Want to protect your capital? There are good reasons to disbelieve Thursday's American market ebullience...and good reasons to believe most of Asia's...
We have been saying since early June that Fed Funds would reach around 6% around 2006 - foolish heresy then, looming reality now. So there is not much further to go, but that does not mean that you buy the market!
Thinking that rate rises have paused or stopped, yesterday's American market rally lacks credibility:
1. Legacy. Do you really think that Bernanke and Co want to go down in history as the parents of America's next round of inflation and subsequent recessions? No. That is why we reckon with further rate hikes.
2. Profit desperation. One key reason for further rate hikes is lower profits. Contradictory, or sensible? In the jargon of our Economic Clock®: whenever an excess supply of goods looms, profits have to fall along with demand. So in order to protect profits, corporates pass higher costs on to shoppers. What corporates lose in turnover they seek to gain by protecting their margins. Expect this pattern to repeat itself. Result: stronger inflation. So up go Fed Funds yet again. The Fed wants America's Economic Time® to worsen.
3. Peak madness. Many punters are telling you to buy stocks, now that rates have peaked. Well, we don't think that they have peaked. More importantly: sell at the peak of the Fed Funds cycle. Reason: the Fed now believes that its high rates will "bite", i.e. will create an excess supply of goods. So profits must fall (see point 2 above): who ever bought a stock knowing that profits are falling?
Even if we disbelieve America's rally, we are delighted that Asia got a massive boost today. Suffice it to say that in many Asian countries, their Economic Time keeps improving...but not in all of them. Your Economic Clock will tell you which Asian markets we like (and dislike), so subscribe and protect your capital.
Money-saving implication: Short the US markets and buy selected Asian markets and sectors favoured by our Economic Clock.