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harbsta

Any Funds To Invest In Now While Everything Is Cheap?

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Hello,

Just wondering if any of the more stock markety people here would recommend any funds to start buying into shortly. I am thinking as the stock market is in a downward spiral at the moment, it is a good time to start thinking about investing into funds for long term growth (5 years ish).

Thanks.

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Just wondering if any of the more stock markety people here would recommend any funds to start buying into shortly.

I think it would be a foolishly brave person who would recommend any fund at the moment. If a bear market is assumed (which lots of people seem to accept) then we should expect most stocks to fall in value - with only a handful of objectively under-valued shares rising.

My take is that funds tackling business sectors, geographic regions, market capitalisation size - etc. will find it very difficult to turn a profit for some time... and only then will it be possible to see which stocks offer value for money and present a solid foundation for investment.

I'm not at all convinced that anything is too cheap... hence my interest in shorts (one thread down) but that topic, I'm finding, is remarkably difficult to get my head around - let alone pursue to the point that even I think my ideas are a sensible investment strategy.

At the moment, I can't find anything more sensible to invest in than cash... and that includes commodities, "precious metals", shares that have dropped 90% in value already - and banks that supposedly won't be allowed to fail.

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I like the iShares ETF range. There's lots of trackers for the main indicies (FTSE, Dow etc.), emerging markets and property. My SIPP is full of them.

They have ultra low charges of around 0.4% a year and many pay dividends. You buy them like shares and there's usually no stamp duty. Unlike funds they're also easy to sell out of if you need your money.

http://uk.ishares.com/fund/overview.do

There are also commodity ETFs, but they're very volatile and risky for us amateur investors.

I'm also drip feeding money into unit trusts - I'm doing this with my ISA with £50 a month into a UK financials, a Pacific Rim and an Indian fund. I chose my funds for their low charges. The Hargreaves Lansdown site have a list of their 150 favourite funds.

:ph34r:

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Hello,

Just wondering if any of the more stock markety people here would recommend any funds to start buying into shortly. I am thinking as the stock market is in a downward spiral at the moment, it is a good time to start thinking about investing into funds for long term growth (5 years ish).

Thanks.

I don't think it is a good time to buy stocks, when we are in the midst of a secular bear market which I think will last many years. They usually last about 2 decades. That goes for secular bull markets also.

I like this fund...Merck Asian Currency Fund It has 41% exposure to the RMB and has a distribution in most of the other Asian majors.

I would also get into precious metals like gold/silver etc. The open interest shows there are some very large long positions building in Gold at this time, especially in the November contracts. That could be about the right time for the next crisis in the system.

The point to remember is that in every secular bear market in stocks this century, has coincided with a secular bull market in commodities. They move inversely. In each of these bear markets lasting 15-25 years, the DOW has always reached a ratio of 1/2:1 with Gold, ie, Gold 3000 USD:DOW 3000, Gold 10,000: DOW 10,000...In a deflation it would be more likely that the DOW would reach 3000-4000 and gold around 3000 USD...However, as this is an inflation, that I m sure of now, I think the DOW will trade in a large range, and gold could finish its bull market between 5000-10,000 USD. It is very cheap today. Look to a hard currency fund, or a futures in CBIT mini Gold...which I think is the best way to make alot of money on gold and silver.

Also, when investing in any stock funds, pay attention to the currency. The DOW is up in USD terms since 2002, but down in terms of every other currency and asset. After all it is priced in USD. 10,000 on the DOW means 10,000 USD....same applys to the FTSE...it is priced in sterling. So if the FTSE goes up, it will be down in sterling terms in my view...

Stay away in my view from all these western markets in my view. Get exposure to stocks in resource rich countries, and therefore their currencies. Places like Oz, Brazil, China. Stay away from countries that are running huge fiscal deficits and huge current account deficits. Go with net creditor nations....

The agricultural commodities are very cheap today. Sugar I think is one of the cheapest substances in the world today. Studies have shown that as people become more affluent, they eat more sweet stuff. From my own direct experience this is happening in Asia, China, Thailand....etc...Also the studies also show that coffee consumption grows. This is also true from my direct experience...and official coffee consumption figures also. Coffee is still very cheap. The other point is that Brazil the biggest sugar producer in the world, have turned alot their plantations into bio-ethanol producing plantations...so this will affect the longer term price of sugar.

Check out thr sugar and coffee charts...They are very cheap...These commodities have lagged other commodities so far, and they will do well over the next many years....

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The open interest shows there are some very large long positions building in Gold at this time, especially in the November contracts. That could be about the right time for the next crisis in the system.

From where did you acquire this insight?

While I understand your insight that, historically, commodities and equities have appeared inversely correlated... I remain to be convinced that this will hold should we experience monetary contraction. It occurs to me that there is something very different about the world today - i.e. that derivatives provide a strategy by which to take profit in a falling market. Is this, as it appears, something 'new' - might it prove to be the undoing for strategies that worked in previous recessions but that have not been tested in the context of a credit driven economic decline?

