Yuan up, dollar down, gold up, U.S. GDP down, emerging markets up, housing prices down, government spending up, sentiment down, unemployment up, and markets up and down. Sounds a bit disjointed, but actually it all paints a fairly consistent picture.
MARKETS UP AND DOWN
August was the worst month for the overall markets since the dotcom meltdown, with the major indexes
down 6% for the month. Fortunately, the investment world appears to be moving towards our favorite sectors and August was a flat to slightly up month for us, while September is shaping up to be an excellent one.
GOLD AT $2500/OUNCE
Congress has recently stepped-up the fervor against the Chinese currency, pressuring China to allow their yuan to appreciate against the dollar. Read between the lines and you know where our government wants the dollar to go – DOWN. If the dollar is to go down in value, gold (the alternative currency) must go up. For that matter, so will all other hard assets.
Then take a look at our nation’s $13 Trillion debt, $59 Trillion unfunded debt and record deficits for years to come; and compare that 
to a shrinking workforce (due both to high unemployment and retiring baby-boomers) and you have a recipe for quantitative easing (Fed printing money). Considering the discrepancy of debt to tax-base, I calculate gold at $2,500/oz. in the next couple of years, on its way to $5,000, before the end of this decade. And that assumes no dollar meltdown.
Simply put, gold is a reflection of the dollar and other fiat currencies. Whether it be from classic inflation, too many dollars chasing too few goods, or in this case from dollar devaluation (same effect on prices but different cause). Dollar devaluation is caused by the Fed printing more dollars, or today, by the expectation that they eventually will. So, if you see gold rising, it should be a warning flag against holding dollars in money-markets or CDs, since the dollars you receive later will be worth less than those you deposited.
EMERGING MARKETS
There are long-term structural changes occurring in the world economies today. Though we have been invested in emerging markets for many years, it is only in recent ones that there has been much attention to the BRIC economies (Brazil, Russia, India, China), and not much beyond those. Our other Asian and Latin American investments are now beginning to get more attention as investors realize that they can take advantage of their turbo-charged growth and make money while the U.S. is seemingly trapped in a trading range. Combine growing economies with governments that are both business friendly and maintain healthy balance sheets, and you have an investment opportunity where gains may be plentiful and enhanced by currency conversion to a lower dollar. The growth of emerging markets while developed economies struggle to regain their footing will be a monumental shift in which investors should take advantage.
We are focused a bit more narrowly than just buying the foreign indexes. I don’t expect the export sectors of emerging markets to do very well if they are exporting to the U.S. and Europe, however the best exporters selling to the new middle classes will do very well. Whether it be an American company or one located in almost any other part of the world, I expect the good ones will do very well selling to the emerging middle and upper classes.
BOTTOM LINE:
As China allows the yuan to appreciate, items we import from them will increase in value. This could be bad for Wal-Mart consumers and bad for Wal-Mart. Interestingly, it will actually work in favor of the small Mom & Pop shops that tend to get their wares locally or from Latin America. It is one more reason we are concentrating our Chinese investments on their consumers rather than their exporters.
Low interest rates, growing demand for materials with diminishing supply, combined with growing emerging market economies, may not make for a smooth ride but it should make for a profitable one… at least in the right sectors.
Frank
Ph. 512.345.6789
Ph. 512.231.0800
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