vendredi 15 janvier 2010

A summary of my long term investment positions

Here is a list of the trends that I expect in the coming year :

1. Real Estate is going down relatively speaking in the medium to long term. The long term trend is very clear. Prices will follow volumes, especially in the local markets where the statistics do not show a fall yet. In the markets where the fall has already happened, it might become exaggerated.

2. Inflation will come, but not necessarily right away. The forces of deflation have not played out yet. There will be a second round of forced foreclosure and this is when the fall of real estate will become real in countries like France, that have been spared so far. This second round of deflation will ultimately force an even bigger round of bailouts, stimulus plans and quantitative easing (QE). This is only then that Inflation will appear in force

3. All the rest is a question of timing. In the short run, I might be inclined to think that the rise of the stock market could continue until the Spring, if only for reasons of seasonality. But a second semester of rising stock prices would invalidate the secular bear market, and this is not the scenario I envisage. Therefore I favour a fall of stock prices in the short term, maybe followed by a further rise. Basically, we might move inside a channel during the whole year, with wild swings in between.

A general rise of all asset prices will come only later., when inflation manifest itself.

But I admit it is a close call. This is probably why I don’t feel very confortable with my losing position shorting the stock market right now.

As far as the Hui/S&P500 ratio is concerned, it has bounced on a support and it should continue its rise.

There are other ratios to study :
1. Gold/oil ratio : it shows signs of consolidation before a new rise. Basically it measures the probability of a real crisis environment (depression and or hyperinflation) versus the probability of classic recession/disinflationary environment.
2. Agricultural commodities vs oil : this ratio is still very low but seems to be bottoming and starting a new ascent. It would mark a new era if agriculture prices outpace oil prices (not a good omen)
3. S&P500/gold : a new leg down is likely. The 15+ cycle is not over
4. S&P500/oil : this ratio is already very low by historical standards but should still go lower.

How to analyse these facts in regard to the inflation/deflation debate.

It seems to me that Gold performs better than Oil in times of real crisis, and relatively worse in periods of accelerating inflation.

Right now the Gold Oil ratio is at a turning point, sitting on a support.
Depending on its behaviour, we will have our answer on this debate and the best way to invest in the medium term.

I’m inclined to bet on deflation in the medium term, and gold outperforming oil.

We are in a period of stabilizing real estate prices and talks of a rebouind ar prevalent, but it is only a counter-cyclical rally.
There will be a new wave of asset depreciation shortly.
It will come in May at the latest, but probably sooner.

But, REGARDLESS of this debate, we are still in a long term phase where stocks underperform the commodities, and where economic activity has peaked in the developed world.
It is also a phase where peak oil is fast approaching with huge repercussions for the world economy.

For the developing world, I am not so sure, but I suspect that only the resources-rich countries will prosper.
Not the whole BRIC, but rather BRIC without the I and the C.
I would rather bet on the Brazil and Russia but also Canada, Australia, and maybe Argentina and Africa, depending on the socio-political situation there.

And then, there is the main problem : the amounts of debt and the huge economic imbalances in the world economy.

The Developed countries will have to get rid of their debt, without breaking the world economy (by letting inflation develop) and the geopolitical balance (by blatantly letting their currencies slide).

The Developing countries (and China first) will have to continue their growth and avoid the mounting protectionism and dollar devaluation.

But the tensions will mount and a global decrease in the real GDP growth is predictable.
New bubbles will form and then explode, in an accelerated fashion.

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