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Investment decisions need to consider both global strategic considerations and domestic economic necessities

The book ‘Currency Wars’ by James Rickards makes one realize how vulnerable the investor is, not to the market forces but really to the goings on behind the scenes.

Currency wars are part of economic warfare, which in turn is part of asymmetric warfare where all warfare is aimed at control of resources.
The relevance to me as an investor is that I should understand what the strategies of the warring parties are to know how this will impact on investment markets and on my investment decisions, besides also taking cognisance of the impact of domestic, and more particularly the US domestic, economic necessities on these markets.
Strategically the most important resources are currency, oil, water and agricultural land. Looking at the global political map today, the main adversaries for the control of global resources are the US and China and then there are all the other countries. As George W Bush put it – if you are not for us you are against us.
Where does the US stand with regard to the key resources? It controls the global currency and it will do all – ‘all options will be on the table’ to use President Obama’s pet phrase – to defend this status. The US is large enough to be self-sufficient as far as water, resources and agricultural land is concerned, unlike China. Although it does not have to be too worried about these strategic resources, it will no doubt try to deny China access as far as possible. Oil then is the next strategic resource. With the advent of fracking technology the US has become virtually self-sufficient but for how long is a question to which I have not seen an answer yet. At this stage one would believe that the US is still strategically very much focused on securing global control of this resource which at the same time would deny control by China and would maintain China’s sub-ordination.
The assertion that the dramatic collapse of the oil price has nothing to do with market forces was floated in a previous newsletter, as was the case with the dramatic incline in the price a few years earlier. So if its not market forces it must be the result of economic war games – but what could be the purpose of this? If it had anything to do with the US, it has certainly hurt its own economy badly but have the other consequences been more important for the US in the greater scheme of things? It has certainly badly effected the Russian economy particularly in tandem with the sanctions imposed on Russia by the West. It will have also badly effected other oil producing countries first and foremost Saudi Arabia. Saudi Arabia seemingly being fully aligned with the US it would be odd if the US played this game. However, Saudi Arabia has a ‘war chest’ of something like US$ 700 billion. Considering that oil is a finite resource could it be a matter of what is not pumped this year can be pumped next year?
On that basis we would not expect the oil price to remain at its current levels for too long, still it could be a few years. Thereafter it should move back to a price that will make fracking viable once again which will be broadly between US$ 70 and US$ 100. This will of course help the global consumer and governments of oil importing countries across the globe. South Africa is saving on an annualised basis on the basis of the decline in the oil price in Rand terms from the beginning of 2014 to its current level, an amount of R 23 billion or approximately 0.5% of GDP (based on oil consumption of 25 million liters a day). Although the lower import costs of oil will help SA’s trade balance, SA is currently running a large trade deficit (R 90 billion for 2014) far exceeding the benefit of lower oil import costs. The Rand will thus not experience any support but will remain under pressure as the result of foreign investors withdrawing investment capital from SA.
While the general expectation was that the money printing by the US Fed would result in an increase in US and eventually global inflation this has seemingly not happened. It is also unlikely that the ECB’s printing commitment will produce a different result in the medium term. However what one should not lose sight of is the fact that these money avalanches have dramatically deflated interest rates and inflated prices of equities across the globe. The question at this stage is – how much is this reflecting inflation already and how much was occasioned by artificially low interest rates? As global interest rates will start returning to normal, there will be correction of the disparity between equities and fixed interest investments to the point of a risk adjusted equilibrium between these two asset classes. For the time being equities is really the only conventional asset class one should be invested in while one should avoid fixed interest investments. Despite equities being at extremely high levels in nominal terms, the SA equity market returned only 3.5% (excluding dividends) in real terms since the beginning of 1986 while the S&P 500 returned 4.5% (excluding dividends) over this period. On that basis we believe equities should continue delivering fair returns over the medium to long-term.
For the next 2 years we should expect no major swings in investment markets, given no political upheavals impacting investment markets. Over this period the interest rate environment will be normalized in step with an improvement in the domestic economies. At that time we would expect inflation to start gathering pace and with that we will see interest rates being increased in step with inflation. Only at that point will fixed interest investments become an attractive asset class again.

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