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Further Market Decline Will Create Opportunities

Published 02/12/2016, 01:36 AM
Updated 07/09/2023, 06:31 AM

Many global stock markets remain uninteresting, but a further market decline will create opportunities. Gold is interesting, especially if one buys on a dip.

We do not see much opportunity in U.S. and foreign stock markets. They have not yet become inexpensive enough to buy for more than a trade. We have been patiently waiting for a dip on which U.S. stocks can be bought. There are a number of well-managed companies which are progressively becoming more attractive as their prices fall while their earnings grow. Most of these companies are found in new industries with tailwinds: social media, technology, biotechnology (with the caveat that they remain political hot potatoes), online retailing, security software, mobile payments, healthy food, and sharing (home rentals, ride sharing and other sharing services).

Gold

Gold shares are attractive on dips. Technically, gold has shown encouraging signs, and we expect further appreciation after a short corrective phase. We do not anticipate a rise in the gold price to the old highs of $1900. Rather, we envision a more modest appreciation to between $1320 and $1500/ounce. That appreciation will, in the short term, be due to demand as a hedge against government behavior, and in the long term because of a realization that if central banks cannot create inflation with their policies, governments will print money to get inflation up in their countries.

Why is inflation necessary and why do central banks want it?

It has become very obvious that inflation is a necessity for world governments; that is why central banks are trying so hard to create it, and that is why we will get it one way or another. If economic growth is poor and inflation is minimal in spite of all of the tools in the central banks' toolkits, governments will eventually have no option but to print money and devalue the currency. This will allow them to pay back debt more cheaply.

Today the world finds itself in the midst of an industrial revolution much like the ones that we studied in school.

This revolution, as many have pointed out, is a technological revolution. What fewer have mentioned is that this revolution is affecting the standard playbook that central banks in the developed world have used since the end of World War 2.

That playbook is to create a modest rate of inflation -- 1 or 2 percent per annum -- which will gradually allow debts to be paid back as currencies depreciate. This strategy encourages the growth of corporate profits and salaries, and thus allows stocks and real estate prices to rise gradually, allows governments to spend slightly more each year on programs which are sold as beneficial to the voters' pocketbooks. This ensures the security of the voters, and the longevity of the politicians.

The entire edifice of U.S. and developed-world debt creates the need for economic growth and a modestly inflationary economic environment. A deflationary economic environment will work to undermine and eventually topple the edifice of world debt. If borrowers can no longer depend upon repaying debt with less valuable currency, and are instead repaying debt when the price to repay is higher than the cost to borrow, many borrowers will renege on debt -- which can lead to a cascade into national or even global economic hardship.

The way that governments have historically solved this problem is by debasing their currency. Historically, when nations have borrowed more than they can repay, they often print money and repay in devalued currency. Major side effects occur for the defaulting nation and for others. Today we see some countries at various stages of the default cycle.

Like all previous industrial revolutions, many aspects of the current one are productivity enhancing and eventually deflationary. The deflationary characteristics are frightening to many who are used to the status quo and to gradual change. It is a well-understood psychological pattern to resist change, and most people are not comfortable with rapid change, especially when it requires job retraining and the development of new skills as an alternative to loss of work.

Those least likely to resist change are the young. This is good, because change today is occurring at a greater rate than it ever has before. With rapid change comes rapid job displacement, and the creation of new industries and new jobs. It also creates the need for vocational retraining, lifelong education, and the development of new skills while on the job. Most of us will have to adapt, learn and reeducate ourselves throughout our lives.

All of this creates anxiety among the populace, which is being reflected in the political process in the U.S. and around the world.
Additionally, the world economy is also dealing with the cyclically deflationary tendencies that have resulted from the overbuilding in the world of commodities, due to demand from China which has now been fulfilled.

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