major recessions…or did it have the unintended consequence of creating a new series of bubbles?

In 1990, the U.S. Savings & Loan crisis was followed by a recession…..creating a short bear market in the U.S.
In 1990, Japan’s property bubble was followed by a recession….creating a long bear market in Japan.
In 2000, the U.S. tech stock collapse was followed by a recession….and created a bear market in the U.S.
The 1987 Crash was not followed by a recession….the injection of global liquidity to stave off recession created a great buying opportunity; the last great buying opportunity in Japanese stocks before they would peak in 1990.  From 1987, the Japanese market rose by almost 100% over the next three years, and many stocks rose 5 fold.
The December 1994 Mexican currency crisis was not followed by a recession in U.S.  It created a buying opportunity.  Between 1995 and 2000 the S&P more than tripled and many stocks went up 6 fold.
In 1998, the Russian debt default and Long Term Capital crisis was not followed by recession in U.S.  It created a buying opportunity…the last buying opportunity of tech bubble before its peak in 2000.  Many tech stocks ran up by absurd amounts before the tech crash of 2000-2002.
Today, the expected outcome of the current credit crisis is a recession in U.S., but no worldwide recession.  The liquidity being added, we believe may create the last great buying opportunity in commodities, and the developing world’s stock markets before this bubble peaks some time in the 2010 to 2012 time frame.  The liquidity created by all the central banks will flow to where the growth is strong, which is to the afore-mentioned markets.

What we know:
1. A wave of liquidity is being unleashed.
2. Real Estate and bonds have already had their bubbles (created by an unprecedented 25 plus year decline in long-term interest rates).
3. The money being injected into the world economy will create inflation and the effects will be rising interest rates…. and big rises in the prices of commodities and some stocks (as people move to protect themselves from inflation).

We expect the current monetary madness to end in tears….but not before the wave of money being injected into the world’s economies leads to a huge rise in the prices of precious metals, other commodities, well-managed currencies and stocks in the fast growing parts of the world.  By that we mean India, Hong Kong, China, emerging Asia and parts of Latin America and the countries which provide the raw materials for global growth like Brazil, Canada and Australia.

1. People do not believe the growth can continue in China and India.  They think that slower growth in the U.S. will derail them.  This creates a chance for people to be underinvested in these markets, and when they realize how strong profits are they will belatedly invest.
2. GDP and corporate profits will grow rapidly in these two countries for the next two or three years at a minimum.
3. Chinese investors will shift into the H shares (Chinese shares trading in Hong Kong) which are not overvalued.
4. People want growth, and both of these countries have growth.

We have good-sized positions in India and in Hong Kong (we buy our Chinese stocks in Hong Kong where they are much more reasonably valued than in China). In Hong Kong, the same stocks sell at a 40% discount to its China price in Hong Kong.


We are gratified that our currency theme has been rewarding.  The currencies have gone up considerably versus the U.S. dollar, and we think the currencies could correct at any time.  However, long-term, the U.S. dollar will continue to fall until corrections are made in our national economic priorities.  Today, the Canadian dollar, Norwegian Krone and Euro are all at new highs versus the U.S. dollar, and the pound is rallying as well.

I will be traveling In Asia next week and will try to keep you up on developments there.

Thanks for listening.

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