The market used to be a case of 'buy the rumor and sell the news'. Perhaps times have changed. Times may have changed because of the soap opera, the media and the propaganda. This latest episode of government shutdown and default was nothing more than a new direction in an economic plot which needs to be sold to Main st. America to convince them all is ok. The plot to tell the American people, that the Government has your back. As the story unfolded, the stock market rallied. Apparently it is great news that the USA can borrow more money that they cannot afford to pay back, and even better that the Government is reopened to fast-track the spending. It is always good when your credit card company sends you one of “those" letters that says you have been approved for a limit increase. It is hard not to feel a buzz.
Right now the USA stock market is reacting to that buzz and relief. It will be short lived. Soon the credit card will be maxed out again and the drama will build as these ugly actors we call politicians hunker down for
their 2 weeks of “look at me” political debate. At some stage this story will get old. Viewers will tune out. They have already seen this episode a few times. They know how it ends! While people in the USA may become numb to the whole soap opera, economies like China are numb for a different reason. They are the largest holders of USA treasury debt and have not yet secured enough physical gold to hedge against the $US collapse. Political pressure from China on USA to get a deal done highlights their vulnerability.
Right now China is accumulating physical gold at an alarming rate both on their official reported holdings and the even bigger unofficial stock pile. China is waging a silent war to purchase gold to hedge against inflation and the potential collapse in confidence in the $US. This latest round of USA debt drama had elements of the old, tail wagging the dog scenario. Political parties bickering, debt default all aiming to fuel a push for the depreciation in the $USD. This depreciation is necessary to promote growth in local jobs by making USA exports cheaper after currency conversion and at the same time imports more expensive. The USA currency war is being waged both on a Federal Reserve front with the USA Government marching to the same drum beat. The Government, through the Federal Reserve will get their $USD depreciation one way or the other. No doubt the latest round of shutdowns and debt default debates have given more than enough cover for the Federal Reserve to postpone a “taper” and perhaps even increase Quantitative Easing. The currency wars are really heating up to the point that they are about to internally combust into a ball of fire.
Continued QE WILL depreciate the $USD and drive gold prices. Other commodities such as oil will also move to the upward side. The interesting asset class will be equities where psyche of the market will be a whole different story. The market is trading, across the board at approximately 18 times earnings. It has also seen fresh new highs in recent times.
When I look at equities from a long term perspective and I try and "price" the market, I like to examine the following:
- Where the market is trading now
- What sort of returns are investors going to get at current market value
- What returns will an investor need to feel comfortable being in the investment
- The likelihood of growth both in earnings and dividends
- The economic outlook both from a micro and macro perspective including fiscal and monetary policy trends.
- Other investment opportunities in different asset classes both at current time and over prospective investment period.
- The eventual potential exit price.
Navigating this period from an investment perspective looking at the above points is difficult. The market is currently trading near its all time high. Earnings season has started in a weak manner. We are awaiting
employment numbers which were delayed due to the government shutdown but I am anticipating these to also be poor. The retail sector is still sluggish and home builder sentiment has slipped to its lowest reading since July according to the NAHB/Wells Fargo Housing Market Index. The report directly relates to the interest rate rises that have impacted on new homes and also refinances. As I have said in previous blog entries, this is an interest rate recovery. As interest rates rise the economy, in its most fragile state in years will be hit hard. The question is now how will the Federal reserve act in the face of a potential stock market fall? What decisions will it make if unemployment figures are soft? History says that they will act decisively and inject more QE liquidity into the economy to prop it up. This would support the equities market
when it should not be supported. I feel it would be more bullish and positive for Gold.
My market tips are that even though the Dow and other equities markets should be falling perhaps the Federal Reserve will intervene to stop this. The one sure play is to be long gold. Gold is currently trading at $1,320 and change an ounce which is up around 2%. For those of you who read my blog yesterday Barrick Gold ($ABX) is up over $.88 or more than 5% today from yesterday’s price. I am expecting Newcrest Mining ($NCM.AX) listed on my beloved Australian equities market the ASX to have a strong gain today also.
I am also tipping a rocky road ahead for the DXY which is a $USD index which measures the performance of the $US against a basket of other currencies. I would be short the DXY and as I write this blog it is
currently down 1% for the day trading at $79.66. I still think it is going much lower long term.
Time will tell, the soap opera will roll on, like sand through the hourglass…
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