Saturday, June 25, 2005

Problems in the future

Primer on my investment outlook

We live in a strange world. The imposition of negative real interest rates by the US Fed combined with increased leverage has increased the amount of liquidity around the world. This has resulted in increased consumption by the US consumer with a near total depletion of Household Savings Rates. China has gained due to investment monies building factories to provide consumable goods. The rest of Asia has gained exporting to China and to America. In summation, the reflation trade resulting in the increase in prices of commodities and financial assets over the last few years can be traced to the easy money policy at the fed.
Today, the Fed is still increasing interest rates. However, looking at the Bank Repos the Fed is still injecting money by buying bonds. Also, nearly every developed country besides the US and Canada, including the Eurozone, Australia, NZ are in a serious slowdown. Clearly, the commodities market can crash along the rest of financial assets. However, I do believe that this will be a cyclical slowdown within a larger secular bull market. Also, the crash in prices of real assets and stocks may well be a cyclical crash within a secular bear market.
Either way, I have tried to ensure a large margin of safety with my investments. The VIX cannot go much lower that 11 but can go much higher, upto 40, in the event of a crash. All my investment are in Convertibles issued by companies that provide a high yield because they trade below Face Value. I have taken care to ensure that the cash/asset position in these companies will ensure at least the return of the FV of the Convertibles.


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