Rising
Markets See Brighter Times by
Mary Anne & Pamela Aden - June 26, 2009
It’s
been a wild ride this past year, but the markets are now on
the upswing. Following a rough year where most of the markets
dropped sharply, then stayed dull for a while, they’re finally
headed higher. Most important, these are significant rises.
GOLD ON THE RISE
Gold, for instance, surged about $100 last
month and, despite normal ups and downs, a renewed rise within
its major bull market is clearly underway. This is being reinforced
by the U.S. dollar, which is starting to break down, signaling
that a bear market decline is just getting started. That is,
the currency markets are up and so are commodities in general.
Stocks around the world have been generally
moving up too. Bonds, however, are down significantly as long-interest
rates head higher. At the same time, short-term rates keep
falling (see Chart 1).
What does this mean?
First, it means that many of the major trends
are changing. The U.S. dollar is going to fall further, while
gold, silver and some of the strongest gold shares will continue
to move higher. That’s also true of the major currencies,
as well as the global stock markets. These should all do well
in the months ahead, and probably beyond.
Second, the decline in the dollar is very
important. It means that investors are beginning to feel safe
again and they see no need to hold dollars as a safe haven,
like they did before when the crisis was intensifying and
people were running scared.
On the contrary, investors are coming to their
senses. They see that this year’s budget deficit is going
to reach about $2 trillion and the dollar can’t hold up under
the weight of this large debt. Investors are returning to
the fundamentals and they know that all of this easy money
is going to result in inflation. That’s why bond prices are
falling too because they’re very sensitive to inflation.
PLUNGING LIBOR RATE: A banking recovery
sign
The Libor interest rate has plunged for a
different reason. This rate has its pulse on the global banking
system and when trouble became apparent to everyone, and things
were at their worst, the Libor rate soared to near 6%. Now
that it’s way below 1%, it’s telling us that the banking recovery
will likely continue.
Remember, the markets tell the story. They
always lead the economy. More important, the markets are now
all in synch and they’re telling us the same thing. It’s a
fascinating message and a fascinating time.
Stocks, for instance, have been moving up,
signaling the economy is going to get better. The global stock
markets are reinforcing this. The rise in commodities and
gold is another indication that the worst is behind us, and
so is the fact that silver is stronger than gold.
These markets are all pointing to no deflation
ahead. In fact, by moving higher, the likelihood of a recovery
is increasing, followed by eventual inflation downstream.
INFLATION / DEFLATION DEBATE
Meanwhile, the inflation-deflation debate
rages on. Many are convinced that deflation and/or a depression
is not only likely, it’s inevitable. The main reason why is
due to the massive magnitude of the current crisis since it
cannot be compared to most other crises or recessions, which
pale in comparison.
While that’s true, the markets are saying
something else. And we learned a long time ago to never underestimate
the power of the markets. In other words, it would be foolish
to ignore their message.
We humans have a tendency to hang onto our
preconceived notions. That’s fine but it’s also important
to keep an open mind, especially when it comes to the business
of investing. Be flexible and regardless of what your personal
future scenario is, don’t fight the market trends.
Keep in mind, markets will turn up when the
general feeling is negative and skeptical. The news usually
improves later, and all of the reasons why the markets are
moving the way they are will become obvious with time.
REPERCUSSIONS STILL TO COME
There’s no question that this crisis has been
the worst since the Great Depression and downright scary,
which is something most of us have never experienced. The
entire financial system was on the brink of disaster and an
unprecedented amount of wealth was destroyed worldwide. The
deflationists argue that this cannot improve so quickly and
the worse is still coming. That could be true but if that’s
what the future holds, it doesn’t look like it’s going to
happen in the near future.
We’d be the first to agree that the fundamental problems are
extremely serious but we also understand that the monetary
response to these problems has been mind blowing. The amount
of money involved is hard to grasp. This has not been a normal
response to the crisis. It’s been overkill, so it’s quite
possible that things will improve from here as an effect of
this monetary overkill, at least for the time being.
As our friend Bill Bonner points out, “this
monetary response has been three times more (adjusted to today’s
dollars) than the U.S. spent to fight World War II. It is
12 times more (relative to GDP) than the total committed to
fight the Great Depression.” That’s a lot of firepower and
it certainly provides food for thought.
Plus, we’ve noticed that sentiment is beginning
to change and that’s half the battle. We were recently in
the U.S. and we were surprised to see people shopping, eating
out and spending. That coincides with the strong rise in consumer
confidence and it’s a huge change compared to just seven months
ago when people were as gloomy as they could be.
Aside from better markets and a few signs
the economy appears to be improving, we also recently saw
an inflationary straw in the wind. Import prices soared at
a 19% annualized rate. And while one month does not establish
a trend, this is probably the first sign of what’s coming
and it’s well worth watching.
WHEN CHINA TALKS, IT PAYS TO LISTEN
Then there’s China. Regardless of how you
feel about China, you have to admit that they are money savvy.
In less than half a generation they’ve transformed China from
a poor rural country into one of the world’s richest and most
powerful. This is simply amazing, so it pays to watch what
China is doing.
Currently, China is concerned because it has
too many dollars and U.S. bonds. China is also concerned that
the Western monetary stimulus is going to trigger global inflation,
along with weak bond markets and a falling dollar, so it’s
taking action.
China is cutting back on their U.S. bond purchases
and they’re buying gold in significant amounts. China has
increased its gold reserves by an impressive 76% in the past
six years. This is obviously to hedge against rising inflation
and a weak dollar, which explains why China is also buying
commodities.
As the Royal Bank of Canada recently reported,
“China is stockpiling global commodities such as copper and
iron ore as part of a reallocation, amid concern that the
value of its dollar assets may decline. It’s part of an overall
desire to decrease its exposure to dollar assets.”
China is also expanding all over the world.
China is buying land in South America and Africa, other metals,
and they’re building up their reserves of other currencies
and bonds. While they’re at it, they’re spreading goodwill.
We’ve seen a small sample of this first hand
here in Costa Rica. The Chinese are here and, for starters,
they’re building a new, modern, soccer stadium. The Costa
Ricans are happy since soccer is their passion and based on
what we read, this is happening all over the world.
Like we said, the Chinese are savvy and they’re
patient. They see what’s happening and they’re acting rather
than reacting, which is what many other nations are doing.
The bottom line… aside from watching the markets, we’d keep
watching China too, and we’d continue buying gold.