Five Trends for Q4
Climb the Wall of Worry
As I write this, the preliminary meeting for the Group of 20 largest economies is taking place.
U.S. Treasury Secretary Tim Geithner wants to force the Chinese to inflate the yuan to reflect true market levels. The yuan has been undervalued for years against the U.S. dollar in order to push their export based economy...
This has been the leading factor in global monetary imbalances. And this battle between the two global heavyweights will determine a number of factors in the macro economic situation going forward.
You can profit from the Wall of Worry.
Today, I give you the five specific situations that will determine what goes up, what goes down, and where you seek your profits.
Five topics of doom
Helicopter Ben Bernanke has said that he will do all he can to create inflation out of deflation. He has already dropped the Fed rate — or the cost it charges for banks to borrow money to 0.25%, which is essentially free...
Ben now plans to credit its own account with money it creates ex nihilo, or out of nothing.
The Fed will then buy assets such as government bonds, mortgage-backed securities, and corporate bonds from banks and other large financial institutions. This will fill bank deposits to the brim with money; in addition to holding up real estate prices in the Hamptons, it is hoped it will spur investments in new business, and thus create jobs.
Many people think that this policy will destroy the dollar and spur inflation.
Furthermore, as there is already a surplus in idol manufacturing capacity and large personal and private debt — plus a surplus of cash at the large banks — few people are willing to take out new loans.
Ben is, in essence, pushing on the proverbial string.
On the flip side, it's argued that shrinking credit (in addition to trade wars) created the Great Depression.
2. Currency war is a trade war
As the G20 starts in South Korea, the biggest threat to the global economy is a trade war in the form of currency devaluation.
While Printing Press Ben is saying he will go ape on the second round of quantitative easing, the Treasury Secretary “Strong Dollar” Tim is setting out to convince the rest of the world not to devalue its currency — despite the fact that the U.S. is actively doing so.
A cheap currency and high inflation deflates debts and increases exports. Japan, Israel, South Korea, Brazil, and others have already admitted to selling their currency in order to depress its value.
This is a race to the bottom that is good for no one. It is the first step to tariffs.
Brazil has seen its currency rise abruptly, and has been the first to issue rules against foreign inflows of fast cash.
These currency games are a classic prisoners’ dilemma. Unless all agree to free trade of currency, the one who moves first and hardest will be the winner.
As the U.S. is by far the world’s largest economy and prints the world’s most-used currency, it will be able to slash its value. Thus, it will “win.”
However, in terms of international corporate planning and profits, inflation, free trade, and long-term trust in American style capitalism, Uncle Sam will “lose.”
3. Austerity vs. Keynesian
One might think you can’t solve a debt crisis by going into more debt, but here we are.
The neo-Keynesians who have been in power since Greenspan believe that you spend in bad times “to prime the pump.” The problem is that the politicians (and the fools who elect them) don’t save during the good times.
So you have a situation in which each recession — instead of paying down debt and balancing the budget — the government goes into more debt. Each recession begets a boom and larger debt. At some point, the debt becomes too large... and you have a credit crisis.
This leads you to Europe: France, Greece, Spain, and Italy are now on fire because the politicians made promises during the good times that they can no longer keep. They are attempting to tighten their belts and pay down debt in order to get to return to the good times.
In the United States, we are expanding the promises and going into more debt with the belief we can grow our way out.
(I would point to the last four bubble-bust cycles during the past 15 years and say, “Ben, it doesn’t work.” All that spending simply created false profits in dot-com, housing, oil, and sundry, smaller bubbles from uranium to potash. But then again, I’m not that smart...)
4. Global growth
Can we grow our way out?
Nouriel Roubini, the man who made his bones by calling the last bust, recently gave a talk in Istanbul...
“The relatively fast growth in world economies in the first half of 2010 has started slowing down in the year’s second half.”
“Some factors that contributed the growth performances of developed economies in the first half of 2010 will not continue to exist in the second half, slowing the growth. The growth of the U.S. economy will drop to nearly 1 percent and create a recession-like effect.”
The problem with Roubini is he is always looking for bubbles in need of a pin — and of course, he is right sometimes. It’s a no-risk trade.
The IMF calls for U.S. GDP growth to be 2.3%, and world GDP growth to be 4.6% for 2011.
The IMF is notoriously wrong at these guesses.
5. Winners and losers
There is one thing the Fed is good at, and that is creating bubbles. They have been in the process of creating the next bubble for the past two years.
The only question you need to ask in order to profit is Where will all the new money go?
So far, it’s been in the Chinese and Canadian property markets, metals, and fungible commodities like agriculture.
In the past fifteen years, I’ve made a lot of money by betting in the Fed’s ability to create bubbles. Every asset class, with the exception of the last bubble (housing), will go up. The question is which asset class will be the best performer.
For the fourth quarter, I recommend buying coal companies that export to India and China; buying metals on the dips; and seeking unique situations as they arise.
Stay out of investments that might be subject to harsh currency liabilities — like Toyota Motors (TM) — due to the strong yen.
The trends are clear. You want to be out of the dollar, out of multinationals, and into undervalued countries with rising currencies.
Buy pure plays in coal, uranium, food, and gold. Buy emerging markets like Mongolia, the Philippines, and Chile.
Energy & Capital
Energy Demand will Increase 58% Over the Next 25 Years
After getting your report, you’ll begin receiving the Energy and Capital e-Letter, delivered to your inbox daily.