Friday, June 23, 2006


A quick review of the history of markets shows that really bad news is due from somewhere. There are 50 easy examples available but I will present just a few. In 1981, when the worlds liquidity was being sucked up by central bankers, Latin American countries, including Mexico, went bankrupt, in 1997, when the worlds liquidity was being sucked up by the central bankers of the world, Asia nearly imploded, in 2001 when the worlds liquidity was being sucked up by the central bankers the technology bubble burst and in 1990-91, when the worlds liquidity was being sucked up by the central bankers, the world experienced the worst recession since the great depression and savings and loans that had loaned money on resort properties experienced massive defaults.

This time around, so far the possible candidates for implosion include emerging market economies or the bursting of the commodities price bubble. Gold went down 5 weeks in a row before stabilizing this week. Many an emerging market mutual fund in down 30% in 6 weeks. However, so far, there has not been an event of "crisis" proportion. Also, predicting the actual event is not a reasonable expectation. Predicting that there will be bad news after a massive move by the central bankers is easy enough.

The good folks at point out that it could be Old Europe that takes a hit this cycle. Germany is one of those countries that relies on exports for economic strength and the irony is that the slow down in rapid growth in the third world may lower Germany's ability to export goods.

The size of the China "build-out" is often under appreciated. The fact that China is taking steps to slow the growth rate could lead to major consequences. It is an old story that folks should be careful what they wish for. The US current account deficit serves as a great straw man for politicians to use for making hay but the reality is that a growing deficit shows there is demand for US dollars to engage in world commerce. Again, look back in time and it is easy to see that the "balanced budget" near the end of the Clinton Administration foretold the looming recession.

Please do not misread the above. I believe the world has already entered a relatively mild economic slowdown. I do not believe a recession is likely.

The true leading indicators suggest only a modest slowdown. The most important point investors should take away is that now is the time to invest in late cycle stocks. It is time to sell early cycle stocks. Those who generally in the right sectors during the next few years will make a lot of money. Those who try to catch the falling knives of the first half of the cycle will get cut badly. BUY THE BULL. For more details, Write me