The media and officials from the Fed and US Government have been goading investors to believe the worst of the financial crisis has come and gone. I am far from convinced about that hypothesis for myriad reasons. Although residential real estate prices have been falling less quickly than in previous months, many of the purchases being recorded are foreclosures and much of the mortgage activity has been refinancing at artificially low rates. Furthermore, there has been significant deterioration in the commercial and industrial real estate markets as job losses and facility closures have lead to low occupancy rates, mall closures, and manufacturing declines. The loans backing those markets have been bundled precisely like what was done in the residential markets and I foresee further bank write-offs coming in the next 6-12 months. Likewise, the American consumer is beginning to default on credit card loans, auto loans, and to some degree student loans, many of what have also been packaged and sold to investors. The ramifications of rising delinquencies could lead to increased pressure on the banking system.
In past posts, I argued that the US Government rescue would merely lead to a reflation in asset prices of homes and the stock market because of Quantitative Easing which is flooding the market with dollars. As it has played out, the stock market has surged, led by banking stocks which have benefited from a FASB rule change which effectively allows them to hide potential loan losses from the balance sheet if the bank itself deems those write-downs to be 'temporary'. Consequently, banks announced record earnings and their stocks soared.
Against this backdrop of collective elation is the reality that as I argued, the US dollar has reversed course from its rise as a 'safe haven' asset and has plunged to recent lows against the Euro and the Pound. Commodities have rebounded, especially crude oil which I had said was grossly under valued at $33/barrel and now stands above $60/barrel. Gold has been consistently staying strong and has been approaching highs above $1000/ounce. Silver has been performing even better. These markets are indicating that fiat currencies are being debased by central banks world wide and that hard assets continue to be valued given long term projections of demands from increased populations.
Although the US Government has committed unprecedented funding to quell this crisis, I am not of the opinion that the March 9 lows won't be revisited. The stock market may continue its rise into the coming months but I would position yourself to benefit from upcoming corrections back towards the lows.
I have been long: gold silver, the Brazilian Real, the Swiss Franc, the Australian dollar, short the dollar, long oil and other commodities, emerging market funds like EMF and TDF, closed end income funds like EFR for their dividends.
In the short term, I think the dollar will find some strength, treasuries might rebound from increased Fed purchases, the Brazilian Real might take a breather from its massive rally, oil should correct down after moving too quickly, and emerging markets should drop at least temporarily. Commodities should run into some Resistance when future bad news about the banking sector re-emerge later this year.
But the long term picture seems clear: inflation-protected bonds (TIP), floating rate bond funds, commodities, gold/silver/copper, dollar short, US treasuries fall leading to increased interest rates are where I will be positioned.
The toughest call will be timing when inflation begins to set in here in the US from the Quantitative Easing policies. Deflation may persist for longer than expected. But my bet is that our Central Bank will not know when to increase interest rates in order to decrease the money supply which has been so inflated now.
Good luck.
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