… the $400 billion or so pumped into financial markets to unfreeze short-term credit markets caused the stock markets (as well as other financial markets) to celebrate by rallying anew and investors are again taking a more relaxed attitude toward risk.
Global central banks are finding the path of least resistance is to provide continued liquidity injections (and job longevity, because anyone who believes that central bankers are immune from political pressure is simply being naive). But doesn’t this monetary largesse have consequences? You bet it does.
The consequences are bear markets in the US and Japan stock markets relative to “hard” assets like gold, and “banana republic” real exchange rate values in the US dollar and the Japanese yen that are at 20-year lows and falling. As long as monetary inflation continues, $100/bbl oil (an 18% appreciation) and $1,000/ounce gold (a 31% appreciation) no longer seem like a pie-in-the-sky notion. Over the long term, it could even lead to Weimar Republic-like scenarios. The “hard” currencies are now the Euro and BRICs currencies like the Chinese yuan. For stocks, companies more closely linked to commodities and BRICs demand will continue to outperform, especially if they are in “soft currency” markets like the US and Japan.
While the most recent run in crude oil and gold will eventually run into short-term profit-taking, you still need to own oil, gold and BRICs-related stocks because the Presidential Election Year Cycle trend has historically been your friend through November to January. In the typical cycle, the stock market bottoms by the end of September of the mid-term year and peaks in early August of the post-election year. In addition, the November-January period tends to produce the best quarterly gains each year because of the so-called “Halloween Effect”. That’s why we continue to like emerging market ETFs, commodity funds and BRICs/commodities related Japanese stocks, although continued monetary inflation makes us nervous. (yeald)
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