Global Market Commentary

October 20, 2016

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Global economic growth is boringly slow, but it is still growth.  Pessimists point out that the last few years have been the slowest economic recovery in seven decades, and that the average household in the U.S. has less income after inflation than in 2006.  Optimists point out that positive change is afoot in many countries.

Recently, new governments in Brazil and Argentina have made moves to better their economic circumstances with more economically rational policies.  This trend may continue worldwide in coming months.  We see world markets as changeable, and we are closely monitoring those changes for opportunity.

The most important investment trend that we see, and that we believe we will continue to see, is an increase in inflation in many countries.

This inflation will first develop in those countries which have encouraged their currencies to fall versus their trading partners’ during the current polite but real war of devaluation.

We say “polite” because the devaluations that are going on are gradual, unless a crisis develops.  Gradual devaluations have historically worked, and will work again this time.  Their purpose is to allow the country to export more and discourage imports.  A lower currency makes foreign goods more expensive and generates more exports.  Among the gradual devaluing nations are China, Europe, the UK, and much of Latin America and southeast Asia.

Countries such as the U.S. which have allowed their currencies to rise will see a slower inflation increase, but the inflation trend will also be up in the U.S.  Higher inflation will spark demand for assets that can hedge against inflation.  These include gold, oil, other precious metals, natural gas, and growth stocks that can grow more rapidly than inflation.  We remain bullish on all of these inflation-benefitting sectors.

          Stocks

The U.S. market is slightly positive — focus on three sectors mentioned below.  The key to the U.S. market is the price of the U.S. dollar.  If the dollar rises too much from its current level, U.S. exports will be hurt and U.S. corporate profits will suffer.  Watch the DXY U.S. Dollar Index.

          Sectors

1.  Beneficiaries of inflation: gold, natural gas, oil and commodity-related.
2.  Technology with a productivity advantage — major tech growth stocks.
3.  Old-line technology for access to e-commerce and the cloud, which could provide revived growth for older tech companies.

          Emerging Markets Remain Attractive

Look especially at those which have strong demographic trends, or are turning from corruption toward reasonable governance: India, Brazil, Argentina. Look for commodity plays, especially oil and gold, in these countries.

          Europe

There are a few good areas in Europe — for example, Norway (oil producer with big sovereign wealth fund), and UK (export beneficiary of a lower pound if you hedge the currency).

          Currencies

Longer term, we believe pound sterling is an attractive short sale.  We are watching several other currencies as potential short-sale candidates.  Stay tuned.

          Commodities

Precious metals: we are bullish on gold and silver both technically and fundamentally for a few months; we are also bullish on oil for a few months.  We are carefully watching the grains for a bottom which may be developing.

          Economics

We anticipate that many nations will add some fiscal policy in the form of tax cuts or infrastructure spending to their policy activity in the next year or two.  Monetary policy seems to have reached its limits of effectiveness, and fiscal policy can stimulate economic growth — especially if combined with tax cuts or possibly if combined with effective infrastructure investment.

We believe that the world economy will experience another recession beginning in Europe in the next few years.  We are prepared for that, and we do not see it as quite as bad for the U.S. as the recession of 2007–2009.  We expect it to originate outside of the U.S., and the U.S. will be partly protected by our better-capitalized banking system.

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