Wednesday, May 20, 2009

Listen to the Market

Although the stock market has had an extraordinary rebound, what are the thematic tendencies we see. The last two months have been an exercise in return to risk and practically anything has been a profitable buy, but some areas are the tea leaves of the future.

We have seen the strongest move in our gold holdings. In the past twenty trading days, the S&P 500 index has risen approximately 4.5% while our gold investments have risen approximately 25%.

Our commodity stock fund and emerging market holding have advanced in the area of 15% over the same period. The other sector above 10% growth has been developed international markets.

At first blush one could reach the conclusion that money is flowing out of the US equity markets on a relative basis. The treasury bond market has sold off modestly in the past month and our negative US dollar investment has been moderately higher. Deeper analysis agrees with the first impression.

On balance I believe the guidance of the market leads one to be more wary of US Dollar denominated assets. The strength of the US dollar has been substantial over the past year but principally because of its position as the continuing global reserve currency and more importantly by the fact that as bad as the US economy has been, other economies, in Europe in particular have been worse.

As global recovery takes place over the next years, the green shoots of globalization will benefit other less debt burdened economies and the US dollar decline, higher interest rates and higher inflation are on the other side of the current deflationary environment.

John Barnyak