By Alexander Ross

Commentary Feb. 04, 2009 - 02:00AM JST ( 5 )

Stock markets continue to go down, the uber-wealthy gather in Davos and populist sentiment turns against the media nominated heroes of the past decade. Nothing can equal the collective outrage poured on John Thain from Merrill Lynch for first asking for a huge bonus and then denying he had made the request. Then the item that seems to have stuck most in the collective gizzard of the public was his extravagant refit of his office which he took on soon after taking over the troubled giant.

Such is the outrage as the general population awakes like Rip Van Winkle to the fact that the self proclaimed creators of wealth are nothing more than robber barons. This outrage is now coming too late, as the current global economy could be likened to a hot air balloon with thousands of holes that has been stretched way beyond a natural point of equilibrium. Unfortunately, massive pumping of more air into the balloon does not keep it inflated; everyone knows that it is slowly deflating. Thus, the stock markets are falling, consumer expenditure is falling, and there seems no end to bad economic news. 

Frugal producer nations that at first glance hadn’t indulged in excessive credit growth have still built up excess productive capacity to satisfy the excessive consumption in other nations. Japan, Korea, China and to a lesser extent the countries of Southeast Asia are all afflicted by the slowdown as are producers of raw materials. This pretty much sums up the rest of the world. The effect is seen in the price of commodities, none of which is more visible than the precipitous drop in price than oil. For those of us in the West, we are suffering a recession, for countries in Africa, this is a life and death situation for many populations.

In the political arena, the growing popular frustration for something to be done is resulting in ever growing stimulus packages from government. Prudent fiscal discipline to hold back inflation is being thrown out the window of short-term expediency as politicians boldly step forward with your money to spend their way out of these problems. 

What is the investor to do? Well, at the moment, cash is king, everyone is hoarding it and not spending it. Precious metals have come back from the highs set just a few months ago as investors that need to raise cash literally sell the kitchen sink. Even good investments are sold to cover the losses of bad investments and it is all going out in one giant garage sale.

Will this continue? While it may seem in the short term that the selling will never end, there will of course be a time when astute investors feel that prices are too low, and will start to buy. The turnaround begins when a general realization seeps in, early buyers have picked up the cheapest assets, and others start to pile in from the sidelines with their ready cash. The pattern has been repeated many times in history and no doubt it will be repeated this time around but in the meantime, where will it happen? 

We have to step away from stocks in general. There is now an oversupply of money, which despite a slow down in velocity of money in the economy will at some point start to seep out and cause a rise in asset prices. 

The first thing that is going to happen will be a repeat of the famous spike in precious metals of the 1970s. I believe that what we have seen so far is nothing compared to what will happen. We are now seeing forecasts for gold to hit $2,000 per ounce sometime this year. Recently, we have been seeing the price of precious metals react to this phenomenal growth in money supply. Mass media financial commentators, the people who have been telling us there is a recovery on its way, dismiss worries about the resurgence of inflation, which is exactly why we should be worried. 

The financial system, while creaky still works. It will stop working when politicians decide that it is showing the wrong results and try to change the rules of the game; it won’t be because the market breaks down of its own accord.

I don’t want to sound like a cracked record, but, there are plenty of cheap assets around that should be more expensive, time will tell, and you can still choose them with a bit of common sense. 

The writer is an independent investor in Tokyo.