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From where did you acquire this insight?

While I understand your insight that, historically, commodities and equities have appeared inversely correlated... I remain to be convinced that this will hold should we experience monetary contraction. It occurs to me that there is something very different about the world today - i.e. that derivatives provide a strategy by which to take profit in a falling market. Is this, as it appears, something 'new' - might it prove to be the undoing for strategies that worked in previous recessions but that have not been tested in the context of a credit driven economic decline?

From where did you acquire this insight?

The CFTC report. Non-commercials increased. The CFTC reported that hedgefunds and large investment banks have been building hefty positions. Net long positions last week gained over 200,000 contracts over shorts...

While I understand your insight that, historically, commodities and equities have appeared inversely correlated... I remain to be convinced that this will hold should we experience monetary contraction. It occurs to me that there is something very different about the world today - i.e. that derivatives provide a strategy by which to take profit in a falling market. Is this, as it appears, something 'new' - might it prove to be the undoing for strategies that worked in previous recessions but that have not been tested in the context of a credit driven economic decline?

Historically? I thought it was still happening today? The negative correlation since 2000 is stronger than ever...and the correlation in the last 6 months is as strong for ever....During the period of the Great Depression, commodities including Gold went up between 1924 to 1955..this was a contraction a huge contraction of credit, didnt affect commodities prices, infact they went sky high over the next decade or so....during all major recessions commodities have went up...I find it very confusing and misleading the dichotomy the FED and the vested interests present us with...They keep saying that recessions and a slowdown will bring prices down...All the evidence is to the contrary. But I know their game, so I m not surprised. I would go as far to say, it is rising commodity prices which cause recessions, and not a slowing economy which brings the prices down...It is the chicken and the egg question. I think commodities go up first...and the economy downturns follows...or at least they excerbate the deterioting economy and throw it into a worse recession.

On one had they say the economy is suffering because of high oil prices, and a slowing economy will bring down prices...leading to a recovery. However, if the economy starts to recover, then will this not push oil prices up again...Talk about wanting your cake and eating it.

Other point which is very important to understand is that in the 1920's 1930's and so forth the US was a net creditor nation. Not today. Today they are the biggest debtor nation the world has ever seen...In my studies, I have found that countries who are net debtor nations, go into hyper-inflations...and countries where there was great deflations were creditor nations, The US in the 1930's, Japan 1990.

Is this, as it appears, something 'new' - might it prove to be the undoing for strategies that worked in previous recessions but that have not been tested in the context of a credit driven economic decline?

I thought the speculation in stocks during the Great D was mostly margin trading?Are not all collapse created by excessive credit expansion?

The world is not much different today. Jesse Livermores book "Reminisces of A Stock Operator" talked about all the bucket shops (todays equivalent is spreadbetting companies) he was in during the 1900-1930, and the short selling, and high margin...Not much different from today. Perhaps the means are different, but all in all....

If anything what you are saying about derivatives and all that makes me all the more bullish about gold...

Gold will do well in a deflation or an inflation....This has always been the case. Gold went up 300% between 1929-33. Around this, I m not sure exact figures off the top of my head.

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The CFTC report. Non-commercials increased. The CFTC reported that hedgefunds and large investment banks have been building hefty positions. Net long positions last week gained over 200,000 contracts over shorts...

Good answer.

Historically? I thought it was still happening today? The negative correlation since 2000 is stronger than ever...and the correlation in the last 6 months is as strong for ever....During the period of the Great Depression, commodities including Gold went up between 1924 to 1955..this was a contraction a huge contraction of credit, didnt affect commodities prices, infact they went sky high over the next decade or so....during all major recessions commodities have went up...I find it very confusing and misleading the dichotomy the FED and the vested interests present us with...They keep saying that recessions and a slowdown will bring prices down...All the evidence is to the contrary. But I know their game, so I m not surprised. I would go as far to say, it is rising commodity prices which cause recessions, and not a slowing economy which brings the prices down...It is the chicken and the egg question. I think commodities go up first...and the economy downturns follows...or at least they excerbate the deterioting economy and throw it into a worse recession.

On one had they say the economy is suffering because of high oil prices, and a slowing economy will bring down prices...leading to a recovery. However, if the economy starts to recover, then will this not push oil prices up again...Talk about wanting your cake and eating it.

This is where I'm being a sceptic. I agree with you that there is a complex interplay between economic downturn and rising commodity prices - but these are only two of the variables. I think that the reason for the downturn is significant, and that it is important not to confuse the timing of the "event" when fundamentals reversed with the observation of the consequences.

While credit is central to any economy, I can see two distinct reasons for economic downturn. First, there might have been over-production of (inappropriate) goods - which would being a recession... many of the ill effects of which could be minimised with some timely looser monetary policy. Second, there might have been over-investment in (inappropriate) capital assets. In the second scenario, I don't consider loosening monetary policy to be much of a help... in fact, I think, it could be a dramtic hindrance - permitting fundamentally insolvent propositions to continue for longer than is productive for anyone concerned. I think it matters which party called a halt... I think it matters that, this time, there was still strong consumer demand for debt - but investors who decided that they didn't want to lend (at the market price) any longer. I think this distinction is crucial - it is not that home buyers realised that prices were crazy... but that financiers of the mortgage industry realised that home buyers were crazy.

