The End of the World...Or the Right Time to Buy?

As our dear readers are painfully aware, the Dow has seen its worst one-year performance – ever. But, regardless of the Armageddon fears prevalent today, Puru Saxena argues that this slump may turn out to be a fantastic buying opportunity for the patient, long-term investor.

Global financial markets are acting as though the world is about to implode. Over the past four months, the investment community has dumped all assets; regardless of their underlying economic fundamentals. We have seen unbelievable wealth destruction on a global scale and trillions of dollars have evaporated and returned to monetary heaven.

The rate of decline has been astonishing and in the past twelve months, the Dow Jones Industrial Average (Dow) has seen its worst one-year performance – ever! It is interesting to observe that the Dow’s recent plunge has been even worse than the 1929 decline which preceded the Great Depression of the 1930’s (Figure 1). So, are we really witnessing the end of the world as we know it?

Figure 1

Regardless of the Armageddon fears prevalent today, I would argue that this slump may turn out to be a fantastic buying opportunity for the patient, long-term investor.

Now, the mainstream media seems to be convinced that our planet is headed into a permanent global depression and investor-sentiment certainly reflects this thought process. The same cheerleaders who, only a few months ago, were gleefully shouting about the emergence of a new global economy are now forecasting eternal disaster. Furthermore, investors are liquidating all assets as images of their children living in shanty towns fill their fearful minds. ‘Demand destruction’ and ‘de-leveraging’ have replaced ‘liquidity’ and ‘global growth’ as the new buzz-words. Stocks are down significantly from the highs, corporate bonds have taken a beating and even commodities (including precious metals) have joined the bear parade. And those who naively bought structured products from private banks have seen total losses. So, where do we go from here?

The best way to begin is by reiterating that global markets are now extremely oversold and undervalued, hence attractive. This may sound counter-intuitive but it is vital to understand that a decline of 40% in US stocks (and even more in some countries) has set the stage for fantastic long-term gains. If my assessment proves to be correct, investors who buy the unimpaired sectors today should make a fortune over the coming decade.

Remember, the best time to buy is when everyone is despondently selling. As John Templeton (founder of Templeton Funds) often said, “bull-markets are born on pessimism, grow on scepticism, mature on optimism and due on euphoria”. And you can be sure that the investment community is feeling extremely pessimistic and fearful today.

At present, a lot of ‘gloom and doom’ and ‘deflation’ chatter is doing the rounds in the mainstream media. The recent selling panic is frequently being described at the worst crisis since the Great Depression. However, this hype does not imply that the economic outlook is similar to the 1930’s. One of the biggest reasons why the Great Depression occurred was due to the failure or inability of the money-supply to expand in line with the need for this money. Furthermore, the failure of roughly 5,000 banks did not help the situation either as millions of Americans lost their savings! In the current situation, however, various central banks and governments are throwing trillions of dollars into the monetary system and all bank deposits have been guaranteed. And if need be, the authorities will print money until the world runs out of trees. So, in my view, a prolonged deflationary phase or a global depression is not likely to happen.

The recent sharp declines in the markets can be attributed to the fact that two separate negative events caught the public’s attention at roughly the same time – depth of the financial crisis and fears of a US recession. Now, as far as the first issue is concerned, it is my belief that the worst is behind us. For sure, we may hear of sporadic bank busts in the months ahead, but the recent government guarantees prevented a total collapse of the banking system. For the record, I do not agree with the recent bail-outs because they are immoral and are going to cause huge inflation in the future. However, we all have to deal with reality and for now, it seems that the credit markets are starting to function again.

Our research reveals that currently US$3.5 trillion is sitting on the sidelines, waiting to be invested. And when investors deploy this cash into the markets, it will flow towards sectors which have been unharmed in this financial crisis. Now, I do not know about you, but apart from natural resources (where supply and demand imbalances persist) and industrials (which may benefit from massive government-sponsored infrastructure projects), I cannot find any other sector which has strong fundamentals. Housing faces severe over-supply, autos are struggling, banks will suffer due to over-regulation and consumer discretionary stocks will also fare poorly as the over-stretched public in the West tightens its belts.

