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Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

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Saturday, August 11, 2007

Inflationary outlook

Global markets have entered a new phase. Many pundits are suggesting that this market correction is short-lived, which is true in a sense, but lt this point mark the end of the easy money from property and equities, and lets poise to consider where we should be investing in future. For the last 15 years the global market has undergone a period of monetary expansion. I know you have heard about the wonders of technology and the impact of market liberalisation and productivity gains. But it gets to a point when all those factors are priced into the market and asset prices have no where to go but down. Consider these parameters:
1. Unemployment in western markets where the bulk of consumption occurs is tight
2. Productivity has fallen off considerably as asset prices have undermined consumption
3. Debt creation has reached its limits as wsterners become fully leveraged and home ownership rates have never been higher.
4. Interest rates are tightening after reaching their lows
5. Asset prices are falling from their peaks, giving people with high debts reason to pause
6. Inflation is feeding into the basic cost of living, particularly with high energy, food costs. The factor that has not readily been apparent to us has been monetary inflation, although we had witnessed the associated asset inflation. We were lead to believe that was due to higher incomes, growth in income and employment and easy money. But it was more than that. There was a shift in pricing from market prices to the consumers ability to pay, which itself reflected the ever-presence of easy money. Those days are now over. Inflation and debt liquidation will bring money supply back in sync with global output. We tend to talk about inflation and deflation as if they are univeral phenomena, but the reality is the nature and reason for price increases. Over the last 15 years we have seen strong equity and property prices, whilst in the last 5 years commodity prices have been strong. In future we are likely to see subdued asset prices and higher prices for basic commodities. At this juncture there seems to be 2 ways the market can go - each outcome depending on the governments attitude to inflation. It has a choice of achieving a market equilibrium by allowing prices to rise or credit to fall, but normally its some politically palletable combination. It can respond with:
1. Easier monetary policy: This would involve the Fed ignoring inflation and responding to falling asset prices with an injection of credit or paper money into commrcial banks to support credit growth. Of course this would result in run-away inflation culminating in choice 3.
2. Modest monetary policy: That assumes that the governments respond to higher prices with slightly higher interest rates. Despite the increases in nominal rates importantly the increases maintain cheap money in real terms. Eventually this results in negative real interest rates, but asset holders still benefit from higher prices, but only after loan defaulters have been squeezed out of the market. Governments take this approach because it shifts pain to the poor, whilst protecting the asset rich. This stratgy involves the economy working its way out of problems. The consequence is what might be referred to as a 'lost decade' of low returns that occurred in the late 1970s and early 1980s.
3. Tight monetary policy: This strategy involves staying above the curve, to rein in money supply, to force prices down by raising rates, ending credit expansion. This strategy causes a precipitous fall in markets, though once the correction has ended markets are able to build on a firm footing. It hurts everyone, but particularly the holders of assets.

So basically we are looking at 5 years of subdued growth and stable asset prices, or a precipitous shakeout of asset market and credit liquidation culminating in a rapid transition to economic growth, though a calamitous shift in wealth from those with asset or liability exposure to those with cash. The question is:
1. Does the Fed have the skills to maintain a flat market for 5 years?
2. Will global markets be exposed to exogenous factors that might impose instability, eg. bird flu?
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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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The NZ property market is shaping up as one of the most attractive property investment markets for the next few years. High yielding property and the collapse of the NZD make NZ the perfect counter-cyclical investment if you buy right! In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

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