 Is the End Nigh?
Puru Saxena
7 August 2007
Over the past few days, the
ongoing credit-crunch in the US has grabbed all the media attention
and the capital markets have responded with sharp declines.
At present, there is an ongoing debate as to whether the sub-prime
debacle will sink the US into the next "Great Depression".
Not surprisingly, the bears are out of their dens again, forecasting
the very end of capitalism! So, what should we make of the current
situation and more importantly, how should we invest during these
volatile times?
There is no doubt in my mind
that the US economy is past its prime. Gone are the days when
the international markets used to shudder in fear at the very
thought of American investors withdrawing their capital from
overseas. Remember, not so long ago, financial crises used to
spawn in some far-flung "emerging" nations in Asia,
Latin America and Eastern Europe. And the US establishment used
to stand firm as the lender of last resort. This time around,
however, it is ironic that the world's most influential nation
is weighing down on the global economy and causing a mini-panic
in the markets. A few years ago, the US was a creditor nation,
but today it is the largest debtor nation the world has ever
seen. Previously, Americans used to fund other less fortunate
nations, however these developing nations are now funding the
American way of life by financing those horrendous deficits!
Based on these facts, it is clear to me that over the coming
years, the over-leveraged American society will have to undergo
some sort of adjustment. Moreover, I suspect that this adjustment
will not be easy. In other words, I expect the standard of living
in the US to gradually decline in the years ahead.
Now, I am aware that there
are a number of well-respected economists and analysts out there
who are forecasting the end of the world due to the ongoing problems
in the credit-markets. I tend to agree with their assessment
that the US economy is in a bad shape but I do not expect a deflationary
collapse in global asset-prices due to the sub-prime mess for
the following reasons:
Firstly, it is worth noting
that the size of the US economy is roughly US$13.5 trillion,
global exports are over US$13 trillion, global non-gold foreign
exchange reserves are above US$5 trillion and under the worst-case
scenario, sub-prime mortgage losses could amount to US$300-400
billion. No doubt, these losses would be a total disaster for
the effected households, but they are not big enough to cause
a major recession at least in nominal terms.
Secondly, I believe that with
its ability to print an unlimited quantity of Dollars, the Federal
Reserve will come to the "rescue" at the cost of the
American currency. After all, we are in the third year of the
US Presidential cycle (historically, the best year for stocks)
and you can bet your bottom Dollar that the American establishment
will do everything in its power to avoid a major bear-market
or recession prior to the elections next year.
Now, I can almost hear some
of you say that this era of endless prosperity cannot go on forever
and that a deflationary bust is inevitable. For sure, this fantasy
"fix" through even more inflation and a further debasement
of the US Dollar cannot continue ad infinitum. However, as long
as the public remains oblivious to the inflation menace and keeps
buying into the low-inflation propaganda, our current "monopoly-money"
system could easily continue for several more years.
I happen to believe that the
US Dollar will be sacrificed in order to avoid a painful contraction
in the economy and asset-prices. The necessary adjustment in
the US economy will be stealth and is likely to occur through
a weakening currency rather than an outright crash in asset-prices.
Already, since 2002, American savings have depreciated by 50%
against the major European currencies and even more so against
the major commodity-producing economies (Canada, Australia and
New Zealand). In the period ahead, I expect the US Dollar to
diminish in value against the Asian and Latin American currencies,
which are still grossly undervalued against the greenback.
The final reason why I do not
expect a deflationary collapse is due to the fact that despite
the ongoing credit-problems in the US, the emerging economies
of Asia, Eastern Europe and Latin America continue to expand
rapidly. This should act as a cushion against any major financial
set-back in the US.
So, given the current economic
outlook, how should investors position themselves? First and
foremost, I suggest that investors continue to avoid exposure
to US financial assets as the risks far outweigh the potential
for return. Moreover, if my assessment is correct, after some
additional near-term weakness in the markets, I expect the up-trends
in natural resources and emerging-markets to continue. As a
money-manager with the capability to invest in global assets,
I have allocated our clients' capital to these sectors.
Despite the rally over the
past 5 years, stocks in the emerging-markets are reasonably priced
in terms of valuations (with the exception of China) and commodities
remain extremely cheap when adjusted for inflation. After the
big run-up over the past several months, these markets had become
somewhat over-stretched and are now in the process of consolidating
their recent gains. Such periodic pull-backs are normal within
long-term bull-markets and should be used as a buying opportunity.
Accordingly, I would urge investors to shake-off their sub-prime
blues and take advantage of the ongoing panic by buying solid
resource-producing companies positioned to benefit immensely
from the ongoing growth in the emerging-nations. Remember, in
the business of investing, it usually pays to buy the panic!
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena 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. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, 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. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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