Lenoir suggests that commodities will show the way. For those, like us, who see defensive merit in gold, Zero Hedge suggests that the Paulson & Co hedge fund may have been liquidating some of its huge gold holdings to make up for losses incurred elsewhere. A correction in the price of gold would be, for us, a welcome opportunity to top up at lower levels, particularly if – as looks increasingly likely – central banks are preparing the way for a second round of quantitative easing, or QE2. The jury is still out on the first round of QE, not least because we will never know the counter-factual (what would have happened to the economy without it). But as the ever-sceptical Ambrose Evans-Pritchard points out for The Daily Telegraph, zero interest rates, $1.75 trillion of QE and a fiscal deficit above 10% of GDP have failed to deliver much for the US economy. This is the problem with QE: the reason your money doesn’t buy so much is because of how much they’re printing. QE represents the monetary law of diminishing returns, and is the single biggest reason to seek wealth protection in the form of unprintable precious metal.
Over recent weeks, the future has seemed (to us, at least) that much clearer: deflationary, with a Double Dip more or less a racing certainty. If this view turns out to be justified, then it supports arguments for the highest quality bonds, the most defensive equities (if equities at all), genuine ‘absolute return’ funds, and gold. Perversely, although the medium term outlook in financial terms seems once again challenging, there are some clear and, we believe, eminently practical investment solutions as a way through the woods. We could, of course, simply bang the ‘recovery’ drum, but in the face of so much evidence to the contrary, why bother ? We can leave the conflicted and perennial happy-talk to the stockbrokers.
“We think the recovery here in the United States is quite solid.”
The Federal Reserve Open Market Committee would beg to differ, but then they’re not in the business of promoting stocks (at least, not explicitly). The admittedly subjective assessment of the FOMC is not the only reason to be a little wary of the vigour of the apparent recovery:
- The Baltic Dry Index, a measure of shipping costs and a plausible barometer for world trade, has fallen by almost 60% in its longest streak of successive declines for 9 years;
- The Thomson Reuters / University of Michigan preliminary index of consumer sentiment fell from 76 in June to 66.5; consumer spending accounts for roughly 2/3 of US GDP;
- The Philadelphia Fed’s July index of new manufacturing orders fell from 9.0 to minus 4.3;
- The US workforce has contracted by 1 million over the past two months;
- US mortgage applications have fallen by 42% to a 13-year low.
Goldman Sachs has just published a report entitled “Double Dip or Double Up ?” which, revolutionarily for a brokerage firm – albeit one masquerading as a bank – calls the bottom and advises investors to dive back in. We think the correct answer is unequivocally Double Dip and prefer the analysis of ICAP’s Nic Lenoir:
“The silver lining is always the same: private GDP has collapsed, and governments around the world are trying to prevent us from falling off the cliff artificially via stimulus, quantitative easing, accounting gimmicks, or data distortion.. The day we get weak equities, weak commodities, weak US Treasuries, and a weak US dollar.. well that day you better start praying because it means gravity just woke up.”
Lenoir suggests that commodities will show the way. For those, like us, who see defensive merit in gold, Zero Hedge suggests that the Paulson & Co hedge fund may have been liquidating some of its huge gold holdings to make up for losses incurred elsewhere. A correction in the price of gold would be, for us, a welcome opportunity to top up at lower levels, particularly if – as looks increasingly likely – central banks are preparing the way for a second round of quantitative easing, or QE2. The jury is still out on the first round of QE, not least because we will never know the counter-factual (what would have happened to the economy without it). But as the ever-sceptical Ambrose Evans-Pritchard points out for The Daily Telegraph, zero interest rates, $1.75 trillion of QE and a fiscal deficit above 10% of GDP have failed to deliver much for the US economy. This is the problem with QE: the reason your money doesn’t buy so much is because of how much they’re printing. QE represents the monetary law of diminishing returns, and is the single biggest reason to seek wealth protection in the form of unprintable precious metal.
Over recent weeks, the future has seemed (to us, at least) that much clearer: deflationary, with a Double Dip more or less a racing certainty. If this view turns out to be justified, then it supports arguments for the highest quality bonds, the most defensive equities (if equities at all), genuine ‘absolute return’ funds, and gold. Perversely, although the medium term outlook in financial terms seems once again challenging, there are some clear and, we believe, eminently practical investment solutions as a way through the woods. We could, of course, simply bang the ‘recovery’ drum, but in the face of so much evidence to the contrary, why bother ? We can leave the conflicted and perennial happy-talk to the stockbrokers.
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