Friday, June 24, 2005

Investment Positions

Primer on my investment outlook

Right now, we see two conflicting trends across the investment world. The growth in liquidity across the world leading to monetary inflation primarily seen in financial assets and raw materials and the trend towards globalization leading to intense competition in services and manufacturing. Marc Faber and Jim Rogers are in the Inflationists camp while Mike Shedlock and Robert Prechter are in the Deflationists camp. I'm more inclined to a view that the next decade will see alternating periods of inflation and deflation. As interest rates move towards zero across most of the developed world, reflation and leverage will inflate demand leading to increase in prices of raw materials and financial assets. At the end of the reflation cycle, as central banks get concerned about inflation and increase interest rates we are more likely to see crashes in financial markets and prices of raw materials. If anything, I view the emergence of India and China as a big positive outcome for prices of raw materials.
As hundred of millions of people move from poverty to the middle class, they will buy 3 meals a day LONG LONG before they buy iPods. Food, basic materials and anything with supply inelasticity as a theme will be in a secular bull market.
Also, the emergence of hedge funds with leverage and large numbers of funds ready to write options have reduced the volatility premium. Volatility is the most undervalued asset around us. As the VIX approaches 10, I buy VBI (VIX futures) and sell on major declines.
To play on raw materials, I buy convertibles of companies listed on the ASX (Australian Stock Exchange) trading below redemption value. The yields are substantial and there is a small desire to sell when yields are available. I dont care about the outlook or price action, I simply buy when a company's assets are able to cover all its debts as well repayment of the convertible capital. I only buy mining/agriculture related companies.


Blogger Roger Nusbaum said...

Welcome to the blogosphere and thanks for the link. I would add Pakistan and Viet Nam to China and India as catalysts for growth in resources demand in the coming years.

12:17 AM  

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