Where to place your money during this recession

An article in the San Diego Tribune offers some investment advice in these hard times. I have some other advice for you, which you might like to consider after reading this article, which I find only modestly helpful.....mostly for its factual information.

Gold is far from over-valued based on historic measures. Based on the previous three cycles, the dow jones index vs gold price can go to 4, giving a gold price of over $US2,400/oz. Adjusted for inflation, gold is still cheap. In fact, it was only lasy year that it surpassed its old high of $780/oz – set 30 years earlier. But there has since been 30 years of inflation, compounding at 3% per annum.

Gold is not simply a hedge against inflation. It is a hedge against debasement of currencies. In a world where all major governments are debasing their currencies, we are looking at currency relativism. The only strong or 'hard' currencies are the commodity producers like Australia, Canada, NZ, Brazil and South Africa. Because of their cheap labour, resulting from structural liberalisation in the post-communist (liberalised collectivist) era, you can also consider China, India, Brazil as attractive emerging markets.

There is not going to be a collapse in China anytime soon because this is a 'super cycle'. China has plenty of cheap labour, and that will mean Western factories will continue to invest in their country. The softening of the global economy offers reason for China to stimulate domestic demand, as Western countries previously did. So these economies are attractive.

Why is Japan’s currency too strong? The US is simply debasing their currency at a faster rate than Japan. You can rest assured that Japan is going to change that very soon, as it contends with a public debt of over 200% of GDP and diminished export competitiveness. So this is more economic or simply currency relativism.

Bonds offer a poor yield in the USA, so you need to look at short term emerging market or hard (commodity) currency markets like Australia, NZ, South Africa and Canada, however even these markets are pretty volatile, so you have to trade opportunities.

Real Estate in the USA or Japan is ok, but gold stocks is by far the best opportunity.

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Andrew Sheldon www.sheldonthinks.com

Bond yields breaking downtrend?

Some interesting developments in markets of late. The real yields on long-winded treasuries have broken their downtrend after the US Federal Reserve engaged in subsidising of the banking system for a time. Does this herald a period of rising interest rates? If you are worried about gold investments, result assured that inflationary pressures will keep Ben Bernacke well behind the curve. I suggest these rates will pull back when new inflation numbers are presented. I think the Fed is not likely to raise rates just yet, and I think these yields will fall once again.

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Andrew Sheldon www.sheldonthinks.com

Treasury yields close to historic lows!

The inflation-adjusted yield on US treasuries according to my charts are about to reach its previous low, so that should not only spark a sell-off in bonds, but also a sustained rally in stocks. There is no question in my mind that the broader equity market will attract interest as well, but at some point fundameentals will result in a flight in portfolio funds away from broad equities and into commodity based equities and derivatives. Whether minerals, precious metals or agricurtural commodities, we can expect a significant rally yet in commodities.


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Andrew Sheldon www.sheldonthinks.com.

Debt market outlook

Attached is a todays news report from Bloomberg - see http://www.bloomberg.com/news/markets/bonds.html. My comments in bold brackets.
`Investors started to push bonds higher again in afternoon trading as crude oil and natural gas rose to records on concern a storm heading for Florida may threaten production platforms in the Gulf of Mexico`.``There is this underlying demand for fixed income which has restrained the increase in yields'' said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union in New York, which manages $2 billion in debt. [Doesn`t he have this around the wrong way. Aren`t the high yields attracting demand for US treasuries, pushing up bond prices, thus reducing yields. ie. Supply-demand. I`ll have his job].

