A year ago we mentioned that although we were generally bearish on stocks overall we couldn't see anything knocking the steam out of the stockmarkets. Our portfolio was positioned almost entirely in mining stocks and that sector generally had a good year although it remains extremely volatile with stocks regularly moving up or down by 20-50% over a few months.
Ultimately we are positioned in gold/silver as a hedge against the continuing printing of money alongside massive amounts of new debt being produced and packaged up. In fact this is the main reason why Central Bankers the world over hate gold with a vengeance, they can't produce it out of thin air. Interesting though that the Chinese and their Central Bank are avid fans of the metal and have been accumulating in bulk for over two years now. Still the Chinese are likely playing a long term game of many years versus the western obsession with chasing short term results.
It is also interesting to note that with all the bullish reports on China over the last year, it's great economic potential etc, its stockmarket is down around 16% for 2004 and is approaching 5 year lows. In fact if you look at the chart since the turn of the century one could hardly argue that it's been boom time in their markets. Still, China remains a market that we can't discount and looks an attractive proposition to invest in if your view is 5+ years and preferably longer.
How to Invest in China
There are two ways to invest in any overseas market, indirectly through an investment fund (which also takes care of the currency risk for you) or buying the individual stocks yourself. With the advent of the internet and online brokerage accounts buying individual stocks is getting far easier but direct investment in a country as far away as China requires some specialist research and knowledge. On page 3 of this newsletter we've identified a solid and experienced analyst within the Asia region that has produced excellent advice for many years.
US Debt Problems
The debt problem has been out of hand for a few years now, yet we are told by Greenspan and the other Fed Governors on a daily basis how 'strong' the US economy is etc. But if things are so good why are interest rates at such artificial low levels? The reason is simple, Greenspan knows that if he raises rates too high then debt defaults come flooding in breaking the built up excesses in the US economy.
So the better action is to keep rates low hoping that time will sort out the internal economic problems. Well, that may be the case but Newton's 3rd Law states that every action has an associated reaction. Excessive low rates in any economy are simply not healthy because they usually encourage excesses which are almost impossible to control if they get out of hand. Perhaps one of the problems which may occur over the next few years is a cooling off in the overheated US property market where as much as 40% of demand comes from so called 'flippers', people who buy a new un-built home looking to sell for a profit once it's completed. And of course most if not all of the money used for this practice is borrowed often on flimsy personal financial appraisals which is also widespread in applications for UK mortgages.
So the world is awash with debt normally backed up by nothing more than promises to pay. This paper led debt revolution has worked wonders over the last few years but like most things they run in cycles so perhaps 2005 will see a shift in mentality from paper assets to hard assets that can't be manufactured with the click of a mouse. And this is likely to be a feature for our own investing in 2005, we're going to favour companies that deal in hard assets and hard profits versus paper promises and sleight of hand profits manufactured by trickery.
