The global stock market looks more over-extended this summer than at any time since the dot-com crash of 2000. This is either predicting a big economic recovery around the corner, or a massive mis-pricing driven by cheap money in search of yield.
Posted on 04 August 2013
Arabian Money
Global stock markets look more over-extended this summer than at any time since the dot-com crash of 2000. This is either predicting a big economic recovery around the corner, or a massive mis-pricing driven by cheap money in search of yield. Critically profits are already turning lower.
Readers of ArabianMoney will know our conclusion. The momentum upwards will run out soon and all investors rushing for the exit at the same time will send stock markets into crash mode. Bonds will rally and then follow with their own crash.
Asset allocation
The time to do something about this is now, in the depths of summer when you can tip-toe out of the backdoor and nobody will notice. But what do you do with your money then?
This website can only offer broad advice. For our more detailed and specific investment recommendations then you need to sign-up to our companion newsletter (click here).
However, diversification of asset holdings is really your best policy. The newsletter is currently hot on Dubai stocks and real estate, oil-related assets, gold and especially silver. It makes sense to buy assets that are low in price – like gold and silver – rather than those on a high like stocks.
Silver is the biggest bargain this summer. It’s incredibly cheap and recent volatility will work on the upside as well as the downside. All you need is some patience and a strong stomach for the volatility of the ride.
We note that the oil price is high, indeed remarkably strong for this stage in the economic cycle. But then it was in July 2008 before the markets crashed that autumn. It’s another indicator, like the 24-times price/earnings multiple for the S&P 500 index that we are close to the top again.
DP World’s numbers for global trade highlighted a 2.1 per cent fall in the first half, and as an index for the global economy that seems a better indicator than most (click here).
Oil prices
Nonetheless oil still looks a good long term buy for the same reasons as gold and silver. There is an inflation coming down the pike from global money printing and real assets will be your best protection.
In the late 1970s we saw a very similar economy to the one we are now facing. Then money printing was also out of control. Inflation roared despite a very poor economy with low or no growth. Stocks crashed by 50 per cent and zig-zagged nowhere for almost a decade. Oil, gold and silver were the standout winners. Property held its value against surging inflation.
It’s difficult to time this. Perhaps it is better just to gradually accumulate these assets. In the ArabianMoney investment newsletter each month we look at the cleverest ways of actually doing this. We did pick the best Dubai property opportunity of the past year correctly.
Actually it is far more important to your wealth to get into the right assets now rather than worry too much about timing. If silver goes to $100, does it matter if you bought at $25 or $20? The most important thing is to be in the right asset class at the right time, not when you bought it!
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