My take is that, this time, commodity prices rose (predominantly) after support was withdrawn for mortgage finance. I think that we are set to see substantial demand destruction - though production shows no sign of abating. I think this can only result in lower prices... within a few months or, maybe a year or two. I don't think lower commodity prices, however, will cause economic growth, however - the economic problems are far deeper than commodity prices.

Other point which is very important to understand is that in the 1920's 1930's and so forth the US was a net creditor nation. Not today. Today they are the biggest debtor nation the world has ever seen...In my studies, I have found that countries who are net debtor nations, go into hyper-inflations...and countries where there was great deflations were creditor nations, The US in the 1930's, Japan 1990.

I thought the speculation in stocks during the Great D was mostly margin trading?Are not all collapse created by excessive credit expansion?

The world is not much different today. Jesse Livermores book "Reminisces of A Stock Operator" talked about all the bucket shops (todays equivalent is spreadbetting companies) he was in during the 1900-1930, and the short selling, and high margin...Not much different from today. Perhaps the means are different, but all in all....

If anything what you are saying about derivatives and all that makes me all the more bullish about gold...

Gold will do well in a deflation or an inflation....This has always been the case. Gold went up 300% between 1929-33. Around this, I m not sure exact figures off the top of my head.

I'm entirely unconvinced by your deflation/hyper-inflation argument. I think it is a mistake to consider debt without also considering dependence on foreign trade. I think that inflation - let alone hyperinflation, in today's global environment, poses such a risk as to make hyper-inflation of any significant currency extremely unlikely. If I were in the right authoritative position and sufficiently mad as to want to cause hyperinflation - I'd need to find a way to get more money into people's pockets. Today, I can't see any practical way to do that on any significant scale.

I'm reluctant to be sidetracked by gold - because I do not believe in it as an asset. I'm aware some do, and - as such - the movements of price are academically interesting. I note, however, that according to this list of gold prices between 1800 and 2008 the price of gold (in US$) was absolutely stable from 1929 to 1932 - and jumped 75% by 1933 - thereafter seeming pretty stable again... Quite different from the 300% you claim (were you talking about sterling prices? I can't find such historic data - but - if so, the abandoning of the gold standard in 1931 was a one-off event that rather undermines the predictive value for trends from that era.)

The curious thing about derivatives, in my opinion, is that they affect the market by exaggerating trends... so, if you were bullish on gold, the existence of speculators working on margin would likely make you more bullish. I'm bearish on all non-cash assets... and existence of derivatives suggest to me that prices might well fall faster than I expect.

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I'm also drip feeding money into unit trusts - I'm doing this with my ISA with £50 a month into a UK financials, a Pacific Rim and an Indian fund. I chose my funds for their low charges. The Hargreaves Lansdown site have a list of their 150 favourite funds.

:ph34r:

If you don't mind can you please share which funds these are? I've been looking for a financials fund for some months but haven't been able to find one.

Thanks.

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If you don't mind can you please share which funds these are? I've been looking for a financials fund for some months but haven't been able to find one.

Thanks.

Yup, it's the Liontrust First Income, although it's more of a high dividend fund (yield ~ 4.7%) than a dedicated finance fund, with only 13% in banks...

Liontrust First Income

There are pure financial funds though, e.g. AXA Framlington Financial, JPMorgan Global Financials, Jupiter Financial Opportunities etc. Be aware that historically banks make their losses at the end of a recession, not at the start, so we are in uncharted territory right now!

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Yup, it's the Liontrust First Income, although it's more of a high dividend fund (yield ~ 4.7%) than a dedicated finance fund, with only 13% in banks...

Liontrust First Income

There are pure financial funds though, e.g. AXA Framlington Financial, JPMorgan Global Financials, Jupiter Financial Opportunities etc. Be aware that historically banks make their losses at the end of a recession, not at the start, so we are in uncharted territory right now!

Thanks for this much appreciated.

I have been putting £100 pm into the Allianz BRIC fund and £100 into Jupiter India. Which indian fund are you in if you don't mind me asking?

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Thanks for this much appreciated.

I have been putting £100 pm into the Allianz BRIC fund and £100 into Jupiter India. Which indian fund are you in if you don't mind me asking?

Yes I'm in Jupiter India as well, it seems to be well regarded. I've also got HSBC Pacific Index which is the cheapest Asian tracker fund I could find.

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No, I'm more interested in trading so I largely stick to ETFs as I can be in and out of them in a flash.

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Good answer.

This is where I'm being a sceptic. I agree with you that there is a complex interplay between economic downturn and rising commodity prices - but these are only two of the variables. I think that the reason for the downturn is significant, and that it is important not to confuse the timing of the "event" when fundamentals reversed with the observation of the consequences.

