You are probably rolling your eyes, aren’t you, dear reader? You imagine that we are going to harp again on our Trade of the Decade.
Well, you’re right. Long gold, short stocks – that’s the basic position. Stocks are going down because we’re on the downside of the credit expansion. Gold is going up because people in charge of paper currencies are determined to print more of them. We wish we could give you more specifics, but we don’t have them; no one does.
Yesterday, the Dow rose again Thursday… the dead cat is still bouncing. Gold shot up too – by $22, to $905. Just what we would expect. The United States Federal Reserve is pumping as hard as it can in order to save the stock market and the economy. The dollar should be going down and gold should be going up. Our guess is that it won’t save stocks… but it should do wonders for gold.
The euro rose to $1.47.
But there is more under heaven than is contained in our Trade of the Decade. More opportunities for investors, that is.
There is not much subprime debt in Argentina’s financial industry, for example. In fact, there’s not much prime debt either. Or credit card debt. Or home equity debt. Or corporate debt. Or any kind of debt.
Argentina was protected from debt by its own recklessness. Want to buy property on the pampas? You will have to pony up in cash. Neither consumers nor businesses have much debt in Argentina because no one would lend them money. Adjustable rate mortgages? You’ll be lucky to get a mortgage of any sort.
Nor do the emerging countries have huge trade deficits – they couldn’t afford them. Instead, they tend to be on a pay-as-you-go system of international finance. And now, many are building up large stockpiles of hundreds of billions of dollars. By contrast, the United States of America has a paltry sum socked away in foreign currency reserves… and practically none of it in the currencies of emerging markets. Not surprisingly, most emerging markets, including former and present backet cases, such as Argentina and Iraq, have watched their currencies rise against the greenback over the last two years.
Many emerging markets are major exporters of raw materials… and food products. Often, they are the world’s low cost producers. In a worldwide downturn, demand for oil may go down… but would demand for cheap chicken? Nor are emerging countries generally burdened by high social and environmental costs. They’ve been too poor to afford expensive public pension and health care systems.
As a consequence of all these things, if there is a broad slump, these emerging markets – especially those in Latin America – are likely to come through with the least damage, says our Buenos Aires colleague, Horacio Pozzo.
Another buy is Japan. The land of the rising sun seems to rest in perpetual darkness. The sun never climbs above the horizon.
While domestic companies focus on new products that disguise pedestrians as common mechanical devices, Japanese investors look elsewhere to place their money. The slump has been going on for so long they’ve pulled out. Foreign investors, too, given up.
But not your editor! Colleague Merryn Somerset Webb of Money Week magazine tells us that many Japanese companies are selling below book value… and some below the value of their cash. Of course, in the interest of full disclosure, we both rated Japan a buy a year ago too – when Japanese stocks were 20% higher. Now, we like it even more…
The Daily reckoning Australia