Auction
The price of crude oil surged to $67.40 a barrel in New York, up 49percent from a year ago. [How many economists predicted that? Only a few]
Treasuries also benefited as the government sold $20 billion of two-year notes at a yield of 4.014 percent. A category of bidders that includes foreign central banks bought 44 percent of the debt, the most since September. There were $2.28 of bids for every $1 sold, compared with the$2.14 average for the previous 12 sales. [Not surprising that foreign bidders dominated given that US investors are still pooring money into real estate. So expect higher demand for white goods - durables, sustenance of the boom a bit longer, but those US treasury yields are now 4% - not1%, so the US deficit is going to rise greatly. The US is paying more for oil, its paying higher interest on its foreign-held deficit, and the demand for foreign-manufactured white goods will be up. So long as property prices are rising stronger than interest rate payments, US house holds might feel comforted by the high level of economic activity, at least until house prices fall. A few bad numbers could easily kill a Japanese recovery, starting with high oil prices. Mind you the Japanese don`t relyon cars nearly as much as the Americans. Chinese factors do. But oil is likely a bubble too, and like housing, it will go higher. Certainly to$US75, perhaps $US100/bbl if the US Fed start cutting interest rates prematurely to maintain activity. Lastly, US imports will rise (ie. higher deficit) because Americans are paying more for Chinese goods - thanks tothe US deficit. Since the US has no competitive advantage in the Chinese product fields, this does not give the US a competitive benefit...rather Indonesian might benefit over China].``The 4 percent coupon may have enticed some people looking to park moneyin the short end of the curve,'' or shorter- maturity debt, said Rick Klingman, head of U.S. Treasury trading in New York at ABN Amro Inc. The firm is one of the 22 primary dealers of U.S. government securities that are obligated to bid at Treasury auctions.The so-called yield curve may have flattened to the point where two year notes are attractive, Klingman said.Two-year yields rose to within 18 basis points of 10-year yields today,the narrowest since the start of 2001, reducing the incentive for investors to buy a longer-dated, and thus riskier, 10-year security. Thegap has shrunk from 211 basis points in June 2004 as investors pushed up short-term yields in response to the Federal Reserve's 10 interest-rate increases. [An inverted yield curve signals a recession. Every war in recent history has been associated with high oil prices and recession].

Durable Goods
HomesOrders for durable goods tumbled 4.9 percent in July, compared with a riseof 1.9 percent in June, the Commerce Department said. A decline of 1.5percent was expected, according to the median forecast in a survey by Bloomberg News.Later, a government report showed sales of new homes unexpectedly rose toa 1.410 million annual rate last month. A drop to 1.328 million from 1.324million was expected, according to the median estimate of economists surveyed by Bloomberg. [See comments above].
Some strategists predict the rally will be short-lived.Ten-year yields ``just don't make a lot of sense,'' given the Fed is goingto keep raising benchmark rates, said William Prophet, an interest-rate strategist in Stamford, Connecticut, at UBS Securities LLC. The securities are ``definitely rich,'' he said. Ten-year yields will probably rise to about 4.40 percent next month, said Prophet. [Unless demand for long bonds remain strong because of uncertainty, ie. fears of asset erosion].

Is the US Deficit a problem?

I've been studying the US market for some time, and by necessity, the Chinese, Japanese & EU as well. There were times when I feared a collapse in the market, at least before I'd get the opportunity to complete my analysis of the market.

I have come to the conclusion that:

1. The deficit is a concern but not a critical problem
2. Focus on the trade deficit has ignored the structural changes that the US is going through
3. The inadequacy of the national accounts in providing an accurate assessment of the market.

The problems as I see them are the following:

1. US Structural issues: The US is not addressing some serious structural flaws in its society. The problems are the over-reliance on hydrocarbons for transportation fuels. The US needs a better rail service. Government intervention into the money supply has resulted in a blow-out in property prices, which is fuelling imports, and a decline in the national savings rate. US corporations are 'slashing & burning' US jobs to move production facilities at home with though thought to the long term impact of those moves. They should remember that ex-employees are also consumers of their products.
2. 
   

There are several elements to the US deficit issue, which arise on its several accounts:

1. Merchandise Account: The US has experienced a decline in exports, whilst imports have continued to soar. This 'statistical fact' is taken as evidence that the US has lost its competitive edge. This might serve the interests of US companies seeking concessions, hoping to sway public opinion, but it must be recognised that a great many US companies have moved manufacturing capacity offshore. The best indication of this are Capital Account statistics, which records the flow of investment funds abroad, as well as the income received.
2. Services Account: The US has also experienced a decline in its services about, though its far better than the trade account. Regardless, we might expect to see the same movement of jobs offshore as consulting, banking, etc is undertaken from regional offices.
3. Capital Account: The Capital Account statistics fail to reveal offshore earnings by US companies. Every year, US corporations are increasing investment in offshore markets, recognising that these markets are where the growth is occuring. Rather than repatriating profits to the US (which would improve the Capital Account), these companies are re-investing profits in additional production capacity. We are not likely however to see this until US demand falls. In this case, we might expect the flow of investment funds out of the US, since markets like China remain firmly export-orientated. Without a strong US market, opportunities for growth in China would decline.

Whilst I don't see the deficit as a risk, the is however solid prospects for higher inflation. But thats another story. A 'gold story'.