The Key Asset Classes For 2011

Economic growth will be fine. The debt overhang will be handled by continuing and accelerated quantitative easing. Looking ahead, we are quite optimistic about demand for stocks, gold, and commodities in 2011.

Investors are moving from bonds to stocks and the huge cash balances at money market funds will likely find their way into stock and commodity markets in 2011. This means that inflation and commodities prices are likely to rise faster than wages, and those living on fixed incomes or bond interest will be affected the most, due to the fact that their money buys them less of everything; both luxuries and necessities. However, the ramifications of this inflationary trend are also serious for wage-earners. In every inflationary period in recorded history, wages have risen more slowly than inflation.

Although government officials do not want to admit it, the current environment in the U.S. is one of rising inflation. If you are skeptical, look around at the costs of goods and services that you buy. You will see that they are rising and in months and years to come there will be acceleration of this rate of increase.

So why does the government downplay this fact? The U.S. Government has many obligations tied to inflation, such as social security and other entitlement programs, and because of this, it behooves them to downplay inflation in their speeches and in their inflation reporting.

Over the last few years world stock markets have been very volatile, and unforeseen events have been more common than in previous decades. This year, we expect sovereign debt problems in Europe, debt problems in U.S. states and municipalities, periodic market shakeouts due to high-frequency trading, and stronger economic growth within the developed world, to create more market volatility. This volatility may create opportunities to buy gold, oil, and quality U.S. and foreign stocks at attractive prices. We expect the market to recover from all of these events by the close of the year and end higher than today's values.

The debt crisis engulfing the developed world's banks and governments will be solved by devaluing the U.S. Dollar, Euro, other currencies and by creating liquidity via Quantitative Easing, (QE), or the printing of new money. This liquidity will flow into stocks, precious metals, commodities, and commercial real estate. When these flows arrive, all of the above-mentioned asset classes will enjoy price rises, possibly even dramatic ones.

What this means to investors is that gold, oil and stocks (both U.S. and foreign) will be beneficiaries of the liquidity that is and will continue to be pumped by many central a banks into world markets. Your U.S. dollars, Euros, etc. will not buy as much, but you can protect yourself from the declining currency by owning the above asset classes.

One of our resolutions for 2011 is to do a better job buying the dips. As always we will sell quickly to take profits or cut losses if the markets appear to be entering a long-term bear phase.

As we enter 2011, the U.S. dollar looks like it could be in for a rally. European governments have significant debt issuance needs in the coming weeks, which could cause some unsteadiness in the Euro. This period of dollar strength could cause a pullback in some of the commodities that have been so strong for the past few months.

Fundamentally, we see no cause for a big commodity or stock market selloff in 2011. Short-term sell offs of 10% will always occur, but overall we see signs of economic growth. The banking system liquidity crisis which has plagued the developed world for years will continue to be dealt with by the infusion of large amounts of liquidity into financial institutions and the financial markets. In summary, we believe that this Quantitative Easing will keep the stocks of growing companies in many countries, as well as oil, precious metals, foods and industrial metals moving up.

Harry Schultz

Last month saw the retirement of a great investment mind. The bold and brilliant Harry Schultz retired after a 45-year career and offerings of wise advice to the world's wealthy and powerful through his Harry Schultz Letter (HSL). Harry has been a great and experienced observer of world events for decades. After watching inflation in China as a young man he became a voice for rational economic behavior that has never wavered. Harry has enjoyed a superlative investment record in gold and in world markets. At 87 years young he deserves some rest, but I expect he will remain active in many areas. Harry remains a courageous, energetic, and youthful individual. All the best to you, Harry.

The Fed Did More Than Many Realized In The Bail Out Of 2008

Many informed observers believe that without the Federal Reserve's emergency liquidity programs in 2008, the U.S. and Europe would currently be in a major depression at this juncture. While it is difficult to know for sure, we do know that the problems in the world's financial system were much worse than publically advertised. The system was, for all intents and purposes, bankrupt. The Fed was able to provide enough liquidity to keep it afloat, and is still having to provide liquidity today. Will it last forever? I doubt it. Watch out for liquidity problems in 2011 and coming years.

For an interesting article on this, see the following link:

"How Fed Crisis Aid Got Tested" from The Wall Street Journal, 12/09/2010.

It might also be helpful to remember that one of the major factors that caused this crisis was unregulated, non-exchange-traded derivatives. These are still a problem, called "weapons of financial mass destruction" by Warren Buffet, and not enough is being done to rein them in.

India

India's economy has good fundamentals. Rational economic behavior is on the rise and we believe in India as a long-term investment. Over the short term, we are concerned that Indian stocks are just not cheap enough. They must continue to produce a flow of good results to maintain their valuations. We are taking profits in India and exiting with a small profit. We continue to be attracted to India but we believe that the market is too highly priced. We will wait for a correction and then return to this long-term gem.

South Korea

South Korea has been in the news as a result of the antics of the North Korean leader Kim Jung Il, who despotically presides over a poverty-stricken nation. We are impressed by the recovery in profits and the outlook for profits in South Korea despite this. South Korea is well positioned to sell to China, the rest of emerging Asia, and to the developed world. They are strong in technology and heavy industry, and Korea has many transferrable technologies that the Chinese would love to develop. We look for growth and opportunity in Korean stocks.

Summary of Recommendations

Investors should continue to hold gold for long-term investment. We have been bullish on gold since June 25, 2002, when it was selling at about $325 per ounce. In our opinion, it will move to $1,500 and then higher. Traders should sell spikes and buy dips.

Food and food-related shares remain a favorite of ours and we believe that oil-related investments hold promise. We have been bullish on grains and farm-related shares since late 2008 and bullish on oil since February 11, 2009, when oil was trading at $35.94 per barrel.

For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro. Since September 14^th, we've been mentioning that we like the Singaporean, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies, and we still do. We suggest using pullbacks in these currencies as an opportunity to establish long-term positions.

In each country we favor different companies, as different sectors and industries are at differing stages of their growth. In developed countries, technology, precious metals and commodity producers (food, oil, and base metals) will all benefit from the back-to-work trend developing as jobs begin to appear in the U.S. and Europe.

Those familiar with China and India know that it is not the cost of capital (interest rates) that determines whether economic growth continues, but rather the continued availability of capital. Bank lending will not dry up in India and China. We are bullish on both countries, but if you do not own them wait to see if they institute capital controls, which would decrease their attractiveness. We also remain bullish on Colombia. In Colombia's case, it is due to the very low valuation of Colombian stocks. In summary, investors should continue to hold shares of growing companies in India, China, and Colombia.

We believe U.S. stocks can rally further. Our reason for becoming more bullish on U.S. stocks on September 9, 2010 was that over the longer term, liquidity formation through QE will create demand for many assets, including U.S. stocks. A correction of 5% to 7% could occur at any time; we would use the correction as a buying opportunity. As mentioned two weeks ago, we also recommend Canada as a country for investment.

A summary of our current recommendations can be found in the table below:

Best wishes.