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Back to investment school.

Last summer the bears thought a global recession was inevitable. The bulls thought growth would be mildly slower because global markets had de-coupled from US troubles. The bears won that argument.

This summer the themes are weaker global growth, high oil and commodity prices, mounting inflation and weathering a recession.

Here’s what the more prudent market voices are saying.

Gwyn Morgan, former EnCana CEO, said “rising oil prices increase the cost of virtually everything, unleashing a wave of inflation that will wash away disposable income.” He’s right. If you eat or drive, you see inflation.

Jim Buckee, former Talisman Energy CEO, said that ‘demand destruction (for oil) would be at $1.60 /litre’. He was right. Oil prices have dropped.

The International Monetary Fund expects world growth under 3% through 2009. (It was 5% from 2003-2007). They say that’s a recession (for everyone except energy and agri-food exporters). Developed countries growth is 1.6% (3.8% is average). Developing nation’s industrial activity (which is critical to commodity prices) is slower. US growth is almost zero.

Still high prices and slower growth reduce demand – Economics 101. Canada sells a lot of oil. Ergo, in July, our energy index was down 14% and oil is approaching $100 from $140. (Yet I still pay $1.40/litre).

Finally, McLean Budden’s Robert Spector says markets like economic growth (because it translates into corporate earnings) and stable inflation. We have neither.

So macro themes are pointing more toward prolonged and painful than short and sharp. There are more US adjustable rate mortgages to reset at higher rates in 2008. (The source of much of the US troubles in the first place). Also, as US home prices continue to fall, many home loans are now greater than the value of the house. (14 million mortgages. Worth $3 trillion). Expect problems if these borrowers walk-away. So there is more to come before the worst is over.

Investors will see higher costs for purchases (food, gas) and lower values for what they own (house, investments).

This all sounds recession-like.

On the positive side, oil and commodities prices are weakening. US exports are strong and growing. And, most important, investors are starting to get a sense of valuation with the knowledge of the size of the problem(s).

Looking forward, the bulls say buy now cheaper stocks. The bears, however, say hoard gold (and cache canned goods).

The winning strategy is to go back to school and practice the lessons from the investment masters.

Charlie Ellis says an investment policy helps long term investors avoid distractions from headlines and short term market volatility. Peter Bernstein says buy conservative dividend paying investments. GMO’s Jeremy Grantham says don’t be afraid to hold cash while waiting for value to become apparent. PIMCo’s Bill Gross says non-correlated foreign assets in overseas markets are still a source of growth. The late Sir John Templeton preached global diversification. These lessons position an investor for all environments rather than bet on a single up or down outcome.

Originally published in the Business Thompson Okanagan news, October 2008.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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