THE DOMINO NOOSE EFFECT
The Well-Timed Strategy for Week Ending July 11th
by Peter Navarro, Ph.D.
July 5, 2008
The Markets
Well, let’s chalk June up as the worst June for the Dow and S&P 500 since the Great Depression. While many analysts and pundits remain focused on this sorry situation, I remain painfully enthralled by the slow motion train wreck taking place in the global economy.
In Asia, New Zealand has emerged as the canary in the coal mine. It was one of the first to hike interest rates to fight inflation, it has grappled with a soaring value for its currency that has killed exports, and now it’s contractionary monetary policy has put it on the verge of negative growth and an official declaration of recession. Surely, Vietnam won’t be far behind as inflation as run rampant (over 25%) and the country is desperately raising interest rates to bring some semblance of order to chaos.
As for other countries hiking interest rates, it’s a long and growing list – that doesn’t yet include the U.S. Countries hiking rates to fight inflation range from Australia, China, Indonesia, and the Philippines to Denmark, Iceland, Norway, and Sweden to Nigeria and South Africa and Hungary, Latvia, and Russia. What’s coming clearly is a wave of contractionary monetary policy effects that will act as part domino effect and part noose on the global economy.
In Europe, the situation is both tenuous and schizoid. While Germany continues to worry about inflation, Ireland, Great Britain, and Spain are being dragged down by a burst housing bubble while Denmark officially has joined the recessionary ranks.
Of course, if you are a short seller, you are as happy as a shark in a baby seal preserve. If, however, you are like most investors – only a buyer with perhaps most of your retirement nest egg stuck in underwater stocks – this is not a fun time.
My advice has been to be in cash and that advice continues to hold. The only stocks I’m buying these days are biotechs which are driven not by the business cycle but by drug trial results. I’m also beginning to nibble around the edges of the financial sector in the (perhaps illusionary) hope of hitting the bottom of that pitiful sector. (Wachovia and Fifth Third are two targets.)
Last take: If you are a short seller, the oil market will undergo a cyclical downturn soon. With the global economy getting ready to tank, this downturn is as inevitable as death, taxes, and mudslinging in presidential campaigns.
Presidential Politics
The abiding fact of this upcoming election will be the perverse closeness of it in a year when the sitting Republican president is saddled with the worst public opinion in modern times. The nature of the electoral beast is the closeness of the race is likely to persist and McCain will remain within striking distance right up until November – unless he makes a really bad VP choice.
Funny isn’t it: McCain is the ONLY guy the Republicans could have put up this year that stands a chance precisely because of the independent streak he has demonstrated. Plus, Obama’s “out of Iraq in 16 months” position is fundamentally at odds with a majority of the American people – most of whom regret that we are in Iraq but understand that a unilateral retreat would turn the region over to an increasingly bellicose Iran.
RCP Average |
06/16 - 07/02 |
-- |
47.6 |
41.9 |
Obama +5.7 |
06/30 - 07/02 |
2641 RV |
47 |
43 |
Obama +4.0 |
|
06/30 - 07/02 |
3000 LV |
49 |
44 |
Obama +5.0 |
|
06/26 - 06/29 |
906 RV |
50 |
45 |
Obama +5.0 |
|
06/22 - 06/25 |
2000 LV |
49 |
45 |
Obama +4.0 |
|
06/19 - 06/25 |
805 RV |
47 |
43 |
Obama +4.0 |
|
06/19 - 06/23 |
1115 RV |
49 |
37 |
Obama +12.0 |
|
06/16 - 06/22 |
1501 RV |
42 |
36 |
Obama +6.0 |
Source: Real Clear Politics
Quick Takes
- “Staycations” are clearly in now with gas heading towards five buckeroos.
- China’s “pollution Olympics” gained more ground this week as a massive algal bloom has effectively closed the Olympic sailing course at Qingdao.
© 2008 Peter Navarro
“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks
Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.
Contact Information
Peter Navarro Irvine, California USA | Email | Website | Editorial Archive
