Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
HOW TO SAVE MONEY ON CAR INSURANCE - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Market Madness: How to Play Bonds, China, and Gold in 2012

Stock-Markets / Financial Markets 2012 Jan 11, 2012 - 10:16 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Yes, I know that markets are irrational.

I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.


Even so, when you think about it, 2011 must set some kind of record.

As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.

Take the madness in the bond world, for instance.

Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.

In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.

Conversely, China is revolutionizing the world economy.

Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.

What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.

It is Madness I Tell You
Do you see what I mean when I talk about irrational?

To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk - it's a deliberate stroll that will destroy your wealth.

For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?

The first conclusion to be drawn is that current markets are unhealthy, and largely the product of government meddling.

Western governments have been pumping money into the global economy since 2008, and running budget deficits larger than ever before in peacetime. Meanwhile, the Chinese government has been engaging in massive "stimulus" itself, but financing it through the banking system.

When you look at current markets as massively distorted, the right conclusion becomes clear: Treasury bonds are a bubble, inflated by massive money printing worldwide and the troubles in Europe.

And while they may have done well in 2011, they are likely to reverse sharply sometime in 2012. Therefore, Treasury bonds should be avoided at all costs.

As for the Chinese economy, it is facing severe headwinds due to massive problems in the banking system that will make some kind of crash and recession inevitable.

The Bright Spots are China and Gold
However, the latest data from behind the Great Wall is still encouraging. China's purchasing managers' index in December ticked back up to 50.3 from 49 in November.

If that were a U.S. index, it would suggest the economy was just barely expanding.

However, according to The Economist and Goldman Sachs Group Inc. (NYSE: GS) analyst Yu Song, the Chinese index is mis-calibrated - a "break-even" index of 50 actually corresponds to industrial production growth of about 10% per annum!

The index would actually have to fall to 44-45 before zero growth was reached and it's currently well above those levels.

That suggests Chinese growth may slow, but will likely continue in 2012 at a rate that would be a roaring boom by Western standards.

Even still, investors looking to invest in China should avoid the banks, and other sectors such as construction and automobiles that depend on bank finance.

However, a modest investment in basic consumer sectors, such as food processing and clothing, may well make sense. After all, the Chinese economy isn't going away any time soon. So basic goods purchased with cash by the middle classes are probably a good investment area.

Consider China New Born Corporation (NYSE: BORN), for example. The company makes corn-based edible alcohol, a key ingredient in the Chinese drink of baijiu.

Since Chinese consumers pay cash for their booze, they may tend to drink more, as Americans once did during the Great Depression. China New Born Corporation is currently priced on a 1.6-times earnings multiple and at 43% of book value, as if it was a swindle. But the reality is the company was brought public properly with Goldman Sachs as the lead, so is likely to be on the up-and-up.

For those who don't want to speculate on the proclivities of Chinese drunks, there's always gold.

It may have fallen out of favor recently, as T-bond prices have soared even higher, but it looks a much better safe haven to me.

U.S. Federal Reserve Chairman Ben S. Bernanke has said he's not increasing interest rates until the middle of 2013, the Bank of England has announced a huge new bond buying program, the European Central Bank (ECB) is certainly not going to tighten any time soon and Japan also looks unlikely to do so.

All that money has to go somewhere, and gold looks the obvious beneficiary.

The easiest way to play the bull market in gold remains the SPDR Gold Trust (NYSE: GLD). However, to get a greater upside potential, you may want to consider long-dated call options on GLD.

For example, the January 2014 240 options (equivalent roughly to a gold price of $2,400 per ounce) are trading at $7.70 right now, giving you a big profit if gold trades upwards in a final "spike" to $3,000 or $4,000, as it well may. For instance, on a historical basis, the gold price quintupled in the 18 months between 1979 and 1980.

But remember, as MacKay astutely reminds us, the madness of crowds never ends well.

Source :http://moneymorning.com/2012/01/11/the-madness-of-crowds-how-to-play-bonds-china-and-gold-in-2012/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in