While credit is central to any economy, I can see two distinct reasons for economic downturn. First, there might have been over-production of (inappropriate) goods - which would being a recession... many of the ill effects of which could be minimised with some timely looser monetary policy. Second, there might have been over-investment in (inappropriate) capital assets. In the second scenario, I don't consider loosening monetary policy to be much of a help... in fact, I think, it could be a dramtic hindrance - permitting fundamentally insolvent propositions to continue for longer than is productive for anyone concerned. I think it matters which party called a halt... I think it matters that, this time, there was still strong consumer demand for debt - but investors who decided that they didn't want to lend (at the market price) any longer. I think this distinction is crucial - it is not that home buyers realised that prices were crazy... but that financiers of the mortgage industry realised that home buyers were crazy.

My take is that, this time, commodity prices rose (predominantly) after support was withdrawn for mortgage finance. I think that we are set to see substantial demand destruction - though production shows no sign of abating. I think this can only result in lower prices... within a few months or, maybe a year or two. I don't think lower commodity prices, however, will cause economic growth, however - the economic problems are far deeper than commodity prices.

I will answer you in two posts Steve as my answers are quite long. I will deal with the first part of your post...first, and the second I will deal with the inflation/deflation debate...

This is where I'm being a sceptic. I agree with you that there is a complex interplay between economic downturn and rising commodity prices - but these are only two of the variables. I think that the reason for the downturn is significant, and that it is important not to confuse the timing of the "event" when fundamentals reversed with the observation of the consequences.

What I did say was that, rising commodity prices at least exacerbate recessions…and cause deeper recessions. I m not saying they are the primary cause. I intimated at it as postulation, and perhaps in the latter stages of a commodity bull market it could be a primary cause, as the pain of rising prices wrecks havoc in the economy due to lack of any real productivity growth. If you look at the NBER statistics of US recessions during commodity bull markets you will see that that if you overlay commodity prices during the recessions, they overlap. If we split each trend into three sections a primary trend where prices are still “low”, the medium trend where people become aware of rising prices and the final phase of the trend where prices spike before a correction we can find some interesting findings. In the primary trend or beginning trend where prices start to rise we have no recession, it is in the middle trend and final phase of the trend on commodity prices that the recessions take place.

I am of the opinion that credit expansion and asset bubbles are the cause of recessions, initially. We do have recessions of course in secular commodity bear markets, however, we have fewer recessions in this phase. Yes, it is complex to conclude that commodity bull markets exacerbate recessions and deepen them by only looking at a high correlation between commodity bull market and a recession, however the logic stands firm. There can be no doubting this correlation exists.

Firstly let’s look at a recession in a secular commodity bull market. We have some kind of bubble bursting, real estate, stock market like the NASDAQ for example. This is the initial shock, the bubble deflates, credit is contracted, businesses go belly up, and people hold onto their money and reign in spending. We then have rising unemployment and so forth, leading to more reduced consumer spending. Commodities are non-discretionary items for the most part…food and energy. It stands to sense that if food and energy are rising, peoples discretionary income becomes tighter…Companies input prices, producer prices rise, and profit margins become tighter. This leads to following earnings and a falling share price, and redundancies. Consumers also now face higher costs and spending becomes concentrated, in food and energy…the service sector of the economy and the economy GDP output as a whole drops due to falling output from business with falling profits…which is technically a recession. I believe that commodity prices exacerbate recessions at the beginning of a commodity bull market, but are not the initial cause, and in the middle and final phase stages of a commodity bull market they can be the primary cause.

. I think it matters which party called a halt... I think it matters that, this time, there was still strong consumer demand for debt - but investors who decided that they didn't want to lend (at the market price) any longer. I think this distinction is crucial - it is not that home buyers realised that prices were crazy... but that financiers of the [/bI think this distinction is crucial - it is not that home buyers realised that prices were crazy... but that financiers of the mortgage industry realised that home buyers were crazy.

I thought it was when the lower sub-tranches and sub-prime tranches of the mortgage CDO’s starting to implode in July of last year that led to two of Bear Stearns hedge funds going belly up, which led to a quick contraction of credit in the STIR markets, which then led to the Northern Rock (due to their reliance on STIR markets) blow up due to a huge contraction of credit…I don’t think we can assume that, one day the bankers walked into work, and thought, lets reduce credit…I haven’t heard of any asset bubble bursting with such rationalisation of thought. Due to the nature and the degree of high leverage in the market, I thought that it was this initial souring of the CDO market going wrong that led to a very quick liquidity dry up…which is why the FED dropped interest rates to provide liquidity…to paraphrase their own words...

Check the CDS spreads at the time…see chart below.

If you look at a longer term chart of the credit spreads you will see that volatility was extremely low before the credit spreads spiked in July. Perhaps the calm before the storm. I guess with hindsight it was the calm before the storm. With such low spreads and low volatility and then the consequent spike in July that would say to me there was no decision to contract credit. Instead it was a shock to the system, which was forced, which led to a “liquidity vacuum” for want of a better word.

