Global Markets Up, Up, And Away

The world markets moved like Superman last week.  They lifted off and moved higher in a decisive manner.  In the ongoing contest between bulls and bears, the bulls have had the upper hand in many markets.  Wall Street also moved firmly into the bullish camp with U.S. stocks eclipsing their April 2010 peaks.  To us this means that the technical short-sellers who had been bearish on U.S. stocks and expecting a correction bought back their short positions and took their losses.  

 Pullbacks will come, but the trend is up for: emerging markets in Asian and Latin American, commodities, including precious metals, base metals, oil, and foods.  This upward trend can also be seen in the strong Asian currencies and for U.S. stocks.

 The trends are up for 3 reasons:

1.         The U.S. Fed and other central banks are creating money.

2.         The weak U.S. dollar is causing dollar holders to move into non-dollar assets.

3.         Bond-holders who are worried about the low-yields are moving into stocks and
             commodities to improve their returns.


The Fed Fuels This Lift-Off

Rather than boring you by repeating our thesis that the Fed has no choice but to inflate, I will share an excerpt of an op-ed piece written by Federal Reserve Chairman Ben Bernanke.  The article was published the day after the Fed announced that they will be buying 600 billion dollars in treasuries over the coming months.  If anyone had any doubts that the Fed action is focused on increasing the price of assets like stocks, commodities, and in the long-term real estate, this op-ed piece should put those doubts to rest.

Mr. Bernanke begins the article by giving a history of the Fed intervention in 2008 to reduce short-term interest rates and to buy over $1 trillion in bonds and other assets.  He states, “These steps helped end the economic freefall and set the stage for a resumption of economic growth in 2009.”

The Fed has a dual mandate to promote a high level of employment and low stable inflation.  Bernanke goes on to say that unemployment is too high, and continues, saying: “Today, most measures of underlying inflation are running somewhat below 2% and a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.  Although low inflation is generally good, inflation that is too low comprises risks to the economy—especially when the economy is struggling.  In the most extreme case, very low inflation can morph into deflation [falling prices and wages], which can contribute to long periods of economic stagnation.”

He goes on to point out that that spare capacity in the economy can be used to increase employment and growth, and that we should not worry about inflation being caused by these policies.

As our readers know, we believe that the Fed sees the potential for a Japanese type of long-term deflation in the U.S., and that they will do whatever they can to avoid such a politically unpalatable outcome. Their strategy is to try and get confidence up, spending up and investing up.  Toward this end, they have been printing money, buying bonds and thus creating liquidity.  This liquidity has flowed and will continue to flow into U.S. and foreign stock markets (especially the fast growing markets of the emerging world), as well as commodities, and eventually real estate.

Many of you may remember my recent conversation with Jim Sinclair where we discussed the Fed’s expected action which has now taken place.  Jim pointed out that the Fed officials would continue and expand their campaign of talking up the expected inflation rate so that savers would see the need to become investors, investing in new company formation as well as increasing their stock, commodity and real estate purchases.

There Is No Doubt That Gold Has Plenty of Buyers

The three reasons for upward market trends listed above are part of the explanation for why gold has a large number of buyers; another part is that the world monetary system needs to be revamped.

Robert Zoellick, who has been the president of the World Bank since 2007 came out in the Financial Times and said that the new monetary system he envisioned should “involve the dollar, the euro, the yen, the pound, and a renminbi that moved toward internationalization…” Zoellick goes on to say, “the system should also consider employing gold as an international reference point of market expectations about inflation, deflation, and future currency values”.

In our opinion, Zoellick has part of the right idea…gold could and should be an excellent component of the system.  Zoellick understands that the world will have a hard time without a better monetary system, yet the new system (when such a system is implemented) must be based upon a reserve currency.  The parent country of that currency must have a conservatively managed, well-capitalized banking system, and prudent monetary and fiscal policies.  Ideally, they will employ some connection to gold in valuing their currency.

The U.S. dollar is the world’s reserve currency today.  A currency crisis exists because developed country bankers took on too much leverage and too much risk.  Further, U.S. and other developed country politicians have been employing irresponsible fiscal policies for decades.  Now, there is a debate about the monetary policy of many nations and we can expect this debate to get louder in January 2011.  In the meantime, we expect that demand for gold and other precious metals will continue to rise.


Summary and Recommendations

We still adhere to the same themes and investments that we have been discussing:

Investors should continue to hold gold for long-term investment.  We have been bullish on gold since June 25, 2002 when it was selling at about $325 per ounce.  In our opinion, it will move to $1,500 and then higher.  Traders should sell spikes and buy dips.  The appreciation in the price of gold since June 2002 has been about 330%.

Investors should continue to hold oil-related investments. There has been some recent oil-related news that has driven oil to over $87.00 per barrel.  A negative news event is that there will be an increasing supply from Iraq.  We have been bullish on oil since February 11, 2009, at which time oil was trading at $35.94 per barrel.  The price of oil since February 11, 2009 is up about 140%.

Currencies:  For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the euro.  As we mentioned in our September 14th letter, we like the Singapore, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies.  We would use any pull-backs in these currencies as an opportunity to establish long-term positions.  Since September 14, 2010, these currencies have appreciated versus the U.S. dollar by the following amount: Singapore dollar +3.3%, Thai baht +8.2%, Canadian dollar +2.0%, Swiss franc +2.9%, Brazilian Real +0.5%, Chinese Yuan +1.2%, and Australian dollar +6.7%

Investors should continue to hold shares of growing companies in India, China, Singapore, Malaysia, Thailand, Indonesia, Colombia, Chile, and Peru.  We have been recommending these markets in these commentaries since September 14, 2010, and we would use any pullbacks as an opportunity to add or initiate positions for long-term investors.  Stocks in these countries have appreciated in U.S. dollar terms the following percentages since September 14, 2010:

Singapore 12.1 %
Malaysia  4.7 %
India 13.9 %
China 18.4 %
Indonesia 16.1 %
Thailand 14.7 %
Colombia 13.2 %
Chile  8.1 %
Peru 22.8 %

We believe long-term investors should continue to hold food-related shares such as grains, wheat, corn, soybeans, and farm suppliers.  Since we said the grains had bottomed on December 31, 2008, these have all appreciated substantially.  We see more price rises ahead.  Since December 31, 2008 in the price of corn is up about 41%, wheat is up about 18%, and soybeans are up about 35%.

We believe U.S. stocks can rally further.  Our reason for becoming more bullish on U.S. stocks on September 9, 2010 is that over the longer term, liquidity formation through QE will create demand for many assets, including U.S. stocks.  In the short-term, U.S. stock market indices could pull back as the indices are near resistance areas.  Traders may want to take some profits, but stocks are assets that can grow, so liquidity finds its way into them.  Since September 9, 2010, the S&P 500 Index is up about 9.8%.

Thanks for listening.