Liquid Illusion
Periodic market corrections occur and Rotation …. They are Normal and opportunities
But temporarily painful market corrections are a healthy development. Emerging Markets and periodically to correct, and climb the proverbial wall of worry, last longer and rise higher.
The current market correction in metals and energy stocks is a normal, and we have expected. Therefore we have a large cash position, which we will use to buy good stocks when they fall to attractive levels. We want to panic days like yesterday. They offer low prices at which to buy stocks.
Long experience has taught us to buy when others are throwing things away irrational. Yesterday it seemed early one of these periods for us. We are really excited at the prospect of finding some good bargains.
The extreme pessimism that dominated the market psychology on July 26, 2007, was just as we have seen near the bottom of past market corrections.
The gold, metals and equity markets may not have seen the end of this correction, but much of the damage already done. Many stocks are within a few percent of their ultimate bottoms, and when the markets rally, rising will be fast and fleeting … and it will leave many potential buyers on the sidelines.
YEN Carry trade
Part of the panic caused by the fear that borrowing cheap yen by 0.5% per year or less to invest in foreign currencies, metals, bonds and equities will end. A further fear is that a panic all the above groups of investment problems. This is clearly an unreasonable fear and panic at that stage.
Let's look at the facts. If you borrow at 0.5% and reinvest at 5.25% in British pounds, or 6.0% in Australian dollars make a huge spread for your efforts. The Japanese currency must rally to a piece of your winnings removed. Japanese savers, who is the main user of the carry trade is a weaker yen each time he or she sells yen to invest abroad in foreign currency, in order to earn more interest. So downward pressure on the yen will continue until the Japanese interest rates rise more than a little of these levels. They must be sufficiently high to cause the Japanese saver to convince that investing abroad is no longer profitable. In our opinion, the carry trade panic is just another excuse for a market correction. The compensation is set by a desire of traders to take profits.
CHINA
China's trade surplus in June was a record. China's economic growth seems to be a record, a astonishing 11.7% in the second quarter. It is a little boring reporting month after month that China, India, Singapore, Thailand, Brazil, Indonesia, Hong Kong, Korea and many other countries enjoying a record growth. It can be boring, but it is profitable.
PEOPLE are slow to realize that world economic leadership is slipping from the hands the U.S.
In the year 1960 the U.S. was by far the dominant economy in the world. The Europeans were very slow to realize. Even twenty years after the end of World War II, Europe, clung to the illusion that it is still the economic center of the world. At least she hoped so.
Much the same thing in the U.S. today. Today, the U.S. is the transition from an economically powerful nation, much less powerful status. China will, within a few decades, much stronger than in the U.S. Perhaps India will surpass the U.S. as well.
We expect the U.S. suspended its illusion for a long time, perhaps decades, as Europeans did. It must be human nature to remember past glories. American illusions will decrease as the dollar falls.
There are some potential clouds on the horizon … longer term:
1. After the Olympic Games in Beijing in the summer of 2008 will be as the year 2000 in the technology (much of the preparation and construction that exceeds demand)? China will temporarily overbuilt?
2. The American presidential elections and the increase of taxes in the U.S. after April 2008.
3. There is a surplus of liquidity in the system, causing problems in the U.S. subprime, credit markets, etc. are not devastating. If excess liquidity was pumped into the system is finished, watch below. The probable date of this incident? Difficult to say now. We look.
BONDS ….. We keep only the very short term MATURITY the best quality issuers denominated in non U.S. CURRENCY
We have serious concerns about bonds. After a 27-year interest rates fall, why not ten years an increasing interest rates? That is the nature of cycles, and the interest rate cycle is no exception.
A few weeks ago we sold all income-related stocks and bonds for our clients, excluding short-term bonds (less than 2 years duration). All are in currencies other than the U.S. dollar. Our favorites for the past year British government bonds are denominated in pounds, Canadian government bonds in Canadian dollars and Australian government bonds in Australian dollars. We used to German bonds denominated in its own, but the yields were too low. We also owned New Zealand bonds, but sold them by large current account of New Zealand deficit.
WE ARE insist on our themes for the year, and they are still the best themes IN OUR OPINION
1. Growth in energy demand
2. Growth in China, India, developing Asia and Brazil
3. Continued growth in demand for base metals and Precious Metals
4. Continued decline in the value the U.S. Dollar
5. Growth in demand for transport equipment to transport the raw materials for the growth of world
6. Growth in demand for financial services in the capital deliver world growth
As everyone knows these themes are correct, and the investment in these areas have increased for years.
However, if we examine the economy, politics and social issues surrounding these and other issues, our best analysis leads us to conclude that it is still the best themes for the next few months.
We find the opportunities, and we believe that our issues are in sync with what is happening in global markets. If you are interested are in the hiring of Gilde Investment Management to manage your portfolio, please contact us.
Thanks for listening.
Gilde Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment Recommendations and opinions expressed in these reports may change without notice.
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About the Author
Mr. Guild founded Guild in 1971. Prior to founding the company he was an analyst at a bank and a hedge fund. Mr. Guild is a recognized expert in the areas of international investing and economics. He has been a writer and speaker on economic issues for 30 plus years and has been widely quoted in the world media. He holds a BA in economics and an MBA with highest honors.
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