 Mega
Change!
Puru Saxena
22 Aug, 2006
The eternal truth in the investment
world is that every asset-class goes through boom and bust cycles,
which typically last for several years. However, it is ironic
that towards the end of any bull-market, when the risk is extreme,
optimism towards the booming asset-class is usually at a record-high!
On the other hand, during the final phase of a bear-market,
when the downside risk is limited, the asset which is selling
at a huge discount is always neglected and hated by the public!
The reason for this irrational behaviour is that most people
find it hard to foresee and accept change. The conditions which
have been prevalent for a long-time are considered to be permanent
and investment decisions are made accordingly.
In the late 1990's, the entire
world was in love with "new era" inspired by technology.
Fund managers, economists, media commentators and even the shoe-shine
boys were drooling over the prospects of retiring young, thanks
to their Microsoft and Intel shares. Of course, that turned
out to be the worst time to be invested in the hype as the technology
shares came crashing down to earth in March 2000. Back then,
I recognised that commodities were on the bargain table relative
to financial assets. Therefore, I started buying precious metals
but most people thought that I had been affected by the
"Millennium Bug"! "Why are you buying gold?
I lost a lot of money in gold 15-20 years ago and I'll never
touch it again," were comments I often heard. Once again,
the great majority failed to identify change, thereby ignoring
the birth of a new bull-market.
Once the great technology bubble
burst and the US slipped into a recession, the central bankers
decided to fight the slump by lowering interest-rates to a multi-decade
low. In the US, interest-rates were pulled down to a miniscule
1%. As the cost of borrowing came down, Americans turned to
real-estate as the next sure thing. Real-estate prices surged
as demand rose due to cheap and abundant credit. As home prices
continued to rise, Americans started using their real-estate
as collateral to borrow money. Falling interest-rates and appreciating
home values also created an explosion in re-financing activity
and the US embarked on a gigantic spending-spree. It is worth
noting that over the recent years, Americans extracted a ridiculous
amount of equity from their homes (Figure 1). In fact, since
the beginning of this decade, Americans extracted a whopping
US$4.6 trillion! Figure 1 also highlights the negative savings
rate in the US, which confirms my view that the loans taken out
against homes weren't saved for the proverbial rainy day; instead
the money was spent on consumption.
Figure 1: Americans
using their homes as ATM's!
Source: www.yardeni.com
The above recklessness has
put the US economy in a precarious situation. Interest-rates
are now rising all over the world and after a multi-month pause,
I expect interest-rates to continue their upward trend. So far,
the Federal Reserve has raised rates 17-times to 5.25% and the
impact is already being felt on American real-estate. I'm afraid,
the property industry in the US is falling into a serious recession.
In June, new home sales fell to 1.49 million units, the lowest
since November 2004 and down 18.1% from the record-high of 1.81
million units during January 2006. Furthermore, the supply of
US-homes for sale has recently jumped to a multi-decade high.
In summary, rising-interest rates are starting to bite into
the real-estate boom and trouble may be on the horizon.
I've been warning about housing
for several months now and still urge you to get rid of your
investment properties. In my opinion, we are in the final stages
of the housing-boom and (once again) the majority of people can't
foresee this change. The warning flags are everywhere! Recently,
the stocks of major US-homebuilding companies declined sharply
and I consider this an ominous development. The S&P 500
Homebuilding Index is down 46.2% from its July 2005 record-high!
Such a major sell-off in this sector is the market's way of forecasting
deteriorating business conditions ahead in the real-estate industry.
Moreover, if US-housing slips into a recession and prices decline,
consumption will also be badly hurt due an abrupt ending of the
re-financing boom. Remember, consumption accounts for roughly
70% of GDP growth in the US and any slowdown in this department
may send its entire economy into a recession.
Furthermore, it is my observation
that apart from the US, real-estate is generally overvalued in
the majority of nations. Due to poor wage-growth and rising
interest-rates, housing simply isn't affordable anymore and may
deflate over the coming months as demand continues to evaporate.
So, to re-iterate, my sincere advice to you is to liquidate
your leveraged properties and invest in the world of natural
resources where the bull-market is still in its infancy! A mega
change is currently underway and over the coming years, I envisage
major capital flows from financial assets to commodities.
In my view, every investor
must allocate 20-25% of their total net-worth to precious metals.
This may sound extreme but in a world where central bankers continue
to inflate the supply of money, gold and other precious metals
offer the best wealth protection. Over the coming years, I expect
the various central banks to print a ridiculous amount of money.
The US faces a $46 trillion debt monster and the only way it
can remain solvent and pay-off its debt is through monetary inflation.
Remember, the easiest way to repay debt is by diluting the purchasing
power of each unit of money. So, through monetary inflation,
the $46 trillion dollars the US owes today may not "feel"
like $46 trillion in 10 years time! To complicate matters further,
due to globalisation and international trade, no country wants
a strong currency. So, if every nation continues to print money
in order to keep its own currency weak against a fundamentally
weak US-dollar, the entire basket of "paper" currencies
will decline against precious metals whose supply can't be increased
ad infinitum.
Precious metals are in a gigantic
bull-market, which is likely to continue for as long as monetary
inflation remains the norm. For sure, no bull-market continues
to rise forever and each boom is punctuated with multi-month
consolidations. After a stellar multi-month surge, the precious
metals bull-market witnessed a vicious yet normal pull-back in
May. In my opinion, the worst is behind us now and this is an
ideal time to add to your positions in precious metals. After
a few more weeks of consolidation, I anticipate another strong
advance over the coming 6-9 months. The rising geo-political
tensions and a possible conflict between the US and Iran may
cause precious metals to really shine in the period ahead. Back
in 1980, on an inflation-adjusted basis, gold peaked at $2,100
per ounce and silver peaked above $100 per ounce. Today, you
can buy gold at $630 per ounce and silver at $12.5 per ounce
- absolute bargains, given the money and credit growth we've
seen over the past 26 years!
The above is an excerpt
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22 Aug, 2006
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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