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I've been in macro-economic thinking mode these last days just as I have also been thinking about considerations to my portfolio.

When I say portfolio management I am not talking about the corporate accounts where a fund manager invests other peoples money and thus is not in the direct line of pain should it all go gloriously wrong but rather the thinking which must go into managing your own hard-earned money.

To my mind, knowing and keeping current with the macro, or "big picture" is the only true way one can be successful on the micro outlook, or personal portfolio. With the inherent inter-connectedness of resources, politics and economies, the purely nationalistic approach becomes ever more of a risky dinosaur which probably will not lead us consistently forward to success but keeps us imprisoned in parochial and simplistic thinking patterns even as the obvious environment changes to more global oriented outlook and need for understanding.

The nation-state has never before been more dependent upon intra- and inter-national relationships of trade, commerce and politics yet often many investors take very inward looking approaches to investment and currency considerations. This may be cozy and understandable, as people gravitate to what they know, but it is not necessarily wise or potentially long-term rewarding. Here I am asking investors to expand and learn more - turn off the TV and turn on your mind, do research and be open to international investment vehicles. The world is becoming more complex and to understand risk verses reward we must be willing to leave our "comfort zones" at various times. It was Goethe who said that travel opens us up to a whole new world and it was the Dalai Lama who tells us to visit a new country every year to open our eyes and minds and learn more of the world, as that is beneficial to global healing and understanding amongst ourselves.

Why do I mention these things?

Because I see the entire Western, and often arrogant, culture being slowly transformed from an economic power to an economic cripple. O, this will not happen over night but nor will it take half a century or longer. It is happening before our very eyes, one must only read and heed the signs. With such transformations come large risks but also rewards - it is best we simply "get over" it and look to embrace it, for we cannot stop it. In a piece I wrote last year, I mentioned that the Asians are producing vast amounts of engineers and scientists as the West struggles in keeping up and placing the importance on education. In fact, higher education in the US is now becoming a luxury as recently reported - more and more families cannot pay the tuition. Europe is now also struggling with university fees as the social state can no longer foot the bill - students are left to try and find poor paying jobs to manage enough in order to live and pay tuition.

----------------------------------------

US GDP is 60-70% consumption driven

Why has the US not been hurt by increasing real inflation as resources and commodities like oil / gas move higher? I believe the answer lies in what I call "aggregate pocketbook demand". In an economy being driven by consumption, the normally harmful effects of over consumption, ie. low or zero savings, or spending beyond ones means - which would normally curtail over spending - have been and are being offset by a number of complementary forces.

The imbalance of US over-consumption is dampened by the deflationary tendencies of Asia - yet once the evening out of macro economies starts to exert pressure on that imbalanced equation those left standing will have a complete infrastructure of manufacturing from which to CREATE new value whereas those accustomed to consuming will be left holding a lot of STUFF but with nothing of lasting value from which to create new value or with which to compete. At that point the metaphor of cutting each other's hair kicks in, or in other words, an economy similar to that of a communist state-controlled system, e.g. North Korea or the likes thereof.

We know the consumers need cash and they have been getting plenty of it from different sources : the very low rates in the form of Fed dropping all the way down to zero has obviously caused lending rates to fall and thus capital purchases such as autos and houses become seemingly inexpensive to purchase if not downright attractive. The ongoing purchases of cheap "stuff" from "Made in China" is maintained by the Asians purchasing US Treasuries in order to keep their people in work and maintain an attractive export advantage. This is all more or less known. What people have not spoken about is that the DIS-equilibrium of this equation has also been kept alive by the ability of US companies to "pretty up" accounts by cutting back costs through offshoring certain jobs, job layoffs, virtually no inward capital investment and possibly even internal efficiency / rationalisation programs. What this has resulted in - in the short-term - is that the aggregate costs of things for the consumer has been able to be maintained BUT that the seed corn of future growth is steadily and rapidly dwindling. Room for maneuvering becomes ever tighter.

