I hope you all found some inner peace and enjoyed being with your loved ones over the festive season. I sincerely wish you all a Happy New Year. My Christmas and New Year break was great. We had largely detached ourselves from the markets during and before the break, while keeping all the positions we have open. Was in the UK visiting friends and catching up with them. I will probably be visiting my brother and his family in the US during Q1 of 2009.
2008 was a truly remarkable year, and I think it will mark the end of the once highly leveraged, inflated, credit-driven financial and mortgage-back economies in both the US and UK.
I have been a student of economic history and Austrian economics. The current global economic downturn is an animal that the world has never seen since the 1930s. This downturn is not caused by the central banks deliberately. This one is caused by the breakdown in the credit market even without the central banks doing anything to it. That's why they are all now in a panic and fire fighting mode, trying to reflate the banking and financial industry using the only tool they have -- money printing again. Both the US and UK had more than doubled their national debts in just less than 6 months! Their actions will guarantee us all to experience a great deal of inflation in the future.
Imagine an economy cycle of a country is the speed of a moving car, the engine of the car is the productive capacity of the country, and the driver of the car is the one man who can control the acceleration and deceleration of the car as he wishes through his deliberate manipulation between the break and fuel pedals: the economy enters growth when the man in control presses the fuel pedal; the economy enters recession when the man in control presses the break pedal. That's pretty much how all economic cycles go from boom to bust since the 1930s.
More than 20 years ago western economies, particularly the US and the UK, began to indulge themselves in a completely new way of "driving". They began to drive in a motorway where they asked for the removal of speed limits, traffic lights, lanes, and barriers! We heard Mr Gorden Brown said how he had re-written the law of boom and bust, where there will no longer be bust but only boom; the boom time will continue and asset prices such as land values and real estate will continue to go up. American consumers can consume more than they produce; they were encouraged to spend, spend, and spend and there's no need to save.
Suddenly, a crash happened. All the cars were badly damaged and came into a grinding halt. Those who were supposed to regulate the motorway began to question why removed the speed limits, traffic lights, lanes, and barriers at the first place. As they continued to argue and debate on what to do and who to rescue amid the carnage, the temperature dropped down to minus 60 deg C. In order to keep the inside of the cars warm, the drivers continued pressing the fuel pedals in order to keep the engines, which were largely damaged, going in order to keep the heating inside the cars working. That's exactly what the western economies are doing right now! They continue to flood their system with money created out of thin air, while the economic growth is already at zero if not in negative territory. They will continue to do so before they can agree on how to rebuild the motorway, putting all the speed limits, traffic lights, lanes, and barriers back on. Even when a new agreed set of rules are in place, the cars will not move until their engines are fixed. Even when they are fixed, the cars will no longer be able to travel as fast as they once can when there's no speed limits, traffic lights, lanes, and barriers.
While the politicians are selling us all this and that massive bailout and stimulus plans, we at bhc investment would like to remind our readers a very simple idea: once a bubble has popped, it's not gonna grow back for a generation; once an economy has collapsed, it's not gonna grow back either without establishing a new form of productive capacity that can be BIGGER. Bailouts and stimuli aren't going to solve our problems. We need a new form of productive capacity, one that can benefit us all, one that can not only absorb the damage did during the bust but also create NEW wealth. Dotcom? No, that went bust in 2002 [Correction: Should be 2000 not 2002]. Financial engineering and mortgage and debt repackaging? No, that went bust recently. Green and alternative energy? Probably, but not when Crude Oil is below 50 ladies and gentlemen.
In 2009 we at bhc investment believe the US markets will continue be trapped in a bear market. While mainstream and even a number of legendary fund managers are forecasting a massive rally, we at bhc investment continue to believe the Dow will close below 8,000 by the end of the year. The US Treasury market will peak within 2009, Gold will continue its rise amid volatility, and Crude Oil will bottom out.
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