The one sector of the economy which remains in excellent condition is commodities. Demand is holding firm, supplies of key resources are still tight and the ongoing credit crisis will only delay many projects which were previously meant to come online. This will create additional supply shortages in the future, thereby leading to much higher prices.

As far as precious metals are concerned, it is worth remembering that our world’s financial system has been hijacked by money-printers. Whether it is the Federal Reserve, Bank of England or the European Central Bank – they are all creating money ‘out of thin air’ and inflating the supply of paper currencies.

As this rampant inflation continues, what is astonishing though is that so many investors are being hoodwinked into believing that our world faces a genuine deflationary bust. These days, opinion is divided as to whether we will witness continuing inflation or gut-wrenching deflation. In my view, this discussion is absurd and deflation (or a contraction in the supply of money) is out of the question.

Banks are in the business of lending money and debt creation is essential for their very survival and prosperity. So, you can be sure that the modern-day money lenders will find a new way to further expand the supply of money and debt.

Whilst paper currencies (cash) regained some purchasing power in the past few months due to forced liquidation in the asset markets, there is no chance that they will maintain their value over the medium to long-term. History is littered with numerous paper currencies which became totally worthless and I suspect many of the current ones will also disappear. In fact, a remarkable study confirms that only 23% of paper currencies ever issued have survived the test of time! The vast majority were destroyed due to hyperinflation and are no longer in circulation.

Accordingly, I would urge investors to sit tight with their positions in hard assets (precious metals, energy and agriculture) and add more capital at such depressed levels. Under the best-case scenario, global markets bottomed out over the past two months and even if they did not, at the very least, we should get a multi-month rally in commodities and related stocks.


Puru Saxena
for The Daily Reckoning
December 09, 2008

Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Puru publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action.

As predicted in this space, the November payrolls were down a lot more than expected. Economists thought there would be 350,000 layoffs. Instead, the actual number was 200,000 more.

But U.S. investors shrugged off the employment news. The rally continued…it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.

Oil rose too – back up to $43. And gold shot up $17 to $769.

Commodities, stocks, precious metals – almost everything was up yesterday.

One important exception: Treasury bonds. The yield on ten-year T-notes rose to 2.76%…leading Bloomberg to report:

“Treasuries fall as US to sell more securities than expected.”

Watch those Treasury yields. Along with the dollar, they are going to tell the tale of the NEXT big bubble – the LAST big bubble of the whole Bubble Epoque – a bubble in public debt.

All over the world, the feds are desperately trying to inflate their currencies. People want money. People need money. And they need to spend money.

From the United States this morning comes news that a record one in ten homeowners is either in arrears on his mortgage or already in foreclosure. And everyday brings more dudes without paychecks. With no savings…and no jobs…people are squeezed hard. They can’t spend; they can’t even keep up with their mortgage payments.

So, the simpleton feds are giving people more cash and credit.

As everyone knows, what got them in trouble in the boom years was spending and borrowing. So what do the Feds do? They borrow and spend more! Altogether, they’re putting up more than $10 trillion to try to reflate the world economy.

Where do they get that kind of money? First, they borrow it. Then, they print it. So far, borrowing has been easy. Because, while asset prices are falling, investors lend to government in order to protect their money. And with consumers not spending, prices fall – so there is no consumer price inflation to worry about.

In fact, food and energy – key components of consumer prices, though not of the core CPI – are actually falling. And when prices fall, consumers have an incentive NOT to spend, because they will be able to get what they want at lower prices in the future. That’s when a recession gets to be serious; it’s what happened in Japan. And there’s not much the feds can do about it, because they can’t push their lending rates below zero. So, the feds are sweating deflation – not inflation. They want to avoid it in the worst possible way.