Hence, the disequilibrium will fall back into equilibrium at some point as all the factors which produced the "feel good" times are turning against that equation :

  • Borrowing costs are rising as the Fed increases rates - there are 3 more FOMC meetings before end of year which could raise the Fed rate from 3, 5 to 4,25% if they do a 25bp rise each time. As I have already said, I believe they intend to stick with that tact. This could push mortgage rates to over 7%.
  • One-time US corporate repatriation tax advantages are only for this year which may help the budget this year but does nothing to stop the root cause,
  • Housing owners, being at the mercy of rising rates, are now facing a very tough situation as most mortgages have been dealt with very little downpayment and many with ARMs,
  • The argument of an average US worker output production being higher than that of EU counterparts is nice but does not address the large disparity when compared to workers in Asia or Central America,
  • Oil looks to be settling, on average, above $50 for the long term,
  • Asia is now increasing its appetite for diversity out of US Dollars, albeit slowly, thus putting further pressure on the Fed to raise rates to offset risk,
  • US savings have now fallen to 0% at the personal level,
  • Continued political instability in major oil producing regions like M.East, Central Asia and South America,
  • Investment in oil : major producers continue to resist exploration campaigns as the price is still not high enough to justify costly exploratory research nor has the price rise been accompanied by refinery capacity increases,
  • Russia is now wrestling to gain back control of her oil into state hands just as China is now going on the hunt for resource control through buyouts as in Petro Kazakstan. The days of Petro-Dollar transactions may be coming to a halt and with that a powerful back thrust to the US Empire,
  • US Dollar outflows from US investors is increasing,
  • Equally, once corporate rationalisation and outsourcing projects are finished, no short term benefits to bottom line sheets can be expected. On top of this, often hidden pension scheme costs are not fully transparent.

This is possibly the time when the "writing on the wall" is laid bare for all to see - Corporate America is weakening and the long-term instruments of economic health may now be found in the hands of global competitors.

Based on the above fundamentals, I continue to believe that the risk/reward scenario for US markets remains a stretch at best for longer term oriented global investors and therefore I will continue to look abroad for attractive equities both in the industrial and resource sectors. Of course there is value in US corporations but the fundamental backdrop outlined above continues to plague my outlook and force one to be cognizant of inherent risks which might could better be avoided. Even professional fund managers are having a difficult time to find yield and ensure profits, how does one expect the average non-professional investor to stay ahead of the game?

As I have stated before, if the US Dollar is taking a breather and consolidating, then any further USD strength will continue to keep the Euroland exporters buoyant. The ongoing question mark remains the extent to which oil will correct or move higher. Euroland, in general, being more energy efficient than the US markets and less auto dependent, may weather any extended oil outliers better than oil-consumption hungry US industry and consumers. As well, a strong Dollar is detrimental to the US budget deficit as it continues to encourage consumption, encourage energy waste and delay painful and necessary changes. Nevertheless, I still remain open-minded to the idea that the USD rally may be coming to a near term turnaround as the fibo retracement @ 38% has been touched and tested. This may bring a successful southbound penetration in the near term.

Another reason, although having long been bearish on the German economy, I believe we may be finding ourselves at the cusp of an upturn as election gridlock may be unraveled with the impending election just weeks away (if the constitutional court gives the go-ahead). Likewise, the structural reforms may go further to giving industry greater leeway in labor and investment practices. Should this happen, then the slumbering, to near-dead EU giant, Germany, might yet again start to make pitter-pat humming noises from the factory floors.

I think it still too early to tell whether Germany is back on its economic feet. Ditto for Japan. Many are speaking about a re-livened Japan yet I remain cautious on both counts. Let's see some good quarterly GDP reports before jumping to conclusions. Let's see unemployment in Germany improve. Let's see the Euro consumer start to pick up. It's a nice story but I certainly don't believe it wholeheartedly yet. Where's the beef?

On the gold front I still remain cautious - look at this chart.

Right now, off the red fan, the ratio is sitting at its 200 dma 0.47 and should it breakdown off the 200 dma, the lower red fan line and the blue line, then this does not look like gold stocks are going to go anywhere in a hurry. Articles have been abounding with respect to the commercial shorts, COT, and how they have increased their short positions in large amounts. It will be interesting to see what gold does with all that negativity directed at it - I'm thinking "go gold, but get serious Buss, it might take some more time". Actually I've been thinking that for two years. Patience, patience.

Honestly, when I look around I see mostly fear in the markets, and I'm not talking about the VIX. Too many things can go bad to worse be it housing mania, to oil, to terrorism, to trade wars, to nuclear spats, to Asian Bird Flu, etc. YET the markets are not capitulating yet, but neither are they charging forward. I believe it is now a game of simply waiting. I can wait. No need to rush. Meanwhile I'm looking around for sectors and markets which need our investment attention.

More on this in upcoming issues - if you would like to know more and be included in future portfolio recommendations, please sign up for a free subscription to Der Invest Informant here. As well, please visit the site daily and read my Latest Letter.

Well, that's it for today... for more on this article and more charts please visit the homepage www.dinl.net in the Latest Letter box.

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