I have to admit I’m in the bearish camp, thinking we’ll see a double-dip in stocks as well as unemployment numbers.  This isn’t a recent change in view from yesterday’s turmoil, but a view I’ve held for several months due to the risks right now. Here are a few of the main points – I’ll start with Greece because it’s been in the news a lot.

Greek debt was recently reduced to junk bonk status (Moody’s), and the debt from Portugal and Spain was cut a few notches as well.  The problem with this is that many European banks hold this debt and  expect it to be liquid – like they did in the US with AAA CDO’s – so it leads to tightening lending standards and a possible credit crunch in Europe.  Recently we heard about the new 750 billion euro bailout package, which might up the credit rating, but has it’s risks as well.  The Greek strikes show how difficult it will be for the government to live up to the austerity measures, and the recent regional loss for Merkel shows that the Germans might change their government to get out of this unpopular bailout.  The fiscal problems of the governments involved will be difficult to fix (Great WSJ article describing graft in Greece, which is ranked last in the euro-zone for corruption), and the bailout will likely only delay a future default.  I wouldn’t be surprised to see Greece back with it’s own currency in the next 5 years, but anything can happen I suppose.  I wouldn’t feel comfortable holding the Euro, or the Pound for that matter.

As for the US, the fed more than doubled the it’s balance sheet in 2009 by purchasing mortgage-backed securities along with Fannie Mae and Freddie Mac debt.  This cannot continue long-term, and neither can the stimulus packages and rebate-tax credits of 2009.  We’re looking at a backdrop of rising taxes with nowhere for interest rates to drop (I wouldn’t be surprised if 10-year government treasuries dropped a bit more on flight to safety, but I don’t want to hold them either).  We also have a backdrop of high vacancies and lowering rates in both commercial and residential real estate, along with lowering prices, which will be a continuing constraint on the balance sheets and lending of US banks.

US real estate prices are in a long-term downtrend as the forces of high unemployment, rising average household size (more roommates, living with parents, etc), and the sheer volume of unsold homes both on the market or in default (shadow inventory), push them down.  Local governments are also struggling to make ends meet which will push up property tax rates in many areas.  Finally, the price of homes in the US compared with median household income is still at unusually high levels.

Currently I’ve got mostly money in GLD and uninvested dollars, along with some money in FXA, FXC, and OTTR.  I think gold will go up long-term as central banks expand their balance sheets to fight deflation (US) or to fight government debt problems (UK and Europe).  I also like the commodity-linked currencies of Canada and Australia which have better-than-average economies although they have their risks (property bubble in Canada, new mining taxes in Australia).  OTTR is simply a utility with a 6% yield – great for a Roth IRA or tax-deffered account – and I like the income theme because I think low bond yields will push more income investors toward high dividend stocks.  I’ve held all of these since mid 2009 and haven’t seen a reason to change them.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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4 Responses to

  1. Malia says:

    I am surprised to see you behind GLD. I know that essentially it goes nowhere but up, yet it still seems overpriced to me. I am personally a fan of the biomed stocks…

    • johnonstocks says:

      I realize that the technical indicators suggest that gold is overbought right now – a massive amount of net speculative longs – but there is good reason to believe that gold is in a long-term bull market. According to Dave Rosenberg’s newsletter, gold production has dropped 9% in the past year – and demand for gold jewellry out of India is picking up the slack from where investers are levelling off.
      In addition, look at the currency situation – what major central bank is not under pressure to print more currency?
      The US wants to not only raise exports by depreciating the dollar, but also to re-inflate the housing market (hence the Fed’s massive balance sheet expansion into mortgage-backed securities along with Fannie and Freddie debt).
      Japan and China are too reliant on exports to allow their currencies to appreciate too high
      The European central bank has already succumbed to helping with a bailout of struggling Eurozone governments, and is lending based off Greek debt despite it’s junk-bond rating. There are also signs of deflation throughout the Eurozone – especially with the fiscal tightening by the government – which the central bank will want to combat thru balance sheet expansion.
      Finally, don’t believe in the recovery you keep hearing about because it’s all skewed by temporary factors such as government stimulus – it’s not driven by private sector job creation or wage growth. An uncertain economic environment is also good for gold, as it is a classic safe-haven. Other commodities will likely fall due to struggling demand, but gold is acting more like a currency every week.
      Last note – I’m not actively buying or selling gold right now – just holding my investment. It tends to take a big movement in the price of gold to move the GLD etf enough to make trading worth it’s transaction costs.
      -John T

  2. Jared says:

    Hey John,

    Looking forward to commenting on this blog. Just wanted to get it bookmarked. I’ll look it over in more detail later.

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