Global Market Commentary

August 07, 2014

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Market Summary 

World Stock Markets

The U.S., Europe, and Asia remain in bull markets, but the markets in the U.S. and Europe are in the middle of a mild stock market correction. Causes include the military actions by Russia in Ukraine, and fighting in Iraq, Syria and Libya, which are all exacerbated by fears of diminished QE3, and the risk that interest rates will have to rise within the next year in the U.S. If the market follows the traditional script, we can expect a good buying opportunity for U.S. stocks in October, which we believe would lead to a six-month market rally.

In the meantime, in our view, Asia is the place to invest — India and Taiwan are attractive for investment on dips. We note a combination of excellent economic fundamentals, improved national governance in India, and a strong export market for goods from Taiwan and India.

Technicians Say Gold Looks Weak

Fundamentally, the gold price should be stronger, but it is not. Gold has not been able to rise as fighting worsens in Gaza, Libya, Iraq, and Syria, and while the situation in the Ukraine deteriorates. Meanwhile, oil prices have been holding in a range during this period. Gold appears to be in danger of falling according to two technical analysts who we follow have changed their outlook. They had been expecting gold to bottom between July and September 2014, but they are now predicting that gold could fall to new lows before bottoming in January to February 2015. This is a new and unsettling development, and we are watching gold closely.

Base Metals and Grains

Base metals continue to be attractive for long term investment, in our opinion. Grains will become more attractive after the expectation of a huge crop this fall for corn and soybeans becomes
discounted by the market. By the time the crops come in this fall and grains have fallen in price we will be looking at grains as an investment for the next crop year.

Global Positives

As we have consistently held, China’s banking system will not melt down any time soon. Now evidence of why it will not is coming to the surface. Bad loans are being reorganized and managed. We will still see occasional tightness in the Chinese banking and credit system as the government engineers a slowdown to bank loan growth.

The U.S., the world as a whole, and the emerging markets are growing their GDPs — and world GDP is growing at the fastest rate in years. North America, Australia, Asia, and parts of South America are doing pretty well. Europe is growing very slowly (see below). So, growth is improving and confidence is returning. Real estate is doing well. Inflation is temporarily under control, although gradually rising from a low level.

Global Negatives — We Are Monitoring Them Closely

Things to remember: We predicted the financial crisis of 2008 and warned clients well in advance. There will be another global financial crisis some day, but not in the near future. Here are a few issues we are watching.

1. Today we note some bubbles in certain types of bond markets (high-yield bonds, and sovereign bonds of poorly managed countries). They have not yet become critical. As always, we are monitoring events carefully in an effort to identify problems before they manifest into market-changing events.

2. The European banking system is in poor shape, and this means that Europe will have to do QE. We imagine that some form of bank recapitalization will occur in Europe over the next two years.

3. There is over-leverage in the national debt of the major countries of the world, including Japan, Italy, Spain, Britain, France, the U.S., and many others. As long as governments opt for stimulating economic growth, these debts can be successfully repaid. If governments opt for redistribution programs instead of growth, these countries will experience the same economic fates as Venezuela and Argentina — which are not pretty.

 

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