Three sectors and a funeral
Summary
Yesterday we specified how commercial banks create an excess demand for money (EDM) within the context of our framework, The Economic Clock™.
Today we trace how this EDM affects various sectors - and give you fourn investment ideas.
Topics Covered
- Retailers
- Industrial metals
- Farm equipment
- Banks
- How to make money off this idea
We are going to be very brief as you know most of this anyway. We are just tracing through how the excess demand for money can translate specifically into an excess supply of goods.
Our fountain of knowledge today is the business section of yesterday's South China Morning Post (SCMP).
Background
1. Retailers
You know that people tighten belts when fear overtakes greed. But don't go too broad brush: all of us still need to eat, shower, get to work and so on.
Thus, a safe sector to be in has to be consumer staples, utilities and other boring "musty have" industries.
2. Industrial metals
When people curtail their discretionary spending as well as buying new homes, one area that gets hit is household goods: logically, all of us buy less of them.
This means that companies "feeding" such manufacturers will get hurt. In said SCMP we read that Russia's Norilsk Nickel fell by around 20% during Moscow trading last Friday. Reason: its profit shrank by 33% in 1H08. It is the world's largest nickel miner, producing 20% of the world's nickel at its Arctic mines. Nickel is what companies use in order to make stainless steel. So, when people buy less household goods, they need less stainless steel. You see where we are going.
3. Farm equipment
America's Deere is the world's largest maker of farm equipment.
This company's earnings are being wrenched by two forces: the global worsening Economic Time, one characterized increasingly by an excess demand for money (EDM), and by falling agricultural prices.
The EDM imperils Deere's sales financing model.
Falling agricultural prices mean that farmers plant less, so they need less agricultural equipment.
4. Banks
As you will have surmised from yesterday's piece: definitely a sector to keep avoiding: a true funeral is in the offing.
5. How to Make Money Off This Idea
- Always consult your financial adviser first.
- If you have the stomach for it, then go short of major stocks in these sectors. We have had an ETF short on the US market and on the financial sector for quite some time.
- If you have the stomach for it, buy non-bank lenders, e.g. loan brokers. Worried borrowers must be swamping them with loan requests.
