Thursday, December 04, 2003
There is no doubt to anyone that economic numbers have improved very gradually over the past few months. While a lot of these statistics is polluted by hedonic adjustments and other manipulations, many folks have acted on them and called a bull on the stock market. So far their long trades have been rewarded, and I must give credit where credit is due. Speculators are also encouraged by the fact that its Presidential Election Year in 2004 --- traditionally a strong season for the economy and stock market as government agencies and private enterprises supporting the incumbent President fight tooth and nail to pump-prime the financial and economic system and boost stock prices. So far, artifically low federal funds interest rates and three tax cuts have worked their way through the economy, reflating an economy that has just gone through a massive bubble phase induced by excess liquidity to begin with, and inducing even more speculation is financial assets and property.
Looking down the road, I see many systemic threats to the US economy, chief among them being the unsustainable US trade deficit, an almost certain decline in the US dollar by as much as 40% within the next year, continued over-valuation of financial assets especially stocks, and the increasing attitude of the Bush Administration towards trade protectionism.
The US has incredulously started a fight over, of all things, women's lingerie --- claiming a need to protect the jobs of brassiere factories in the US from the Chinese imports. Fingers point to Karl Rove, chief political architect of Bush's campaign first as governor of Texas and then as President, for leading the administration to imposing tariffs first on steel, and then on selected textile items including women's undergarments. Trade protectionism could derail an already very fragile US economic recovery and lead to the destruction of even more US jobs.
Looking down the road, I see many systemic threats to the US economy, chief among them being the unsustainable US trade deficit, an almost certain decline in the US dollar by as much as 40% within the next year, continued over-valuation of financial assets especially stocks, and the increasing attitude of the Bush Administration towards trade protectionism.
The US has incredulously started a fight over, of all things, women's lingerie --- claiming a need to protect the jobs of brassiere factories in the US from the Chinese imports. Fingers point to Karl Rove, chief political architect of Bush's campaign first as governor of Texas and then as President, for leading the administration to imposing tariffs first on steel, and then on selected textile items including women's undergarments. Trade protectionism could derail an already very fragile US economic recovery and lead to the destruction of even more US jobs.
Gold has become the Yellow Stallion as it has closed above US$400 per ounce --- a price level deemed to be a watershed event for both precious metals bulls and casual observers alike. As the US dollar continues its inevitable descent, gold amassed a level of strength not seen in recent years, rising almost every day and even shaking off momentary bounts of dollar strength to hold its ground. Silver has followed gold on the way up as well, closing above US$5.40 for the first time this couple of years. The fundamentals of the bull market in silver is even stronger than that for gold, because silver is running a larger supply-side deficit and the market capitalisation of the metal is quite a lot smaller than that of gold. This has led many analysts to believe that while gold and silver are in a multi-year bull market, silver will outperform gold in the medium to long term. I do not share this conviction. Sure, silver could well race ahead of gold in terms of percentage gains, but I think gold will be the true performer over time; the reason being that gold has consistency garnered more investment attention than silver, and is increasingly being accepted as a store of value and a safe haven with which to hedge against the competitive depreciation of major currencies like the US dollar and the Euro.
Gold is like an insurance policy to hedge against the devastating effects of a collapse in the fiat money system. It's almost perfectly negative correlation to the US dollar is one evidence that the demand of gold increases as the value of the US dollar falls. The bull market in commodities including gold in recent months is also the market's way of signalling that it anticipates a period of strong inflation. This reinforces my view of the decade (2000-2010) as a decade in which we will have below-trend economic growth coupled with high inflation --- a repeat of the stagflationary '70s. John Mauldin calls this the Muddle Through Decade, and I believe his views will be validated in no time. My take is that the stock market will osciallate between the October 2002 lows and the current highs for the rest of the decade, which means that a buy-and-hold investor of US equities will not experience much meaningful investment success. I am also bearish on US bonds because foreign corporations and governments will eventually become sellers of US bonds as they cut their holdings in response to a falling US dollar --- leading to falling bond prices and higher interest rates. For this decade, I therefore place an outperformance call on precious metals and high quality precious metal stocks like Newmont Mining and Pan American Silver, and an underweight call on US equities and US bonds.
Gold is like an insurance policy to hedge against the devastating effects of a collapse in the fiat money system. It's almost perfectly negative correlation to the US dollar is one evidence that the demand of gold increases as the value of the US dollar falls. The bull market in commodities including gold in recent months is also the market's way of signalling that it anticipates a period of strong inflation. This reinforces my view of the decade (2000-2010) as a decade in which we will have below-trend economic growth coupled with high inflation --- a repeat of the stagflationary '70s. John Mauldin calls this the Muddle Through Decade, and I believe his views will be validated in no time. My take is that the stock market will osciallate between the October 2002 lows and the current highs for the rest of the decade, which means that a buy-and-hold investor of US equities will not experience much meaningful investment success. I am also bearish on US bonds because foreign corporations and governments will eventually become sellers of US bonds as they cut their holdings in response to a falling US dollar --- leading to falling bond prices and higher interest rates. For this decade, I therefore place an outperformance call on precious metals and high quality precious metal stocks like Newmont Mining and Pan American Silver, and an underweight call on US equities and US bonds.