What’s the worst possible way to avoid deflation? Print money. ‘Governments can always avoid deflation,’ says Ben Bernanke – but only if they’re reckless enough to risk runaway inflation. ‘And you can really make a mess of things,’ Gideon Gono might add, if he had any idea of what he was doing to Zimbabwe.

And it can happen suddenly. There are huge piles of cash – in T-bills, in money-market funds, in foreign central vaults waiting out the crisis. At present, the owners of this cash are more worried about deflation than inflation. But at some point – maybe in 2009…probably in 2010 – that will change. Borrowing and lending money will prove ineffective. Real inflation – otherwise known as the kind of money that comes from trees – will be the only option left. Eventually, the feds will get the hang of it…inflation will soar…investors will dump dollars and T-bonds…and the last bubble, in government debt, will blow up.

*** “The great inflation continues,” says Strategic Short Report’s Dan Amoss.

“By inflation, I’m not referring to rising prices. I mean the creation of new fiat money and government credit amid this environment of fear and money hoarding. Lately, banks have hoarded excess reserves at the Fed, so this new money and credit is a long way from influencing consumer prices. But this condition is not likely to last much longer, and may be a function of banks wanting to report the cleanest possible balance sheets at year-end.”

“The latest inflation initiative was leaked earlier this week from the Treasury Dept. Treasury clearly wants lower mortgage rates and will work in concert with the Fed to force them lower. It has not been officially announced, but sources hint that Treasury might use Fannie and Freddie to bring down 30-year fixed mortgage rates to the 4.5% range.

“Many commentators note that government-imposed price floors for mortgage securities are no way to solve a problem rooted in a debt bubble. I agree, but I expect it to happen anyway, with the consequence of extreme dollar debasement.

“So despite their current lack of popularity, I expect inflation hedges, including gold and oil, to rebound strongly in the coming months.”

Find out how you can get more of Dan’s insights and investment advice – along with all of Agora Financial’s best research and investment services and special reports – for life.

*** Our world tour continues. We’ve left the smells of Mumbai – spice, sweat and smoke – for the clean comforts of Melbourne, Australia.

But everywhere we go, there we are. We carry our doom and gloom with us, along with our toothbrush.

“Australia is no different,” says a colleague. “People lent money too freely and spent it too readily. House prices soared. Debt went a little crazy. But Australia is more like South Africa than like India. It’s a resource economy…so we went bust later…when the commodity bubble blew up. And when we went bust, we went bust hard. These commodity producers are down even more than the NASDAQ or the Dow. And now unemployment is rising. It was as high as 15% in the early ’90s, the last time there was a slump in Oz.”

But don’t worry, dear reader. The feds “Down Under” are taking action. They’ve promised to send out a check – to qualifying parents – for $1,000 per child. Senior citizens will get $1,400.

Why the giveaways? Don’t be so thick, dear reader; it’s the worldwide financial crisis. The feds can get away with anything.

Sending out checks is a simple way of “reliquifying” the economy. Especially if you send the checks to poor people. They spend the money.

“TVs and hookers,” says Dan Denning. “They’re both bound to go up…”

Sending money to people probably works better than bailing out Wall Street. If what you’re trying to do is to encourage people to spend, the best thing to do is to put as much money in as many hands as possible. If the government wanted, it could send everyone a $10,000 check…or even a $100,000 check. Of course, the bigger the check, the more obvious the scam.

Nobody bothers to think about it – especially not in a crisis – but if they spared a minute to reflect on it, they would notice that it is nothing more than fraud and grand larceny. In order to put money in some people’s hands, they have to take it out of other people’s pockets. Or, just print it up. Either way, resources are stolen and redistributed. The rightful owners of the money get less of what they wanted. The beneficiaries – whether they are Wall Street’s insiders…or single mothers in the Outback – get more.

*** Sign of the times: a headline on the web this morning: “How to look gorgeous – on the cheap!”

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning