Jim Rogers Speaks on Investing this Fall

Inflation versus Deflation

Currency Trading Opportunity

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When to Pull the Plug

The last month has witnessed an unprecedented rise in world stock markets as central bankers around the world proclaim that the recession is officially over and we are poised for positive economic growth.

Last night, I had the pleasure of listening to a seasoned veteran in the investment community, Peter Drake, VP of Investments at Fidelity. Peter was cautiously optimistic on where he thought he saw the markets heading for the rest of 2009 and into 2010. He mentioned that for economic markets to truly recover we need to see three things:

1/US Housing Prices stabalizing
2/Credit markets normalizing
3/Positive Economic Growth in Global Markets




He presented the Case-Shiller Graph of Housing Prices which demonstrated that there has been a potential basement hit from the plummetting of house prices. The small uptick that has recently occurred could be evidence that house prices will stabalize. Unfortunately, there are 14% of american homeowners that have mortgages that are higher than their house values. In California, Nevada, and Florida....the number is in the 50% range. It is still hard to fathom where demand will come from. Warren Buffet at a recent presentation mentioned that to solve the problem of having 9.4 months of housing inventory we should just bulldoze homes for the next 12 months. Cash for Home Clunkers might be the next government stimulus program.






Being an economist, Peter had a lot to say about the Credit Markets. To begin, he believes that Central Bankers are the heroes in this fairy tale. He showed a really cool chart that demonstrated the coordinated action of dropping of interest rates by all major central banks when the credit crisis hit. He saw this as necessary to keep credit markets and the economy from completely seizing up. I compare this to a shield put out by bankers to deflect the explosive collapse of Lehman Brothers, AIG, GM, Etc.

The next weapon used by central bankers was a massive injection of liquidity. Trillions of dollars have been pumped into credit markets by world governments to stimulate the flow of credit. This acted as a sword, lashing out at frightened banks that were sitting on their money (not lending) and could not trust each other.

The final tool being used recently has been quantitative easing where central banks are actually buying up debt, securities, etc. in the hopes of stabalizing the economy. The challenge that Peter is confidant that central bankers will be able to accomplish will be to "PULL THE PLUG" on its pumping of liquidity at the perfect time. This will be very challenging as we are still operating in a very fragile economic world. Unemployment is still rising, foreclosures are increasing and debt levels continue to increase both for governments and consumers. If governments act too quickly, they will topple the house of cards that they have built through the efforts of the central banks. If they wait too long, the massive money supply that has been injected into the system will cause inflation and potentially "hyper-inflation".

Mr. Drake was asked during the meeting what his thoughts on precious metals were. He admitted that he wasn't a gold bug but felt that it came down to a personal decision on how much faith you had in the central banks in preventing inflation from occurring. If believe that problems like unemployment, continual house price deterioation, wars, strikes, company failures, etc. will continue to occur...you should hedge your portfolio by owning precious metals. If you think that central banks around the world, will be able to suck up all the excess liquidity that they have recently pumped into the system without collapsing the economy, you should stay away from precious metals and stick to a balanced portfolio of stocks/bonds.

From the research I have done, I am tending to lean towards an increasingly inflationary environment. I believe that it is more important to central banks to have a positive economic climate than a strong currency. This thinking is very bullish for oil, stocks, real estate, and most importantly precious metals. Basically, the devaluing of the world currencies will increase prices in all of these hard assets.

In summary, I am happy I attended Peter's presentation and thought that he was very interesting and informative person to listen to. I am finding it difficult to agree with his confidence in central bankers and the United States in getting themselves out of this mess that they have created. It appears to me that the solutions to the problems will just fuel more problems of the same nature. It is always nice to hear different perspectives as this I feel will assist you in making better choices down the road.

Dr. Doom Speaks Again