Financial Meltdown
Well, I never thought I'd live to see another dot.com crash but here we are 8 years later watching the US financial system in ruins. There's been lots of analysis over the past few days/weeks and lots more will be written. So the question becomes how do we make money in this changing landscape?
posted by Junk Bonds @ 9/16/2008 11:57:00 AM
3 Comments:
Indeed interesting times. Every asset class seems to be down in this environment of draining credit. I'm surprised that gold hasn't held up better over the last few weeks as it is usually seen as a safe haven. The latest $US rally was a bit surprising given the sequential bail outs and moral hazard developing in the US financial system.
I think this general market meltdown presents some better bargains for buying. I've been short emerging markets via EUM and think this has room to run. I've never really believed in decoupling and if the US economy is going south, then emerging markets will go along with it. I think we're a lot closer to the bottom for US financials than before, however I'm not sure the rebound will be quick or sustained.
From current levels, I would be long oil and gold. For individual stocks, I would pick over some high quality US multinational blue chips that we've discussed before.
Great call on gold; the biggest 1-day jump in 28 years! I wish I had read this yesterday.
Can you explain how you can be long oil and short emerging markets?
Seems that you trust the "effect" but not the "cause".
I'm not sure if the US banks have hit bottom but I'm reminded of the wisdom of Buffet (and/or Templeton): great wealth can be amassed by investing at the point of maximum pessimism.
My call on EUM (inverse of EEM) was based on the fact that emerging markets have had a tremendous run for five years. I think EEM was up over 40% from 2006 to end of 2007. The US market had already turned down by the end of 2007 and EEM held up. I just believe in reversion to the mean more than 'decoupling' i guess! Also I remember being burned early in my investing days buying emerging market mutual funds in the early 90's only to be torched by the Asian contagion!
Emerging markets are still seen as riskier than developed markets and when there's fear, they will suffer perhaps disproportionally.
My call on oil is based more on my understanding of supply constraints and oil field declines more than anything else. Demand destruction from a recession is hard to model. It is even possible for supply to fall faster than demand. Case in point is falling net exports from oil-exporting nations. Demand growth for oil in the Middle East is second only to China.
So yes it may seem schizophrenic to be long oil on the cusp of a world wide recession, but it is difficult to gauge how bad the recession will be. I think only the mother of all depressions will depress the price of oil for a significant amount of time!
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