http://www.europac.net/voicesframeset.asp?id=7
October 15, 2008
Sit tight, watch the show and let the herd jump off the cliff
By Puru Saxena
The world's banking system is on the verge of a total collapse and I suspect hundreds of banks will go bust within the next 12-18 months. Two days ago, global central banks cut interest-rates in a co-ordinated move but this did not stop the financial market carnage. The point is that rate cuts will not achieve anything because this mess we find ourselves in is due to the excessive leverage which was built in the past few years. This is not a sub-prime crisis, it is a generational unwinding of the auto-loans, prime loans, Alt A loans, ninja loans, student loans, credit card loans, credit default swaps and loans related to commercial real-estate. So far in the crisis, US banks have come clean about their toxic assets but European banks are even more leveraged than their American counterparts! Banks such as Barclays and ING are leveraged more than 40 times! So this crisis is far from over and in the months ahead, we will see more unwinding of the debt bubble.
Global stock markets are declining every day and the rate of descent is astonishing! Unfortunately, investors are dumping everything without paying any attention to the economic fundamentals. In the past 3 months, top-quality energy, fertiliser and mining companies have lost roughly 50% of their values and this is despite the fact that oil is still trading above $80 per barrel, gold is trading above $900 per ounce and grain prices are at multi-year highs. It seems to me as though investors have started believing that the world will not need any energy, food or metals anymore! How else can you explain these massive declines when all the energy, food and mining companies are still announcing record profits. Now, if history is any guide, the stock market looks extremely oversold and a multi-month rally should commence soon. When that occurs, I expect our commodities related holdings to lead the market. So, this is not the time to panic and sell; in fact, I would urge you to sit tight, watch the show and let the herd jump off the cliff. If your investment is not leveraged, you have no reason to panic and remember, emotions are your worst enemy in this business. Once this selling madness is over, fundamentally superior energy, food and mining companies should stage a fantastic recovery.
Energy prices continue to fall given the end of the world sentiment and "demand destruction" nonsense. Ignore all the hype; oil usage is still growing sharply in Asia, Middle East and Latin America. And if we get a harsh winter (likely, given the low sun spot activity), natural gas and oil prices will rocket higher. So, sit tight with your energy holdings and buy more on any near-term weakness.
Precious metals are a mixed bag - gold is staying firm, whereas silver, platinum and palladium are significantly below their record-highs. Central banks are printing money so it is only a matter of time before this sector benefits from the raging monetary inflation and debasement of currencies. Accordingly, keep your positions and buy more during this corrective phase. Remember, gold is real money which can't be printed by any of the central bankers. Furthermore, gold in your possession is not anybody's liability and I would urge you to allocate 10% of your net-worth to physical bullion.
In the past few weeks, the US Dollar has rallied sharply against the European currencies as well as the Aussie and Kiwi Dollars. The strength against the Euro and British Pound was expected but I am stunned by the recent rout in the Aussie and Kiwi Dollars. Please keep in mind that the ongoing mess was engineered in the US and with America's US$54 trillion worth of debt, there is no way that the US Dollar can rally on a sustainable basis. So, I would suggest that you use this strength in the doomed currency to buy the Aussie, Kiwi and Canadian Dollars.
Puru Saxena is a Hong Kong based Money Manager. Information about the firm and its newsletter can be found at
http://www.purusaxena.com.
