My Take On The Market Outlook

I am going to make a fool of myself by making some predictions about the market. Despite that I may have a wrong stand, a wrong stand is better than having no stand. After all, one must take a stand of what he believes in. Here is my take on the market outlook:

  1. US dollar began to move lower against major currency since Fed Bernanke’s comment on possible pause of interest rate. I think US dollar will move lower slightly in the three months. EURUSD may be contained below 1.29, and USDJPY contained above 110. But if looking further out, it may move even lower because of slowdown in the economy.
  2. US bond market probably has begun its long term bear market since last winter in 2005, abeit moving very slowly. It will move lower once Fed re-start its hiking later possibly in October to contain the inflation caused by energy cost. Eventually, 10 year treausry may move to 5.5% by the year end. That is going to add another 0.5% to the current mortgage interest rate. Bonds are destined to fall whether it’s because of heightend inflationary expectation or increase in the short term interest rate. Bonds may rise a little once US economic slowdown is obvious, but the rise in bonds will be somewhat offset by the fall in the $US. The slow descent of bonds will prevent housing market bubble to have a serious correction. The actual price of housing may not begin to correct in full force until 2008. For now, I expect housing price to be stagnated, because for people who can’t afford monthly payments, they will refinance to extract the last bits of equities to pay for monthly payment.
  3. Gold spot price may keep moving higher slowly. The intermediate high may be made in the next three months or the next six months. It is slightly possible for gold to exceed $750 this year, but more probable to exceed $700. However, precious metal equities may not follow through as much, as to non-confirming the high in physical market.
  4. US stock market in general may make new high due to heavy monetization, IF oil price does not rise too much too fast. I believe that the stock market correction due to the slowdown will be minor, while the correction in precious metals and commodity in general will be severe (> 30%). It will be a major washout of weak hands, and may be the last buying opportunity before an even more sustained rise.

Wild factors to watch out for:

  1. Worsening situation in Iran may most likely help oil and gold price to move higher.
  2. Hurricane season is coming. It will help pushing oil and gold price higher.
  3. US and/or China economy slowdown will bring down red-hot industrial material and energy sectors. Precious metals will be affected, but not as much, because they will be supported by lower US dollar. Emerging market equities may take a substantial hit.

Overall, I believe that US Fed is going to engineer majority of market behaviors to a gradual and shallow slowdown by heavy monetization. But the only things that US Fed cannot do is to print more oil. It will loan as much gold as it can to the gold shorts, in order to contain the rise in the gold price. However, all other metals including silver will keep marching forward by more percentage rise than gold. Eventually, it will end with heightened inflation, and of course, a somewhat subdued core inflation rate due to all the current and/or future fudgings. The goal of US Fed is obviously to reduce the debt burden on both US government and individuals by debasing $US. However, their assumption of a corresponding wage rise due to inflation may be less realizable this time. US wage rise will be less than the true inflation rate. More jobs will simply be exported to oversea.

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