After all, the Shanghai stock market has so far not been affected by the mortgage related credit crisis. As an aside, the Shanghai Stock Exchange Index trades now 55% above its 200-day moving average (it is therefore extremely overbought) and it is up from its June 2005 low by over 4-times.
My point is simply this: When emerging markets will break down sometime within the next 9 months the US stockmarket is likely to out-perform foreign markets.
Since I assume that this insight will not have escaped the attention of large global money managers, they are likely to increase their exposure to US equities in future. This, particularly, if the US dollar weakens further.
Therefore, despite being negative about the US economy and its financial market, I am reluctant to be heavily short US equities. Earlier, I mentioned that new US stock market highs were unlikely for the rest of the year and just above I seem to be "relatively" positive about US.
So, if I look at the investment environment I cannot get excited about participating in the ongoing battle between market fundamentals, which are, in my opinion, a disaster, and the manipulation by the Fed (and possibly at some point also by the government), which could boost US asset prices or at least prevent them from declining as much as the bears (including myself) would like them to do. In military battles even the victors have a very high casualty rate.
Gold for optimists
Therefore, I suppose that in the ongoing financial battle between the optimists, who expect a new high shortly, and the pessimists, who expect a new low before the end of October, the best course of action may be to only take small positions and to be patiently awaiting better entry points both on the long and the short side.
However, if some of my readers are very optimistic, I recommend them to buy gold and gold shares rather than the S&P 500 and other major US indices.
At the same time, I would continue to avoid the financial sector, which is in a credit contraction the most vulnerable industry. It is only a massive injection of liquidity that could reignite a further up-ward move in the global asset bubble, which would be nothing else than another major debasement of paper currencies.
How will the global credit crunch impact on the GCC?
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