My take is that, this time, commodity prices rose (predominantly) after support was withdrawn for mortgage finance. I think that we are set to see substantial demand destruction - though production shows no sign of abating. I think this can only result in lower prices... within a few months or, maybe a year or two. I don't think lower commodity prices, however, will cause economic growth, however - the economic problems are far deeper than commodity prices.

Commodity prices had made more than triple digit percent gains since 2001. See chart below. Some 7 years before support was drawn from the mortgage market. The rally starting since August last year when the credit crunch began was a normal secular rally within a commodity bull market. The FED “announced” to the world that they were debasing the dollar, back in 2007, and this has led to a huge run up in prices of hard assets. The FED has cut interest rates in half since August 2007. The USD dollar has played a major part in this latest phase of the commodity up swing…The market seems to agree, as the USD has fallen against every hard asset and currency apart from the Zimbabwean Dollar in that time.

See commdity chart attach

The commodity Bull Run began 2001. This was due to structural changes in the world economy. And 2000/01 fits in nicely with the normal cycle of commodity/stock market bull/bear markets. A structural change is something that has long lasting effects and does not reverse quickly if at all once the change takes place…for example the UK moving to net importer of gas and oil in 2007 is a structural change for the UK economy, which is 99.9% irreversible. This will have a structural effect on the UK economy for years to come, and is sterling bearish.

I will list the structural changes below that have taken place or were already in place by 2000 and give a brief analysis of each:

Outsourcing of labour to developing countries.

The structural changes were an outsourcing of labour to China/India and developing economies meaning we had a benign inflation in consumer goods…as reduced labour costs in developing nations allowed us to consumer goods made in Asia. This was a change that happened, and it is a change that has gathered momentum during this decade. It is not going to be reversed overnight or for a very long time if at all. The infrastructure has been put in place. The other reason this is a structural change built in stone is that the developed countries of the world such as the US and the UK do not have the manufacturing capacity to meet even an infinitesimal demand for production in the global market.

The FED kept interest rates artificially low after the NASDAQ fallout. And this outsourcing of labour helped keep interest rates low, as the cheaper manufactured goods had little effect on the CPI, which was benign during the dotcom recovery. However, the CPI is a measure of the price of consumer goods and does not include real estate and other assets, which is just another form of inflation. Hence the interest rates had no dampening effect on credit creation.

The main purpose of interest rates is to control the amount of credit creation in an economy and to maintain a stable currency. The artificial manipulation of keeping the interest rate too low allowed the uninterrupted growth in credit to consume. The FED did tighten rates ever so slowly between 2004/05 from 1% to 5%, however, credit growth still continued to grow at the same pace as when interest rates were 2%. Credit growth grew at a pace of between 14-16% a year, even after the FED stopped tightening in 2005.

Check M3 chart

Savings Rate falls to ZERO/Negative savings rate

Due to very low interest rates in the US it provided a disincentive to save, as the returns on savings deposits were very low. Conversely this was an incentive to borrow and increase debt. Japan, China and India have very high savings rates, and they were willing to lend 70% of their savings to net debtor nations such as the UK and the US. This led to speculative activity in paper asset markets such as real estate and the stock market….Alas we had this twin economy. We had a deflation of consumer prices due to the outsourcing of labour to developing nations, and as money was cheap, this was a disincentive to save, yet an incentive to borrow and speculate in search of higher yields, we had inflation in paper assets such as real estate.

Incremental Demand Increase from Developing Nations

As the developed nations such as the US and the UK followed this unsustainable and bizarre economic model of “borrow and consume”, the developing nation’s economies were fuelled with money coming from “our” consumption. This money was used in capital formation as China built what are now some of the best roads and transport systems in the world. They also used capital to form factories, and build some of the largest most modern cities in the world today…With this capital formation and expansion came incremental demand for resources, such as iron, coal, oil, corn, wheat, lead, aluminium and so on. Well as economics would dictate increasing demand will lead to higher prices in a global market.

The world is also a different place from the between the 1970’s bull market in commodities. I mean this in the sense that the world has got bigger in a population sense in the last 2 decades. For sure population has been growing at a fast pace, however I mean the population has grown in a socio-economic sense. There are 3.6 Billion people in the Asean region.

Last year the World Bank finally approved Chinas rise to that of middle income nation, from that of a low income nation. The evidence is that when a nation moves into middle income status, their appetite quite literally for meat, coffee and sugar increases. It also means a general level of higher consumption.

With the world population growing at a rate of 1.16% per year that means the world has to find food to feed an extra 70 million mouths every year.

Falling supply fails to keep up with demand

After the 20 year bear market in commodities in the years 1982-2000, supplies of all major resources were at all time lows. Due to tight margins in the period 1982-2000, there was lack of expansion and under development in raw materials. Also the coming incremental demand increase from the BRIC nations was unforeseen in its size and scope. By 1999, inventories were at an all time low. The wheat and corn warehouses were empty.

