Con-tango

Mixed feelings…

 

David R. Kotok, Cumberland Advisors, Inc.
Source: Global Interdependence Center

There’ a lot going on. But let me start out with David Kotok’s remarks (with a copy here) which I picked up from John Mauldin’s mail. I recommend subscribing to both mail newsletters –they’re free and their advice is sound and most of all thought provoking.

Kotok argues that globalization allows us to determine one set of global real interest rates for the different maturities (3 mo, 1 yr, 2, 5, 10, 30 yrs). I’m sure he’s singling out the developed countries (US, UK, EC and Japan) in his determination of the global rate, because they do carry most of the debt weights; as for the rest, in order to determine their real rates, we would have to add each country’s risk rate.

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Sectoring

The whole point of looking at the economy is to get an idea of where to put our chips… and it hurts when we’re wrong.

After making the rounds, I still hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth. If it does get rough, the Fed will have to open the liquidity valves full blast —they’re already pushing liquidity… And if this is the case, interest rates falling, bonds will be a good place to be… And if liquidity will be pushed from all currency angles, assets is the next place to be.

Having said that, let’s hone in to select the best sectors to safeguard our money this coming year.

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Fortune telling VI

What does GS expect for bonds next year?

A downturn in the economy, which will drag interest rates with it; and bonds to do quite well…       

"The economy will grow below trend, around 2 percent in
2007,” said Jan Hatzius, chief U.S. economist at Goldman in New
York. "The short end can rally somewhat more,” with the two-
year yield dropping to 4.5 percent at year-end.

…and base metals?

"While structural changes have pushed metals price ranges higher, we
believe a cyclical slowdown in demand will likely result in a modest
temporary surplus for most metal in 2007, with fundamentals likely
tightening once again in 2008," said the report.         

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Fortune telling V

A pit stop at Roubini’s blog to have an idea of how the US dollar may fair in 2007…

According to Nouriel, the prospects continue to be on the negative side:

I am not in the business of predicting high frequency movements of
currency over the horizon of a week or a month. But my macro and
medium-term perspective tells me that fall of the dollar – over the
medium term – has still a very long way to go.

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Fortune Telling IV

Bill Gross from PIMCO feels that cream may turn into skim milk… or that credit spreads are disquietingly approaching their lower profit limit.

Here’s a morsel to wet your appetite on his comments:

I, and I’m sure you as
well, am always amazed at the pundits who claim that certain just
released information is already €œpriced in to the markets. How do they
know and who did they ask? Even if they did, would a 54% OJ majority
opinion be proof that it was so? I suspect not and that is why
investment management is partially art, partially science, and at least
a small part BS. But there are certain points in more definable, less BS-able asset markets that approach certainty if only because they
are more mathematically based.

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Fortune telling III

Continuing… a short stop at Stephen Roach’s two articles.

The dark clouds in the horizon, according to Stephen:

I am not heralding the demise of globalization.  What I suspect is that
a partial backtracking is probably now at hand, as a leftward tilt of
the body politic in the industrial world voices a strong protest over
the extraordinary disparity that has opened up between the returns to
capital and the rewards of labor.  The extent of any backtracking is a
verdict that lies in the hands of the politicians — specifically, how
far they are willing to go in legislating an effort to narrow this
disparity.

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Fortune telling II

My next stop is at Barry Ritholtz’s very thorough piece (e-mail required), filling in for John Mauldin, who’s taking some time off. Have a good time John —you too, Barry.

In his Real Estate and the Post-crash Economy, Barry underscores the importance of real estate (RE) in supporting the post 2000 crash years, and stresses the prolonged and damaging effects to the economy, as the aftermath of the recent downturn in the housing market.

His conclusion:

…we find it hard to imagine how the economy avoids a hard landing. In a
post-crash economy, that’s about the best we can hope for.

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