Sit tight, the road ahead is still very bumpy.
We appologize for repeating ourselves, yet we feel it is absolutely neccesary to repeat “sit tight” in order to not enter the market to early. We are still recommending cash cash cash. (Se our portfolio section for the details.)
Gold rallied USD 50 yesterday, is this the big reversal and the start of gold rallying to USD 2000? We think not, we believe this is a false start. The macro trend is still deleveraging, and there are plenty still to be liquidated, gold will test new lows sometime during the recession that will last at least another 12-24 months. We will live to see gold at USD 1000, 2000 and more, but not yet.
Oil. Oil will be in demand throughout the recession. We are of the belief that the price of oil will not go much below USD 50, and that oil will eventually stabilize at a slightly higher level. We therefore believe that buying shell-bombed oil companies at huge discounts and close to all time lows is an interesting propossition for the next 12 months. Carefull though, no more than 10% of your portfolio on this bet.
Carefull about the tanker companies though, the mechanics of the demand side for tankers must be understood and is not directly correlated to the oil price.
Many oil service companies will do well, but will you be able to identify whom? Oil at USD 50 will be a boom for some, oil at USD 20 will wreck them all, oil at USD 80 will be a boom for others.
Better play the oil game in oil if you don’t know the particulars of a segment.
The dollar. The dollar rally is amazing and has caught most by surprise. If you are long dollars this is the time to diversify into shell-bombed currencies like the Nordic Krones, the Pound, the Hong Kong dollar etc. The deleveraging trend that has lifted the dollar is continuing so the dollar might actually go higher, this could go on for 12-24 months. At some point though the holders of US bonds will begin to sell and we will see a reversal of the dollar, be on the lookout for this. As the reversal is identified and called we expect a massive, repeat massive – sudden plunge in the dollar. Expect a fall of 20-30-40% within months as the markets take in the fundamenals as rush to the door.
You should be able to play this and we will advice over the next few months, there is still time.
Inflation. The governments are pumping in massive amounts of new fiat money. But how will this enter into the econonomy? The banks are unwilling to lend. Eventually we believe the governments will realize that the most effective way is not to distribute new money but to cut taxes on income and VAT for immediate injection of new purchsing power. Expect massive fiscal defecits as a consequence, that will eventually have to be dealt with – but at least for now it will have effect.
How to make money form the money injections? Bill Bonner suggested sement companies, as public infrastructure projects are started – we do not know about that one. There are bound to be plays on this though, but we have not yet identified what they will be. It is also dependent on how the cash injections will be distributed. Continuing education is our best bet so far, University of Phoenix will do well – but how to play that?
Internet. We also see that there will be continued development on the internet. Today it cost nothing to start a new internet company, it was expensive 10 years ago. As programmers are laid off they will have time on their hands. They will start playing around with ideas, a lot of them have ideas. Because of the great number of things that will be tried some are bound to bound to figure it out. There are still massive massive productivity gainst to be made by tuning the real economy more effectively using the internet. The seeds for the next eBay, Amazon, Goolge etc will be laid during this recession – but how to identify them and play it?
Our reccommended strategy is to build a small business on the side that you own outright. In fact we will in the future focus Farmann more and more on you building this business as opposed to identifying stocks or financial plays. The era of financial plays has changed, this will take us some time to absorb – things will be different going forward wether we like it or not.
22. November 2008 – Oslo, Norway
Hans Lysglimt
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