Your editor finally got the chance to step out from behind the podium and into the audience on the third day of the symposium here in Canada’s Pacific Northwest. There were no togas or laurel wreathes or couches to recline on, as you might expect at, say, an ancient Greek Symposium. But this modern version does have one trait in common with its ancient predecessor: it’s teeming with ideas.
More on the ideas in a moment. But first the markets. If Sydney follows New York’s lead, it will be a red day on ASX. The Dow was down nearly 400 points in intra-day trading, before recovering to close down just 311 points.
Is it profit taking or is it the much-dreaded credit contraction? Some of both, probably. American auto-maker Chrysler was nearly forced to scrap the buyout deal it made with Cerberus Capital Management when J.P. Morgan and Chase bank couldn’t find any takers of nearly US$10 billion in loans Chrysler wanted to move off the balance sheet. The institutional appetite for risky debt is vanishingly small right now.
“There are two revaluations going in the market today,” we told our audience yesterday. “The first is the repricing of risk. Financial assets won’t do well in this environment as interest rates rise and investors back away from toxic brews of asset-backed securities. The other great revaluation is the pricing of resource stocks as if they were not cyclical stocks. Institutions are driving this too, not wanting to miss out on more of the heady performance of the oil, minerals, and energy stocks.”
“Stamps don’t correlate to anything,” said philatelist Geoff Anandappa of Stanley Gibbons in London. Coins, stamps, baseball cards…these are collectables and tangibles which have liquid markets for exchange…and which seem to be perennially popular across age groups. Who isn’t intrigued by the Penny Black stamp….or the Five Pound Orange with a pristine gum?
We confess we’d never seriously thought of stamps as an asset class, but that’s the kind of outside the square thinking you get over four days at a gig like this. It takes all kinds. And the point is to find an alternative to consider, not simply the same old strategies denominated in the same old currencies.
“It’s a sector in which opportunities are increasing and certain,” said Eric Fry. He was talking about water, a subject surely near and dear to many a parched Australian throat. “Water stocks—both water treatment and infrastructure—give investors relative certainty and the promise of a growing income stream. More than 80% of the world’s population has irregular or no access to potable water. And in some parts of the developed world, like New York, the infrastructure is old and in urgent need of replacement.”
“Bonds are a triple threat,” says Doug Casey. “Your first is interest rates. They’re going to go very high. That means prices will go down. Your second risk is credit risk. I don’t want to be a lender in this kind of market. Neither should you. Your third risk [for US dollar based investors] is currency risk. The dollar is going to reach its intrinsic value.”
And what about the resource market? Doug says the easy money has already been made—but the big money is still ahead. “The stealth phase of the resource bull market is over. But the Wall of Worry stage is just cranking up. Analysts debate about whether commodity prices are going higher or lower. Meanwhile, resource stocks just keep climbing up. The last phase is the speculative bubble phase comes along. In that phase penny stocks eventually sell for US$10.”
Doug plans on speculating in mining shares because that’s where the biggest volatility and gains are going to be. But he firmly believes we’re headed for a Greater Depression. “A depression is a period of time where the distortions and misallocations of capital from the previous boom are liquidated. The distortions have been huge. The liquidation will be severe. A depression is also a period of time when most people’s standard of living goes down.”
Most of us do not want to see our standard of living decline. Hence, the open discussion of what the risk and opportunities are in a global market. Your editor hops back on a plane to Melbourne tomorrow morning, bringing his brain with him and some new ideas for our two Aussie-based investment letters.
The Daily Reckoning Australia