No major metal mines have been opened for 20 years, aluminium production by 2004 is running at half its production since 1960, even though the world population and demand has increased many multiples.

Lead production has been falling at a rate of 1% a year since 2000, after peaking in 2000.

No major oil fields brought online in 40 years. Production has hit a plateau.

The use of sugar and corn for ethanol has also reduced acreage dedicated for corn and sugar.

The problem with bringing new supplies of commodities online is that it takes a very long time. Metal mines, wheat corn farming can take 3-5 years to come online, oil fields take 10 years. This is why in the past commodity bull markets last so long…as the supply and demand fundamentals take along time to change.

For me, even if demand falls for a period of time, supplies are still not sufficient. In a Merril Lynch report highlighted the serious problem of desertification and land loss. The UN estimates that “12 million hectares of land are lost to desertification each year”

Commodity production is water and energy intensive. Ready available water is at a critical level. I logically conclude that the input costs of water and energy will have an upward effect on prices, before we even take into account the individual supply/demand issues for any particular commodity.

The reason commodities are so volatile at times is due to supply side shocks. Most of the volatility in the price of commodities is supply side related. As much as demand grows incrementally and is reasonably predictable, supply is not. Droughts, war and extreme weather condition effects all kinds of commodity prices, like this year in wheat, and when the supply side shocks to oil during Hurricane Katrina.

Japan ZERO Interest Rate Policy

Another important structural change in the world economy this decade has been the BOJ zero interest rate policy since 2000. In effect, Japans deflation has been our inflation. The rise of the Japanese carry trade has added huge dollar liquidity to the global economy. Buying yen at cheap rates and converting in into higher yielding assets such as stocks, real estate and bonds. This policy has been highly inflationary for the reason that it has kept world wide interest rates artificially low. Converted yen carry trade money has found its way into mortgages and real estate as far away as Bratislava, Slovenia and New York.

US Current Account Deficit, USD Dollar Crisis

The above policies have lead to a huge US current account deficit. The demise of the USD began in 2001. I believe we will see the USD drop substantially more over the next 5-10 years, and possibly sooner we could have a real crisis of confidence in this faith backed currency. Forgetting all the fundamentals for commodities on the supply/demand side, a collapse in the USD alone will lead to higher commodity prices as it is the reference currency of the world.

The US is not a self-sufficient economy like in the 1930’s nor is it a creditor nation. The US imports 70% of it energy requirements. With higher oil prices, and other currencies in the BRIC nations rising relative to the USD, I can see demand for oil increasing with the increased purchasing power of the BRIC nations currencies. The US has to compete in a global market for oil. It is estimated this year that nearly 600 Billion USD will leave the US to fuel its energy needs. That is a huge downward pressure on the USD. As oil prices rise, perhaps we will have demand destruction in the US, however, this will be somewhat offset by the weaker dollar due to higher oil prices as it will take more USD’s to purchase the oil.

My take is that, this time, commodity prices rose (predominantly) after support was withdrawn for mortgage finance

This is wholly inaccurate. Take a look at the CRB, or Rogers Commodity Index chart attached. The Rogers Index was up 400% since 2001 before the mortgage crisis hit. The FED by cutting interest rates and bailing out every investment bank in sight just threw petrol on the fire of the commodity bull market, as the market read these actions as undermining the USD.

The fundamental conditions I have briefly outline above were in place by 2000, and ironically the fundamental conditions for a secular bear market in stocks and a secular bull market in commodities formed in the period 1982-2000, when stocks were in a bull market and commodities in a bear market. In previous bull markets 40-50% corrections are normal. If you believe this is the end of higher commodity prices then I think you are misreading the fundamentals.

During the Great Depression, with the exception of gold as Roosevelt made it illegal to buy gold all other raw materials went up in price. Between 1930 to 1954 raw material prices increased. If you believe in commodity prices falling then you must be in the deflationist camp, even though the evidence shows that this is an erroneous point of view.

On a final note, I am not saying we won’t have large corrections, perhaps lasting 6 months, 1 year or more, however, I know that when people are calling the end of the bull market I’ll be buying in again. When my granny or my aunt rings me one day and tells me she is working as a commodity broker then it is time to sell commodities.

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Hello,

Just wondering if any of the more stock markety people here would recommend any funds to start buying into shortly. I am thinking as the stock market is in a downward spiral at the moment, it is a good time to start thinking about investing into funds for long term growth (5 years ish).

Thanks.

Given that there are some chunky dividends around, why not look at Perpetual Income fund? Neil Woodford has a good track record of canny investing in troubled times.

I think the key is to take a 5 year view, and maybe not put all your eggs into one basket at the moment but save money regularly, maybe topping up on any stock market blips.

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I will answer you in two posts Steve as my answers are quite long. I will deal with the first part of your post...first, and the second I will deal with the inflation/deflation debate...

A brief response from me - and thanks for being so thorough...

