UPDATE - Global stock markets continue to bounce around as investors seek clarity from the confused establishment. Mr. Giethner's recent speech about "a plan without a plan" weighed down on investor sentiment and caused heavy selling on Wall Street. It seems as though Mr. Obama's administration has indeed brought about "change" but could it be change for the worse? So far, the new government has done nothing except promise that they are going to borrow and print trillions of additional dollars! What a great idea! Remember, that the ongoing credit contraction was caused by excess credit, over-leverage and ridiculous consumption in the first place and now the "cures" being offered are more debt, bigger deficits and even more consumption. Never underestimate the genius of politicians!
At this stage of the game, the officials should step aside and let the markets clear out this mess. However, if they are really itching to do something, then they should enact laws which help the distressed homeowners. Rather than bailing out highly incompetent thugs on Wall Street, Mr. Obama's stimulus plan should assist the over-stretched homeowners who were conned by greedy bankers into believing that home prices never fall! The US establishment must immediately re-structure the outstanding mortgages by extending their tenure (thereby reducing monthly repayments) so that America avoids another wave of foreclosures. If the US government doesn't do this, American consumption won't revive and its economy will continue to struggle. Saving bankrupt financial institutions by printing trillions of dollars isn't going to achieve anything as 70% of US GDP comes from consumption! And let me assure you that the American public couldn't care less about Mr. Geithner's brilliant idea of buying toxic assets off banks! What the American public needs is immediate help with regards to its debt repayments. If Mr. Obama and his comrades can find a way to bring about this "change", the US economy will be able to come out of this hole. Otherwise, by the time his tenure is over, Mr. Bernanke will become the world's best confetti printer!
As per our expectation, the economic news continues to stay grim. However, it is worth noting that the global stock markets aren't breaking below the lows recorded last fall. The Dow Jones has now tested the lows a few times, but every time, strong buying comes in towards the end of the session. I honestly couldn't tell you if this is the work of the "invisible hand" but frankly, it doesn't really matter. The fact is that all markets are holding up in the face of horrendous news and Asian markets are nowhere near the lows recorded last fall - a positive divergence. China is leading the way and we are maintaining our exposure to this market. Apart from China and Vietnam, we have also allocated some capital to India and this is due to cheap valuations and good long-term prospects. It is possible that markets break to new lows in the near-term but we suspect such a decline will be brief. So, the current levels offer a compelling entry point for a 5-7 year investment.
Commodity markets are mixed. As expected, both gold and silver are rallying with the latter outperforming in the post-crash environment. We expect the rally to continue until at least March-April. Base metals are rebounding sharply together with the Baltic Dry Freight Index and this is a clear indication that economic activity is picking up again. The advance is helping the diversified mining companies and we recommend exposure to this sector. Steel companies also look very attractive at current valuations. Finally, the energy markets have fallen asleep and the action is as exciting as watching paint dry. Our view is that crude oil and natural gas are in the process of bottoming out and should rally over the following months. Energy companies should also participate in the advance and we like upstream firms and the service providers to the energy industry. As the world slowly wakes up to 'Peak Oil', energy companies will be in high demand as investors panic and rush towards protection.
Over in the cash and fixed income markets, it looks as though the Yen and US Dollar are in the process of topping out and should decline in the weeks ahead. From a big picture perspective, both the Euro and Pound Sterling are sick puppies so we would avoid them like the plague. We continue to like the Aussie and Canadian Dollars and expect them to strengthen from these levels. Finally, the great bubble in US Treasuries is starting to contract and we are looking for higher long-term interest rates in the following months. As a parting shot, it is worth mentioning that two of the last 10-year Bund auctions by the Germans have failed with not enough demand for German government bonds! This is an ominous sign and tells us that the infamous German printing press may come into action once again! Welcome, sky-high inflation!