Accretus Solutions

As a follow on post to the ‘ Are we heading towards Hyperinflation’ , the recent data/events and actions re-affirm a firm belief that it is time to allocate commodities to one’s portfolio. Let me put together the pointers that has led us to this belief:

1. The U.S. will continue to do ‘quantitative easing’ to ease the credit crunch..Unfortunately, it has not yielded meaningful results till date. According to Meredith Whitney,the Small and Medium Enterprsises in U.S. [ which contribute to over one-third of the GDP] till date have been increasingly denied access to credit.The SMEs are the prime engines of innovation and employment revivals[represents 50% of the nation's workforce]. Lack of credit leads to lay offs and closure of businesses.

2. The U.S. Government’s intent to stimulate the economy through more consumption[ like cash for clunkers program, etc] would not work, since the consumers are paying off their debt and saving more. The notion that over 70% of GDP contribution would still come through consumption seems to be history.

3. Dollar[due to zero interest rate policy] has now replaced the yen as the ‘carry trade’ for investors, fuelling asset bubbles across emerging markets.

4. Recent data put out by IMF indicates that Fiscal Stimulus doesn’t work in reviving the economy, when the fiscal deficit is beyond 60% of GDP. The U.S. has already reached that level.

5. When all mechanisms to revive the economy fails, drastic depreciation of the currency would be the only option for U.S. to revive its economy. This would temporarily bring down the soaring un-employment rates and push consumer prices upwards[deflation to inflation].

Recent Report published by David Rosenberg on The case for commodities captures the above premise very well and also suggests how investors now should re-align their portfolios.

It clearly raises a strong case for commodities. As history shows, during high inflation its the commodities and precious metals which not only acts a hedge to our portfolios but performs better.

What does all this mean to the Indian Investor? Our country and other nations across the world has very high correlation to U.S. and hence what happens there does impact us. For eg. 16% of world GDP consumption is still driven by U.S. investors.

To sum up, it would be prudent to trim equity portfolios , add commodities & precious metals [with a 20-25% exposure] and increase fixed income allocation in your portfolio.

After all, Portfolio Diversification and Dynamic Asset Allocation is the way to preserving and managing our wealth in these uncertain times.

In the last one quarter the data coming out of U.S. clearly indicates the raising unemployment rates and american citizens after a long time starting to save! Yes..in fact the previous quarter savings have been 5%.. Clearly this does not indicate green shoots..more like brown weeds..or rather brown manure as Nouriel Roubini puts it.. His latest article clearly highlights the fact that its going to take longer for the U.S. to recover from the recession..

Circa Sep 2008

Lehman Brothers collapses..Credit markets freeze.. Equity markets crash.. Commodities Markets go on a tail spin..

Central Banks start getting their act together in a coordinated effort to revive the credit market..

Circa May 2009

Quantitative Easing led by the Fed and followed by other Central Banks have brought down the interest rates to near zero..

All major asset classes and commodities have risen dramatically since March 09..

While the U.S. Government, by using the extreme measure of monetary policy of ‘quantitative easing’ is hoping that the credit flows would lead to economic recovery, in the medium term it is setting itself up to ‘hyperinflation’ due to the dollar that would start losing its value.

In this context it is interesting to note that the famous author of ‘Black Swan’ , Mr Nassim Nicholas Taleb and his collaborator who manages and runs a hedge fund have launched a new fund betting on ‘hyperinflation’.

There is a great probability that we would see higher inflation in India too..

The financial linkages have become stronger across the world in the last 4 years..

How should we re-align our portfolios to prepare us for this new scenario that would hit us in the next 2-3 years..

Watch out for the next post which would focus exclusively on this theme..