With respect to our perspectives on commodity prices, I draw a distinction between the mean appreciation of commodities 2000-2006 and 2007-2008. We've recently seen an increase at about 50% in a year - while previously we'd averaged only about 20%. I can easily believe that the 20% arose as a consequence of monetary expansion, but I'm finding the 50% more difficult to believe. My intuition was that the 20% was somewhat rational, While the 50% is not - in my opinion. If I had to take a punt at what will happen next, I'd expect the CRB total return index to pop off the top of the graph for a short while before crashing down to below 300... possibly in a very rapid reversal. BTW - if the rumours I've heard about institutional investors buying commodity long investments with ~2% of their capital are true, I'd conclude that your granny is investing in commodities already...

I am very interested in your idea of calm before a storm... I wonder if this observation can be used to predict 'unlikely' events that should be insured in future?

I recognise the demand increase from china - but I don't accept that abrupt changes in price will arise/have arisen. I think sentiment can turn on a pinhead, but real needs/wants/demands change rather more slowly.

I am in the deflation camp - and I am yet to see any evidence that shows this to be an erroneous point of view. I believe that we can have any outcome, in principle - but that biflation is most likely (rising costs for small ticket items; falling cost of assets) in the short-to-medium term (measured probably in years) followed by modest overall inflation - perhaps at between 1% and 3% per year - both for assets and for day-to-day expenses.

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IMO, the vast majority of people on here were recently recommending the following

Short FTSE @5100

Long oil @140

Long gold @900

It will be interesting to see how this pans out.

I think if you check my posts you will see, I shorted oil at 145 USD,I implicitly stated that on here to RK, A.Steve, Ab Harrison. and I ll be buying in at circa 100 USD.

I bought into gold a couple of years back...I ll be buying more when I get the reversal from this current dip.

I went short the FTSE at circa 6150.

I ll be shorting the end of this present rally in the FTSE.

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I think if you check my posts you will see, I shorted oil at 145 USD,I implicitly stated that on here to RK, A.Steve, Ab Harrison. and I ll be buying in at circa 100 USD.

I bought into gold a couple of years back...I ll be buying more when I get the reversal from this current dip.

I went short the FTSE at circa 6150.

I ll be shorting the end of this present rally in the FTSE.

But were you not last week saying that oil wasn't a bubble when it has subsequently come down ~20%?

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I think if you check my posts you will see, I shorted oil at 145 USD,I implicitly stated that on here to RK, A.Steve, Ab Harrison. and I ll be buying in at circa 100 USD.

I bought into gold a couple of years back...I ll be buying more when I get the reversal from this current dip.

I went short the FTSE at circa 6150.

I ll be shorting the end of this present rally in the FTSE.

I'm happy to confirm that VT. Not that you need my confirmation, or anyone else's.

I also stated on here when I went short WTIC at 125, then 135, closing out my 125s and rolling that into 145s. I've taken part profits, letting part run. I have been short USD/Euro several times under 1.60 - currently running a short. Again, I think I've posted this.

I've been short Au several times since January. (I used to post my trades on here but stopped due to the disquiet it seems to cause physical longs - The words "idiot" and "troll" were most frequently used I think). I suggested the banks would see a massive rebound a couple of weeks before they bounced from 15th July. I didn't trade that, because I'm not comfortable with any bank right now. I am waiting for a sell signal in the US banks to go short on the DOW. I think this will come soon -around 11,750-12,000. I don't trade the FTSE as a rule, due to the DOW having lower costs and being the main driver.

I only trade for my own benefit and would never suggest anyone follows my trades since everyone's circumstances/timeframes are entirely different. As I've posted before, for a longer timeframe (5 years+) I would use a slow moving average to time entry. i.e. Jumping on when there is already a clear uptrend. That applies to any market/instrument imho. Non of the US/European markets exhibit that right now.

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But were you not last week saying that oil wasn't a bubble when it has subsequently come down ~20%?

Yes, oil is not a bubble. However, I never said markets go up in a straight line. I have always said we could get meaningful corrections. Hence why I shorted oil as it was due a correction.

Can you give me your definition of a bubble?

My definition of a bubble is an asset which collapses in price, and doesn't make a new high for at least 5 years, but more normally it could be much longer. Anything between 10-25 years.

The NASDAQ was a bubble, it is 50% below its all time high 8 years later...

The FTSE was a bubble...It hasnt made a new high for 8 years.

The NIkkei 225 was a bubble in 1990 at 39,000, 18 years later it is still 70% below its all time highs.

Gold was a bubble in 1982...it declined for 20 years.

Silver was a bubble in 1982...today it is 50% below its all time high in nominal terms,inflation adjusted, it is 70-80% below its all time highs.

Japanese Real estate was a bubble. 18 years later it is 50% below its all time high...

and the list goes on...

Since 2000, oil has had...

two 50% corrections

two or three 40% corrections

Since 2005, the Amex oil index has had

12% correction

18% correction

12% corrections

15% correction

15% correction

11% correction

19% correction

23% correction

24% correction...

However, within months to a year oil made new highs.

