Markets are society’s energy processing points. They allow pressures of all sorts to be relived through what we call supply and demand. Just like in our bodies this process is not always smooth. Contrasts create distortions, unequal pressure, stagnation and run away energy.
Just like energy processing points markets often need stimulation or sedation. In stock markets we call stimulated markets a bull market and sedated market a bear.
When markets become over stimulated (investing long) or sedated (taking short positions) we as investors can often earn extra profits. However we should realize that for everyone’s good these imbalances must correct. Most investors who make fortunes in imbalanced markets, give the profits back because they fail to see and adjust for correction.
This has been the recent case with emerging currencies and markets. The economic reality that emerging markets have higher growth than developed has been overbought. Now there is a correction. This is good. We should be thankful because these corrections keep the world in economic balance and continually create new opportunities.
On the subject of emerging markets watch the announcement this week of US consumer and producer prices for May 2006. These are indicators of inflation. Here is what investors are thinking.
A: Emerging market economies are doing well, in part, because of US spending.
B: The US has spent itself into deep debt.
C: This debt could cause US inflation.
D: US Inflation will cause the US dollar to fall.
E: A weaker dollar will cause prices of imported goods from emerging markets to rise in the US.
F: Rising prices in the US will slow demand for these imported goods.
G: Lower demand will slow emerging market economies and emerging stock prices and markets will fall.
Jyske Bank says: “Prior to the release of the inflation date from the US, the emerging markets will take it easy. Compared with recent weeks’ volatility, the market has stabilized somewhat. Many investors have adjusted their holdings, either because they were forced to do so or as part of a reduction of the risk. But the Fed still holds the key, while the equity markets are a good illustration of the sour sentiment. In the US the yield curve has become inverse\ again, i.e., expectations of interest-rate hikes for the short term and falling inflation for the long term. High short-term yields and lower long-term yields have been a predominant feature during the past four economic recessions in the US, which would have an adverse impact on the emerging markets. Still, this is not our scenario at the moment.”
I noticed the impact of this inverse curve last week when renewing US dollar CDs. I can now earn higher interest on 3 month money market investments than in one year CDS. If you have US fixed interest investments you are renewing, discuss with the financial planner the sense of investing for the short term now!
Be thankful for distortions as well. When the market paints a genre black, it tends to paint the entire genre, not each part. At times it misses and paints something black that should be white. Take for example, Brazil: The currency has a truly lousy history full of inflation and devaluation. But the fundamentals have changed. Now Brazil is even buying back its debt and the government recently bought back USD 1.1bn of its government loans. This is the type of energy imbalance to watch. The lousy reputation means you can already earn high yields even though the economy may have turned around. The fact that Brazil is still part of the emerging market genre may push the Brazilian yields even higher. This could create a real steal with extra forex profits when the market catches on and equalizes this contrast.
Learn about contrasts and distortions in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Copenhagen and Steve Marchant from Ecuador and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Learn more about Ecuador import and export from Steve. Our May course was overbooked and the September session is filling up. Our free accommodations are reserved on a first come first served basis so do not delay! Go to garyascott.com/catalog/ibeznc.
Here is a picture of Cotacachi Cathedral, a big place in our tiny village.