Bud's Market Observations - March 1, 2008
72. . . . Recession? What recession?
Those are comments which we are continuously hearing from the White House, the US Federal Reserve, various pundits and others who appear to have subjective interests in maintaining faith in the USA economy's strength. We will probably hear that refrain all the way down to a recessionary bottom.
After the markets' poor showing in January and during this last month, my apprehension mentioned in my previous "Observations" is increasing. Equity markets have performed poorly and those markets will increasingly reflect the recessionary trend.
Of interest were the comments on PBS's Nightly Business Report. The featured Market Monitor for the week (Feb 29th) was Frank Cochrane, President of Investment Timing Consultants. Frank says that in his opinion, the markets in equities have topped; yesterday's major drop emphasizes that opinion. He further opines that we are going into a grinding bear market, something that's going to take many quarters and a couple of years to finally unfold. In the context of equities and businesses, Frank's analysis appears to be correct. Incidentally, Investment Timing Consultants has done very well following this analysis. For those who may be interested, look for Frank's interview on the web at www.pbs.org/nbr; he presents some good ideas.
Regardless of a recession, I think that precious metals and commodities will continue to do well. For example, the price of gold continues to move up. Silver prices are doing the same. Agricultural commodities have shot skyward. Although some industrial commodities have lagged, oil and other energy related commodities have surged ahead. My suggestions of January and February remain my investment choices. Those suggestions included the Central Fund (CEF) and both precious metal ETFs (GLD and SLV), plus fertilizer producers such as the Potash Corp (NYSE: POT ), Yara International (OTC: ADR-YAR) and Terra Nitrogen Company, L.P. (NYSE: TNH ).
Other investments which could be profitably made are gold related equities including Lithir Gold Ltd (NASDAQ: LIHR.O), Kinross Gold (KGC) and Barrack Gold Corporation (ABX).
A new investment which I have made is in uranium. That investment is Camenco (CCJ) which is the largest uranium miner in the world. While not a short term investment, my guess is that within a couple of years when more reactors become operational, a doubling of the price can be reasonably expected.
Should there be contractions in global economic conditions, cash may be king! But maximize safety by considering cash in some of the stronger currencies. ETFs in such as Swiss francs (FXF) and Japanese yen (FXY) are readily available. With the US dollar dropping in purchasing power, it is losing any "regal" power that it once had.
As a try at moderating the effects of a recession, the US government is sending tax rebates to millions of tax payers. The hope is that this "priming of the economic pump" will generate some prosperity. Also, the US Fed has significantly lowered the prime rate and announces that further rate cuts are in the offing.
My opinion is that there is no more chance of these actions moderating recessionary effects than the Chinese government's chances to control the weather during this summer's Olympics. On the contrary, sending out a large amount of money that the US government must borrow plus lowering interest rates by the USFed will result in a further weakening of the US dollar. That is a sure recipe for big-time inflation. Or, because we'll be "enjoying" a recession at the same time, the better label is stagflation. Sorry to suggest that such is in our future, but that's the way it looks from here.
Bud Wood
Note that this essay is to inform you of my thinking; these are neither suggestions nor recommendations. Information and/or data included here may have already been overtaken by events; they may need to be verified elsewhere should you choose to act on anything written here.
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Comments
Great hub Bud. My favorite recent soundbyte was when Ben Bernanke said, (in a statement meant to reassure us that the economy was fundamentally sound), "Some banks may fail." What? Hello? It's hard to say "some banks may fail" and reassure anybody. Personally I think further rate cuts are a mistake and there is no quick way around the hard times to come. But I'd like to be wrong.
Thanks Bud, for calling a spade a spade--you have a new fan in me!
This is a note that updates comments made in my Observations of March 1st.
I am feeling a bit concerned because my opinions are starting to fit in with consensus opinions. Seems that the consensus thinks the economy is going to pot. In listening to candidates who aspire to be “leader of the free world”, I hear that the USA economy is grim. Of course, it depends upon where those aspirants are at the time. For example, from campaigns in Ohio I hear that NAFTA is ruining the economy. But from Texas, where NAFTA and other trade activities have created thousands upon thousands of jobs, that rhetoric is not heard. My take on this is that where state and local regulations are more business friendly, jobs and income are generated. But for candidates running for national office, it may not be appropriate to criticize local political environments when “business” can be criticized.
At any rate, in the long term most everyone benefits for freer trade between counties. And, although the USA may be losing manufacturing jobs, data from the St. Louis Federal Reserve says that companies in the USA manufacture more in real terms (adjusted for inflation) now than at any time in history. Admittedly, if a job is lost to a machine (or to a younger worker), the previous job holder is in as dire straits as if his or her job was lost to someone in Asia. But let’s be realistic and address real causes rather than looking afield for scrape goats. And let’s be happy that production is high.
All of which makes me somewhat optimistic regarding the USA economy. Yes, I think that the US dollar will continue to lose purchasing power (as it has for all of the past century); investments in gold and other precious metals and commodities will continue to be wise investments. However, I feel that such investments are getting overly popular and could be caught in a down-draft correction, as the purchasing power of the US dollar strengthens. No, I am not saying that I am considering lightening up on those investments, but I have a wait and see approach on new investments.
There are indications that deflation may hit after the US election. Historically, during the first year of an administration, there is typically some “pain” in “cleaning-up” economic problems held over from previous administrations. Thus, I won’t be surprised to see inflation in an environment of two major economic bubbles popping plus a bear market in stocks (like maybe “stagflation”). Obviously, the trends need to be closely monitored. However, opportunities abound and world economies are not about to fall-off the edge.
You are ahead of the curve once again-- today(3/11) the worlds central banks including the Fed acted, the world's stock markets rallied bigtime, and the TV talking heads rejoiced. It will be interesting to see what tomorrow brings.
Thanks, Robie2, for your kind words.
I didn't expect this so soon, but it appears that the powers that be are anxious to paper over any cracks, so we may see a lot of these activites this year.
Which means zig-zags will abound and we'll see very volatile markets which have little chance of ending fortuitously for investors. Right now, I'm selling some equity investments and buying QID and SDS (inverse market ETFs). If I were to give any advice, it would be to park funds in cash for awhile (cash like in SFr and Japanese yen and maybe even NZ Govt bonds)
How do you feel about closed end tax free municipal bond funds these days? Just wondering.
IMO, most all bond funds are losing investments. Because real interest rates (as differentiated from the Fed funds rate) are rising, most bonds will drop in price. Also, the continuing erosion of the US dollar's purchasing power brings nearly all dollar denominated returns into question.
I am advising holding funds in cash. But not in US dollars. You're close enough to Canada to get a bank account in "Loonies". As you know, Loonies have appreciated signicantly, With Canada being a commodities economy, expect further appreciation.
Also, there are foreign currency ETFs which will somewhat keep their values; I like FFX, FYX, FAX. For more action, see what Everbank offers in currency deposits - Everbank even pays good interest- - typically better than muni bond funds and in currencies of your choice.
Correction to my comment:
I transposed the letters in the "F" symbols above - - Should be FXF, FXY, FXA. Please note correction.
I found this educational and interesting. Thank you! I will look forward to more.
Ken says:
2 years ago
Nice piece of writing there Bud. I'll be looking for your future contributions.