Oil will go to 300 USD and more over the next 5-10 years. That is my price target.

Perhaps this correction could last 1 year, 18 months, or until autumn who knows. These corrections are normal.

So my definition of a bubble, is an asset, that deflates to 40-80% of its value. And remains depressed for many years. At a very minimum 5 years but usually much longer.

So if oil stays below, 147 USD a barrel for 5-10-15 years, and goes to 60-70 USD, then you will have been right...It was a bubble. However, I have done a resonably deep study of the fundamentals, many of which are structural in nature.

I m not going to try to predict a bottom, I have my system that does that for me. Whenever the price tells me, then I ll know. However, at an educated guess, I ll say we could be in a range for a while, around 100 USD.

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I'm happy to confirm that VT. Not that you need my confirmation, or anyone else's.

I also stated on here when I went short WTIC at 125, then 135, closing out my 125s and rolling that into 145s. I've taken part profits, letting part run. I have been short USD/Euro several times under 1.60 - currently running a short. Again, I think I've posted this.

I've been short Au several times since January. (I used to post my trades on here but stopped due to the disquiet it seems to cause physical longs - The words "idiot" and "troll" were most frequently used I think). I suggested the banks would see a massive rebound a couple of weeks before they bounced from 15th July. I didn't trade that, because I'm not comfortable with any bank right now. I am waiting for a sell signal in the US banks to go short on the DOW. I think this will come soon -around 11,750-12,000. I don't trade the FTSE as a rule, due to the DOW having lower costs and being the main driver.

I only trade for my own benefit and would never suggest anyone follows my trades since everyone's circumstances/timeframes are entirely different. As I've posted before, for a longer timeframe (5 years+) I would use a slow moving average to time entry. i.e. Jumping on when there is already a clear uptrend. That applies to any market/instrument imho. Non of the US/European markets exhibit that right now.

Cheers RK. I think you and me seem to understand each others trading style. Quite similar perhaps. Do you use the longer term fundamentals to judge general trend? Before I was an staunch technical head. Fundamental analysis was evil,lol, But I guess thats just stupid and a little immature trading wise. Understanding the fundamentals helps me stay with my postions easier, as I feel I can justify my entry, and I guess anything which makes it psychologically easier is a positive... I remember the your oil and euro shorts, and DOW was it also?

You are right about US and European markets. They are in a longterm secular bear market, which is ideal for selling the rallies. Of course, the DOW, FTSE could make a new high, but I would think it wil collapse again after that. In real terms they are going nowhere.

Edited by VedantaTrader

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Cheers RK. I think you and me seem to understand each others trading style. Quite similar perhaps. Do you use the longer term fundamentals to judge general trend? Before I was an staunch technical head. Fundamental analysis was evil,lol, But I guess thats just stupid and a little immature trading wise. Understanding the fundamentals helps me stay with my postions easier, as I feel I can justify my entry, and I guess anything which makes it psychologically easier is a positive... I remember the your oil and euro shorts, and DOW was it also?

You are right about US and European markets. They are in a longterm secular bear market, which is ideal for selling the rallies. Of course, the DOW, FTSE could make a new high, but I would think it wil collapse again after that. In real terms they are going nowhere.

Vedanta -I've asked RK as well, since both of you address the markets in the same way (correctly imo),could you tell me what are you using to take your positions in these various markets?Do you spreadbet or use options?

I'm just starting out and could use any useful pointers.

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Noel,go on make a call.The only one I remember you making was that Taylor Wimpey was a long term buy just before they cancelled their rights issue.

I've already said. I buy a diversified portfolio and hold indefinitely, as numerous studies have shown that it is nigh on impossible to time/beat the market. Still hold TW BTW

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Vedanta -I've asked RK as well, since both of you address the markets in the same way (correctly imo),could you tell me what are you using to take your positions in these various markets?Do you spreadbet or use options?

I'm just starting out and could use any useful pointers.

I like ABM Amro market index account. It has some commodities that I like to trade...like sugar,coffee, oil.

I have a Futures account with Infinity AT. They are American, for mini DOW...

I have a Finspreads account. Emptied it. Dont like it.

I like MG Forex. I want to get a forex account with a larger direct market access broker...looking into Daniels Trading. Good demo available.

I would recommend a mixture of leverage and unleveraged vehicles. Futures accounts and trading on the exchange is very good level playing field. Some forex retail accounts are good for practise, and any money under 5000 USD, as they don't like you to make money. I was up quite alot in my forex account with IBFX, and I withdrew my money, as the more succssful I seemed to be getting the worse my spreads were, my fills were, and the platform froze at times when I tried to close a position.

Alot of the retail forex brokers are cowboys. Choose carefully.

Socieite General have a range of options to trade, with low starting costs.

I quite like the look of ODL markets, for their range of markets.

Use ETF's, leveraged forex if you like currencies and understand them. It all depends on timeframe. I use leverage for short term and indexes for drip feeding earnings into over time if I m bullish.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
      • up 2.5%
      • up 5%



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