Is this really a low risk or a high risk environment?
Or you take the high road and I'll take the low road, or
is it vice versa?
My own reading is that this is a high risk investing
environment that we are in, not a low risk period. This
is a trading environment we are in right now, and that's
why I am in the market, as a trader, not as an investor.
If I can make a profit, I take it and sell out. If I'm
looking at a loss, I try to not let it get out of hand...
and get out.
Why do I see this as a high risk environment?
1) The dollar is overvalued. George Soros has stated he
thinks the dollar is 30% overvalued. As someone who broke
the Bank of England, I'm inclined to listen to what he has
to say. What's bad news is that he now has lot's of company.
Investment firms from Merrill Lynch to Goldman Sachs are
forecasting a decline in the dollar. With the Fed rate now
at 1.25%, and the ECB and Bank of England around 4%,
obviously you can make more by putting your money there
than in the US. The dollar as a currency has been weak
and falling since Greenspan cut interest rates by 1/2% and
the Euro has broken thru prior resistance.
What is aggravating the situation, is that the US is running
a balance of trade, current accounts deficit to the tune of
about $1 Billion per day.
How long can this continue? Not much longer. When the tide
of foreign money begins to reverse and they refuse to
accept ever cheapening, ever worthless dollars in return
for their goods and services, the adjustment will be not just
sharp at times, but prolonged over many years.
O'Neill talks a strong dollar policy, but in reality, the
administration does not have one.
Where does this leave stocks? Well much of the dollars
that foreigners hold is invested in our stock and bond
markets, commercial property, etc. If they no longer want
to hold so many dollars, then they will sell off these
assets in order to be able to exchange the dollar for some
other currency.
The last thing we need is more selling, more people throwing
in the towel, especially when those people throwing in
the towel hold $2 trillion in stocks - that's how much is
being held by overseas investors. But IMHO, it's coming.
There are other factors that make this a high risk
environment. High debt levels by consumers and corporations,
increasing layoffs and consumer spending that looks about
to poop out finally, stock PE's that are still overstated
due to options not being accounted for and other shennanigans,
book values still overstated due to goodwill and various
other impairment to assets, airlines, utilities,
telecommunication companies still going bankrupt, Moody's
and S&P still downgrading more companies (debt) than
upgrading, overcapacity, a wounded banking sector that is
looking to cut exposure - ie for reasons not to lend, instead
of lending, etc. and it's a pretty bleak outlook.
Sorry to be such a wet blanket. Right now, my take is that
the dollar is the thing to keep your eye on because it's
about to become a huge battleground. And that's the
last thing we need.
The bet that's being made is that it's in no one's interest,
debtor or creditor nations, to upset the applecart too
severely and to let things adjust slowly. We'll see.
Peter. |
