Dow down 129. Gold down $3 an ounce.
No big deal. Good thing, too, because we don’t have much time to think about it. We’re on the road… in Brazil.
At Bonner & Partners Family Office, the small family wealth advisory we set up in 2009 to help families protect and pass on wealth, we’re bullish on emerging markets stocks in general… and bearish on developed market stocks in general.
That’s because we’re long-term investors. And the long-term growth prospects – to our eyes at least – are better in the emerging world… where populations are still growing… debt build-ups aren’t as high… and relatively low market capitalizations for stock markets mean more room for growth.
But 2013 has been a bad year for the emerging markets… and a bumper year for most developed markets.
What’s going on?
Preparing for the Future
Fortunately, we have a global network of analysts to help us…
“What we’ve been explaining to investors down here,” continued a colleague from Empiricus Research, “is that you can’t know the future. You can only prepare for it. And you do that by putting yourself in a position where the surprises are more likely on the upside than the downside.
“You just don’t buy expensive stocks, for example. You don’t know whether they will go up or down. But a surprise to the downside is more likely and more painful than a surprise to the upside.
“Some people refer to this as value investing. But we don’t really know what’s a value and what is not. Ultimately, we only have prices to guide us. And prices are very unreliable. So, we just look at what surprises might come… and what impact they will have on us.
“I mean, I know I will be surprised. So I want a surprise that I will like. And the way you get that is by making sure you always have more upside than downside.
“You look at the US stock market now and what you see is millions of people who are all sure that the market is going up… as long as the Fed continues to add money to the system. When the Fed stops, they think they are going to get out.
“But when everyone wants to sell, who will they sell to? So, in our view the surprise is likely to be on the downside… and it will be much more painful than a surprise to the upside.
“So, what will happen? We don’t know. But we tell our people to stay out of the stock market in Brazil… and the US.”
More to come…
QE Will Surprise Investors on Three Counts
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
When will the Fed taper?
We don’t know…
But we do know that, in a press statement on June 19, Fed chairman Ben Bernanke had this to say about his exit strategy.
[W]hen asset purchases ultimately come to an end the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains — a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.
The funny thing about that statement is that the jobless rate in the US is now at 7% – exactly where Bernanke said it would be when “asset purchases ultimately come to an end.”
And yet the Fed hasn’t even begun to taper… let alone end its QE program.
Source: Bureau of Labor Statistics
What to conclude? It’s our view that the Fed will continue to move the goalposts for the end of QE for a long time to come.
Looking at the historical record of QE – and there is one in Japan – QE tends to last not for years, but for decades. In Japan, it has coincided with deflation, not inflation. And it has coincided with a protracted economic slump.
This is exactly the opposite of what most US stock market investors expect.
1. They expect QE to last months or years… not decades.
2. They expect QE to produce economic growth… not a protracted slump.
3. They expect QE to trigger “stimulative” inflation… not painful deflation.
If past is prologue, they’ll be surprised on all three counts…