Investoid

Fabrice Grinda has wrote a good article on the current state of the world economy, and its current implications on investment. Here are some highlights:

• The US account deficit is being primarily financed by China and the Middle East
• Asset valuations have reached historical highs as a result
• There is a potential for a major correction in the mid term unless oil prices go down or Chinese consumption (as a percentage of income) goes up

I agree with most of his analysis, but I do think there are possiblities that could affect his potential outcomes:

• I agree that oil prices could stay high for an extended period of time due to demand, geopolitical instability, etc., but I could see prices being dramatically reduced if China’s economy overheats. With so many entrepreneurs attempting to capitalize on China’s growth, I could see a scenario where overinvestment leads to a stagnation in their economy.
• It is possible that some Middle Eastern countries will shift their wealth out of the US for political motivations, which would affect the fiscal balances around the globe.

Assuming that Fabrice’s scenario plays out, what does this mean for regular investors? First, the TSX (with its high energy and materials weightings) is likely to continue to do well. Secondly, yields on bonds, REITs and the like will remain depressed from historical levels. On a risk-adjusted basis, many of these assets will be inferior to short term government t-bills. Third, it will make sense to take profit on investments if they’ve appreciated to a point you feel they are fully valued or overvalued. Lastly, do not chase the current ‘hot sector’ with a material amount of your portfolio. If you’re looking to juice your returns with some exotic investments, then by all means if you feel comfortable with such risks, go for it. But as long as this global fiscal imbalance continues, there is a good probability that things could blow up on you. Keep the majority of your investments in solid long term assets.