Market Outlook 20110717

Since my last Market Outlook more than a month ago, things have deteriorated in the Eurozone, with a debt downgrade for Portugal while Italy's problems have come to the fore.  Despite attempts by politicians to postpone the day of reckoning in Greece, things have not worked out as planned either. When these are taken together with the ongoing budget theatrics in the US, it is easy to see why many in the Western world are fleeing risk markets and moving into the ultimate safe haven asset - gold.

According to trader Dan Norcini, the gold chart patterns are suggesting to him that there is real fear amongst speculators that big troubles in the global financial system are heading our way.

When I look at things from a political perspective, a debt crisis in the developed world is a certainty - the only thing uncertain is the timing.  The reason for this is that the people in the developed world have, for the most part, not woken up to the terrible state of their countries' public finances.  Having lived for so long in a welfare-state system, they seem unable to mentally process the simple concept of 'We are broke'. In Greece for example, they have rioted, blamed the Germans by appealing to their 'past sins', and now even tries to demonise the Greek Orthodox Church for failing to pay its 'fair share' of taxes.  They simply have failed to realise that even if they tax the rich and Greek Church at 100%, there would still not be enough money to pay for welfare in a country of 11.5 million people that has fewer people working productively than Singapore.  Furthermore, as pointed out by the legendary James Dines:

Clear-eyed perusal of Greece seems that an inventory is required of what that nation has to sell to the world in exchange for its imports, for example: energy, medicines and oil. Greece has no prominent industrial manufacturing base, so it is reduced to selling its climatic beauty and relics; with copyrights on The Iliad and Odyssey having expired long ago, and fabled Greek drama supplanted by robocop-like movies, Greece is at a crossroads of something dramatic, possibly penury.

Thus, I think John Hathaway, a top portfolio manager in the gold mining sector, was right when he stated that 'welfare state democracy is incompatible with sound money', which to me means that politicians will continue to implement unsound Keynesian policies to try to hide reality from their electorates, and to try to deflect blame from their own corruption and collusion with greedy bankers.

Given the high degree of uncertainty in the current environment, I continue to think that only nimble speculators should involve themselves in the markets.  Long-term investors who want to implement a 'buy-and-hold' strategy will find the stock market challenging, and the only place that I can see such a strategy work is the gold market.

As an aside, I picked the quote from James Dines above to show that far more intelligent and successful investors than myself are of the view that a service-based economy is not capable of sustainable wealth creation and will lead to long-run fiscal problems.  As I have stated previously, I think Tan Jee Say has got it wrong in this regard.