This week’s letter will be slightly shorter – as my oldest son is graduating High School today – and I wouldn’t miss it for the world!
"I wish to tell the U.S. government: Don't be complacent and think there isn't any alternative for China to buy your bills and bonds. The Euro is an alternative. And there are lots of raw materials we can still buy. Some people say the Euro is very weak. Okay, weak is good, we'll buy very cheap" - Yu Yongding (China's former Central Bank advisor)
Look at the commodity space – coal is up – copper is up – iron ore up – lumber up – gold up – silver (really up) – oil is up – and the list continues – mostly up!
China has one thing that we don’t – money. Crushing deficits are not affecting China – because they aren't running a $1.8 Trillion deficit. They aren't swimming in a national debt of $12.5 Trillion dollars. They don't have future liabilities of $99 Trillion as Richard Fisher of the Dallas FED recently just told us we have. And, as we continue to print more money – it lowers the value of the money already in circulation. With China sitting on a large pile of dollar denominated holdings (that are falling on a daily basis) – they first begin to yell at the Americans for letting things get out of control. And then, they begin to swap those depreciating dollars for "stuff" – hard stuff – stuff that you can make bridges and roads out of, burn in your power plants, and store in your vaults that won't lose value. The combination of dollar inflation from printing so many of them, and China's decision to decide to swap out of them in favor of hard goods has sent commodity prices soaring. Even the shipping industry (which had been left for dead) has put on a heck of a show recently as it takes lots of big ships to move hard good raw commodities from one area of the world to another.
Can this continue – yes – just look at oil. All over the globe falling asset prices, coupled with rising unemployment and sour economic fundamentals, forced people to cut back on travel and energy use. The result is that right now we're swimming in black goo. We've got untold millions of barrels floating around the high seas with no port to dock in and unload it. Yet despite that, oil has gone from 40 to 68 dollars. Why – doesn’t supply and demand work any more? Sure it does – it just so happens that oil is priced on the world market in dollars – as the dollar falls, it simply takes more of them to buy the same amount of oil. The purpose of the stimulus and “printing money” is to devalue the dollar. That way you get to pay back your debts with devalued money. So with inflation being around for any foreseeable future - it's absolutely essential that you have the number one and number two inflation hedges, that being gold and silver.
The point behind all this of course is that you should own some gold, and some silver. But while gold and silver are the king and queen of the value party (while the inflation is roaring) the other hard good commodities will stay in play. China is basically trying to get out of holding dollars, without plunging the value of them.
Each and every day, anyone with a logical thinking mind wonders "When's the rug pull going to come?" Nothing about the market is ever easy, but we’ve been playing this game long enough to know how to follow the bigger trends. It's our guess that "overall" the market is destined to go higher. But along the way we should get at least one, if not two scary pull downs that keep people honest. Currently we’re up against the DOW’s 200 day moving average – a very important average – and I think we’ll remain a little flat – then run up to about 9K and then, yank the rug and send us down for several hundred points.
At some point - we are going to take a smack down, and it could end up being in the 8 to 10% arena. If that indeed were to happen here in the next few weeks, it would be another buying opportunity because this market hasn't finished doing it's business – because I think the DOW 10k+ is in the cards before we roll over into another massive bear market later in the year and all through 2010.
Bottom line - the "big" dips are still buyable. Last year our single biggest source of income was riding long term puts lower, some of them returning 400% and more for us. We feel another similar opportunity awaits us for next year.
Currently I like:
- IPI for fertilizer and growing crops
- MOO for commodities and growing crops
- SLW / PAAS for silver (the metal)
- NGD a gold mining company
- FSYS an alternative fuel systems company
- GDX the basket of gold miners
- GLD the basket for gold (the metal)
- XLK the basket of technology excluding health-care
- Look @ TIE – Titanium Metal investment over $11
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.