The U.S. dollar is down by 13% in the last months.
In our opinion, the U.S. intends to devalue the dollar by at least another 10% in the coming months. Many countries are trying to competitively devalue their currencies and are using easy monetary policy to accomplish the goal. This is creating a liquidity boom in many countries. Liquidity is flowing into the area where growth and profitability are the greatest: the developing world, and more specifically those industries and companies who work with or produce commodities.
Will the rally in developing markets and some developed markets continue?
Yes. Historically, such liquidity events continue for years, but of course there will be corrections along the way.
In our opinion, profit growth will be greatest in countries in the emerging world that export commodities, and secondly in developed country companies that benefit from the growth of the emerging world or those companies and industries that benefit from inflation.
The emerging world is currently experiencing inflation, and the problem is expanding. The emerging world is rapidly growing and to continue their growth they have repeatedly said that they will invest in infrastructure. To build infrastructure you need commodities: coal, oil, nickel, copper zinc, steel, and others. This creates an immediate demand for commodities, but it takes many years to increase the supply. Unsurprisingly, a supply demand imbalance has developed; supplies are flat and demand is up.
1. Commodities are needed to build infrastructure so there are years of visible growth ahead for the commodity producers.
2. Commodities along with income producing real estate, gold, silver and growth stocks are where investors go to protect their assets from inflation.
As regular readers know, we were bullish on the emerging markets of Asia well before the consensus joined us in this view. However, we are not ready to sell as the consensus can grow more optimistic. Historically, it has taken about 4 or 5 years of capital inflows into emerging markets to create an investment bubble. Thus far, we are only one year into a capital inflow into the area, and we believe we have another 3 or 4 more years to go before the investment will become so popular that it is time to move on to other pastures.
A Review of Our Market Calls
Reviewing our long term calls on gold, grains and oil, and our shorter term calls on various investments:
Recently, we have had several good market calls which have created gains, and we have had two calls which are unprofitable thus far:
1) We have been bullish on gold since we first mentioned that we owned it on June 25, 2002; slightly over 8 years and 3 months ago. At the time of that newsletter, gold was selling at $325/oz, and it is currently at $1,345/oz. Over this period, we have repeatedly advised investors to hold a core position in gold and buy on the dips. We have also said that traders should buy the dips and sell the rallies.
2) We have discussed oil on these letters for many years. We got bullish on oil in these letters on February 11, 2009. At that time we stated that “At some time in the next few months, energy prices should move upward because, although demand is falling, supply is falling fast as well. Global oil production is falling 2-4 % a year in our opinion.” Since that date oil has moved from $35.94/barrel to the current price of $82.66/ barrel.
3) A month ago, on September 14, 2010, we discussed our bullish view on the following nine emerging markets: Singapore, Malaysia, India, China, Indonesia, Thailand, Colombia, Chile, Peru, and their currencies. In the month since we reiterated this bullish view, these markets have appreciated in U.S. dollar terms by the approximately following amounts:
4) We have been less bullish recently on Brazil, but are monitoring their elections.
5) On September 9, 2010, we discussed the reasons why the U.S. stock market could rally. Since that day, the U.S. S&P 500 is up about 6%.
6) We have been bullish on food related investments since December 31, 2008 when we wrote: “Grains Have Bottomed in Price. Grains- The worlds growing population needs to eat, and grain stockpiles are low. Expected global grain production will be moderate this year, and grain stockpiles will be even lower in a few months. Grains are also priced in U. S. dollars and will benefit as the dollar falls in buying power.”
Since our advice, corn has rallied 36%, wheat has rallied 16%, and soybeans have rallied 20% (since December 31, 2008, corn has risen from $4.07/bushel to $5.55/bushel, wheat has risen from $6.10/bushel to $7.10/bushel, and soybeans have risen from $9.80/bushel to $11.78/bushel).
7) We have been saying short the Japanese yen for three weeks, and in the meantime it has rallied by over 4%, so our advice has not yet proven accurate.
8) We have also been reiterating our long-term bearish view on long-term bonds since August 23, 2010; frequently warning our readers to stay out of longer dated U.S. government bonds. During that time long term U.S. government bonds have rallied a couple percent, but we still hold to our view that the risk in long-term bonds far outweighs their potential return.
Therefore, our long-term calls have been correct on gold and food/agriculture. Our recent bullish call on the nine emerging markets and the U.S. stock market has also been correct as they have gone up.
We acknowledge that we have been bearish on two investment areas that have risen (the Yen and long-term U.S. bonds).
Grain prices have exploded higher in recent days, the USDA admits that crop yields will not be as large as predicted.
Accordingly, many farm equipment and fertilizer stocks rose as did grain prices.
We continue to be bullish on farm related investments for the next few years. Our often-mentioned theme of increased consumption of protein by emerging countries is making itself felt in the markets and investors are enjoying the benefits.
The U.S. employment numbers were bleak last week. We predict that the U.S. Federal Reserve will begin an aggressive program of bond buying and targeting inflation at higher rates to avoid deflation and to set the world on a further inflationary trend. In our opinion, this will happen at the Federal Reserve meeting on November 2, 2010.
Summary and Recommendations
We continue with the same recommendations.
1. Hold long positions in gold sell some trading positions on spikes. We may get some consolidation at any point between here and $1600. Use price dips to add to positions. For our clients, we have been taking trading profits periodically while holding core positions. At $1,500 we anticipate taking some bigger trading profits.
2. Continue to hold long positions in the emerging markets we have favored: Singapore, Malaysia, Indonesia, India, China, Thailand, Colombia, Peru and Chile. This view is a long-term position, and we have good profits. We may add to our positions on dips, and will mention other countries as they become attractive.
3. Continue to hold long positions in food related stocks, grains, farm equipment, etc.
4. Continue to hold some U.S. stocks especially commodity and manufacturing related companies that export.
5. Continue to hold the currencies of the emerging markets mentioned above.
6. Continue to avoid U.S. long term bonds.
7. Continue to short Japanese Yen.
Thanks for listening