Macro Trends Redo
Research for Online Investors

by John Dalt

5/17/10

Nervous investors around the world are watching red paint their computer screens today.  Relax everybody.  The jostling to buy and sell and find the silver in the storm clouds is simply giving you more grey hair.  I have enough for all of us!

One of the ways I like to invest is to study the news for an educated feel for a macro economic trend, then establish positions that will profit if your prediction is true.  This may help you cut through some of the daily clutter that can confuse and daze the most seasoned investor.

The market is past reacting to the Greek credit problems, now we are reacting to the remedy applied by the eurozone countries and the IMF.  The market feels they went too far.  Rather than propping up Greece for $50 to $150 billion, a $1 trillion agreement was announced a week ago, that provides a framework for any eurozone country that experiences problems selling their sovereign debt.

Initially, this was greeted with a great sigh of relief, then the apprehension set in.  Where is all of that money going to come from?  This question has haunted traders and investors for the last week.  It seems like the Europeans are priming the pump, jacking up the weak so to speak, with so much money they are going to kill the patient.  The euro has slid to its lowest level in four years.

If the eurozone is in economic trouble, this means falling exports for U.S. companies into that region. It means larger exports out of the E.U., just because of currency valuations. What will the balance of trade with the eurozone countries look like in one year? One of the sidelights, but a very important issue, is China. China’s yuan is tied to the U.S. dollar.  Europe is China's largest export market.  China exports to eurozone countries are becoming more expensive as the euro falls against the dollar.

We have seen China tighten lending standards and bank reserve requirements since the first of the year in an effort to slow inflation.  The U.S. is pressuring China to let the yuan appreciate against the dollar.  A rising yuan would help the U.S. balance of trade with China.  It will be very difficult for China to let the yuan appreciate in light of the euro falling in value.

This could effectively lock China out of the eurozone economy.  The euro has dropped 7.5% against the dollar and the yuan this month!  That is gigantic.  If they let the yuan appreciate against the dollar, their products could jump in price by 15% to 40% in Europe, because of currency valuation alone.

In retrospect, Angela Merkel, Germany’s Chancellor, may have been right to look very suspiciously at any rescue of Greece.  The markets would have reacted negatively to a Greece default.  But, Greece kicked out of the eurozone would have been akin to a bad shin bruise.  The whole of the eurozone being sucked into the vortex of a credit crisis has more in common with intensive care.

Destruction of the euro causes a lot of unintended consequences.  The heavy footprints of investors trying to understand these potential consequences has moved the market for the last five trading days.

What do we think are the macro trends? The U.S. economy is recovering, in spite of many of the actions taken in Washington. Interest rates are going to go higher everywhere. U.S. rates have been pushed down as investors sought safety from euro debt, then equities as volatility increased. This will change. There is too much debt being created around the world for it all to be bought without rates going higher.

Fixed assets must compete with other investment opportunities.  If blue chip stocks offer a safe 5% dividend, why would you buy a 10-year treasury bond with a 4% yield?  Eventually, and we don’t know when, the U.S. will have a failed auction. Watch out. When buyers do not show up in sufficient numbers to buy everything the Treasury wants to sell, rates will move higher quickly.

Crude oil is going to become more expensive.  Look past the present changes in price due to currency fluctuations, crude is a limited supply commodity.  Economies are improving, and need more oil.  Developing country’s populations want cars, and a higher standard of living.  That means energy usage.  The price of oil must move higher.

Precious metals will go higher.  We don’t believe the current price spike is “the big one”.  We still believe precious metals will take a breather from their present overbought status.  The fear in the market is aimed at Europe.  When this fear subsides, where do the precious metal buyers come from?  It feels like the trade in metals is getting crowded and running out of motivated buyers.  It has not entered a “hyper” stage where Joe Six-pack wants to buy gold.  I have not had anyone approach me in church about gold, yet.  I will let you know when I do.

Let me know what macro-economic trends you are considering that affect your investments.  Have you seen evidence of gold hysteria?

To the mailbag:
“Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the citizens who sent us here. Let’s try common sense.”--- President Barack Obama---sent in by paid up subscriber D.E., found on www.whitehouse.gov/omb

John’s Reply: Thanks for sending in, I may bookmark this site as a weekly resource for the joke section.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top