Monday, May 28, 2007

Power is shifting from USA to Emerging World and so should be your capital. CS

Step out of your Google search box and look at the big picture. What world is facing today: China stock market bust and strong commodity market boom after that. The truth is that flood of liquidity created by FED and Other central banks is eroding value of all currencies, all this unrestricted credit supply is chasing restricted in its nature Real Goods, creating bubbles in all asset classes from basic metals to modern art. Magic 444 number is very close now in Dow Jones China index, it could be too esoteric for financial analyses, but to put it simple - it is the same meaning for Chinese as 666 for Christians. This bubble in Chinese market is unsustainable and created by a problem of trying to keep Jinn in the box. Capped by artificially low rate of exchange of YUAN, local currency is chasing still relatively very small stock market. Suppressed low wages and uneconomic (when all real expenses accounted including environmental and health) production costs fueled by "bad" loans from State sector can not be sustained for needed healthy rate of growth. Chinese Dragon has grown up and need to be on a healthy diet of financially responsible consumption by growing middle class and rising savings reinvested into economy. What is necessary for this positive outcome? Transparent capital market, recapitalised banking sector with recycled "bad loans" for state owned enterprises. Now Bubble mentality is taking over: mutual funds and black boxes are chasing last 20-30-40 % of the upside fearing to miss the opportunity, Woos and Guys are taking their savings and putting them "to work" their magic to riches in Parabolic last leg of bull market before correction. Whole world is getting crazy with intoxication of "free" money. But trouble is already here: USA is facing stagflation - stagnating of economy growth in real terms with increasing inflation in all basic goods: energy, food and commodities. For all those goods advertised on Google you need not clicks, but bricks to produce them and now you have to compete for them with Woos and Guys. China is already preparing for necessary painfully coming back to reality. Stock market bubble need to be deflated the sooner the better. Once liquidity will dry out market will plunge 30-50% to its still solid bull uptrend line. A lot of reckless people will be hurt as usual. Shock waves will hit all asset classes. Picture will be painted as USD will fly again as "safe heaven" when all emerging markets will take a hit. Outcome could be disastrous or very positive for China, Emerging markets and world in total. In my positive scenario China need to sterilise excess liquidity by increasing real rates and reserve requirements for banks. Currency control must be relaxed so that excess capital can go overseas and secure real assets for future growth. Part of Currency reserves must be used for recapitalising banking sector with cleaning out all bad nonperforming loans, reserve diversification from "reserve currency of choice" US Dollar must be speed up by way of deployment of Investment agency and increasing share of other currencies, gold and strategic reserves of oil and basic materials. Is it my dreams or I am just reading you out loud recent headlines coming from China. I know my limits - it is headlines, Bubble will be popped out in nearest future, a lot of "wealth" will evaporate, those who survive will come back to safety of bank deposits with rising Yuan and higher deposit rate. Shock will keep people in China out of market for a while like it was in Russia after 1998. After panic SAFE investment agency and banks will step into the market at around 200 level and buy out back what they have sold to "foreigners". Increasing minimal wage will help to stimulate internal consumption growth which will become solid base for healthy economic growth in range of 5-7% per year for decade to come. No magic here but very disturbing for US consumer truth is that even if wages in China will be doubled, nobody still will be able to compete with China . US economy will continue effectively import inflation with rising prices on all basic goods produced in China. This is the phenomenon of disbalances in the world. If within next 5 months Dow will lose 50% depression in USA will be for years, China's market after 50% loss will be back in the end of 2008. Can you imaging in USA doubling of wages, energy consumption or copper consumption per capita? But it will be reality in China within next 3-5 years, which will lead to unproportional rise in consumption of basic goods and big ticket items because now biggest part of income is spent on first necessities like food and housing. What is the limited part in my vivid imagination? Real assets, gold and silver as ultimate store of value and hedge against falling USD and political disturbances, commodities which are close to peak in production and still perceived as very risky class of assets. Turn on TV and you will hear about oil at 40 dollars, talk to insiders and they are still calculating copper price at 1.o dollar per pound. Nobody could believe that this commodity bull is for real and not for couple of years. I prey and hope that shifting of power from USA in its late stage of empire as dominant force to multi polar sustained political environment will not be disturbed by war and effective reduction of demand from growing population. In all other cases careful investment in resources, particularly in junior companies will pay out handsomely. Look for trustworthy management, stable political situation and economical resources in the ground. Even if all assets initially will be hit by sell off you will be very lucky if you will have opportunity to add to your positions gold at 50USD, silver at 1.0USD and copper at 8 cents in the ground. Do not bet your house, use margin or time against yourself in option trades. But if you have capital, deploy it carefully and be ready to buy more on any pull backs. Be twice as carefull in this market: small cap stocks are easily manipulated, but volatility will be your friend with proper risk assessment, homework and discipline. Common sense secrets of trade could help you on initial steps. Go for small companies which are close to production and in the process of economic assessment of already discovered reserves. You will have double leverage of rising prices and increasing asset base of the company. I will mention few companies for your further study. Silver Wheaton (SLW) has very interesting model of effective silver bank with high leverage to silver price. This is a big cap silver company and is well on the radar screen of investment crowd. Such stocks will benefit on initial capital inflow. Tanzanian Royalty Exploration Company (TRE) is highly leveraged to price of gold and managed by legendary Jim Sinclair who is not reading the gold story, but making it. Sterling mining (SRLM.ob) will start production in December 2007. Avino Silver and Gold mines owns former producing mine and is close to production and has value of only production assets close to recent market cap. Mines Management (MGN) was able to buy out huge deposit in mining friendly Montana at boot sale price tag and now is actively moving its into production. And of cause my story will not be even close to give you the real feeling of bull market for years to come without mentioning Lundin mining (LMC) and Lundin family itself which is behind many successful projects. Recent takeover of Tenke mining is creating one of the most promising intermediate copper/zinc producers and be ready for M&A fever around such companies which will drive commodity market to new highs after consolidation phase will be finished.

1 comment:

Anonymous said...

Why is Google hitting new highs?