These days it is hard for anyone to be credible when they say they know what is going to happen next. I am no different. I have a view and for now it is working but that doesn't mean it will tomorrow. I am happy to tell everyone what I think and they are free to agree or disagree.
My premise is a simple one but it isn't a happy one. So you may sleep better if you just hit the delete key now.
In my view, the problem we all face is a big one. The US like the rest of the world is over leveraged. As anyone who has ever lost their butts trading stocks on margin knows when times are great leverage is a great thing. It juices our returns and helps us make more money, however, when times are bad exactly the opposite is true. Simply put the markets are suffering from a lack of confidence. It started with the mortgage crisis and now it has spread to the world. Everyone is pulling back, banks are pulling in their capital, consumers are cutting back on spending, and countries are repatriating their wealth.
This is causing a massive collapse of the global economy and where it stops nobody knows. If anyone does know it certainly isn't the talking heads on CNBC! As go bubbles so go busts they never level out where they should. They over shoot to the upside and they over shoot to the downside.
Usually, when there is a sell off the relative values of stocks gets cheaper. Today's problem is that the lower the market goes lower the more everyone pulls back so stocks aren't getting any cheaper. we are in a spiral and I think you are making a big mistake if you think we have put in a bottom because the bottom is eroding away.
The US is taking extraordinary steps to stop the carnage but how do you restore confidence? It is easier said than done. We can't bailout everyone that is for sure. Already, the US will need to borrow approximately $2 trillion dollars next year. We already know that there is a lack of capital. Will the US be able to borrow the needed funds? The answer to the question is yes. The better question, however, might be: At what cost? If the US borrows $2 trillion next year rates will go up. Since the US is the safest borrower in the world everyone else’s rates will go up even more. Obviously, as rates go up profitability goes down which makes spreads over treasuries even wider. And so it goes.
Next consider the dollar. The US dollar is the strongest currency in the world. Or is it? There are numerous very astute people who believe the current demand for the US dollar isn't a flight to safety but rather a squeeze. Sure there is some demand driven by the safety the dollar offers but it is more likely being caused by dollar denominated debt that is maturing and not being rolled over. The FED has massively increased swap lines to ease the squeeze. Think of the demand of dollars as the tide coming in.
A strong GDP is what drives a currency. Over the past 30 years the US has gone from a 70% manufacturing economy to a 70% services economy. Most of those services are financial services. I am not saying anything you don't already know by saying financial services is not exactly a strong sector any more. Therefore the US dollar should weaken.
If you combine rising interest rates, a weak GDP, falling confidence, and a falling dollar you start to paint a pretty ugly picture. Not just for the US but for the world economy. The US isn't the worst by far but it is the most leveraged and as any day trader will tell you having to meet a margin call isn't ever fun.
This is all a rather long-winded way to get to my investment thesis.
If it takes capital to make it.....sell it. (Cars, telecom, and other capital driven businesses)
If it takes capital for the customer to buy it...sell it. (Again Cars, houses, airplanes, etc)
If it is discretionary...sell it (fashionable clothing, luxury goods, consumer durables, etc)
In addition, own assets that will benefit from global inflation. To me that means gold. Gold does well whenever there is distrust in financial institutions, inflationary times, etc.). Gold will do better than other metals, which tend to do well in inflationary periods that are driven by over heating economies. To be sure this isn't that so I want to stay away from commodities that have a heavy industrial component. This inflationary period will be caused by a dollar that begins to fall sharply as the tide goes out, fueled by a weak economy, high interest rates and on and on.
Like I said It isn't a rosy picture so you may just want to hit the delete key.
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