Summer comes to a close...

Here we are... The days are getting shorter and the nights longer. There are whispers of the 4 letter "S" word on the trains and buses. AND, contrary to popular belief, the world has not come to an end. The markets keep turning, people keep consuming, and politicians keep on posturing. Let's review:

August was a rough month, so I took some time to meet with a friend and long-time mentor to discuss some of the recent turbulence, and more importantly, to find out where and how we should be focusing our investments in this harsh and unpredictable environment we find ourselves in...

The recent weakened in stock markets started on July 29. That was the day that the US government announced a revision to the first quarter GDP from 1.9% growth to 0.4% and said the first pass at the second quarter was 1.2%. These were shockingly weak numbers given the US deficit spending was running at a $1.5 trillion annual rate and Fed QE 2 plus their interest reinvesting was running in the $ Trillions as well.

Richard Koo said the QE programs wont work because business and consumers are not borrowing and spending, and therefore the money sits in the bank. This means the monetary toolbox of the Fed is limited in impact. (This also spilled into stronger emerging economies igniting inflation)

The two government sectors that control the economy are the elected politicians that can raise and lower taxes and spending, and the non-elected academic independent Central Bankers. Richard Koo is seeing the political winds move against government deficit spending just like what happened in Japan 15 years ago. He must be horrified. He came and warned Congress and proved his analogies between the Japanese balance sheet recession and the current US situation, but the elected people listened instead to their electorate (no surprise). The gridlock around the debt ceiling showed the distaste for government spending and borrowing.

Anyone familiar with Koo's theories realizes that reducing government spending during a balance sheet recession will tank the economy and the stock market. The fact that the Fed's massive QE program just kept the economy flat was ominous. Also the Fed's board had 3 dissenters for the first time in their last meeting, which includes future stimulus actions.

So that being said, where does one focus?

Gold could go into a bubble because any Central Bank action will have to include even more massive money printing given the weak response of QE2, and the elected officials move to restraint either by choice or by bond vigilante pressure.

The unelected academics in the Central Banks will try to offset the deflationary tides of their elected counter parties.

Emerging markets should outperform massively. The current drop in commodity prices takes the pressure off inflation that has kept their stock markets flat or down for the last 2 years.

***Emerging Markets produce over 50% of global GNP with only 14% of global debt... Compared with developed economies, where does the engine of growth look to favor the future?

Very interesting times we are in...

As always, drop me a line if you want to chat.

Best Regards and Safe Investing.

E.

(Above comments courtesy of Ken Macneal, Director/Investment Advisor, Richardson GMP)