Special Update from Puru

The markets have taken a turn for the worse and it looks as though an intermediate-term top is now in place. Yesterday, global markets fell hard and it seems as though the expected summer contraction has commenced. Yesterday's bearish announcement by the World Bank was the catalyst of the sell-off and weakness continues in Asia this morning. Furthermore, other danger signs have popped up over the past few days (strong US Dollar, rising Japanese Yen, rising gold/silver ratio) and this is enough for us to run for cover.

Accordingly, we're liquidating all our remaining 'long' positions in emerging markets and commodities today (with the exception of physical natural gas). And we're allocating the vast majority of our clients' capital to long dated US government bonds. For our more aggressive accounts, we're also allocating some capital to a leveraged bearish bet on financial.

It is our belief that the market is wrong about hyperinflation and we'll probably see another deflationary scare over the autumn months. It is worth noting that Quantitative Easing (QE) has NEVER worked and the economy is nowhere close to recovery. Under such conditions, hyperinflation (surge in the supply of money and credit) is out of the question and we suspect investors are about to find that out the hard way! We'll discuss this in detail in July's edition of Money Matters but for now, we're giving you a head's up on the looming contraction.

If our assessment proves to be correct, stocks and commodities will decline over the following weeks and the oversold US Treasuries will rally in another flight towards safety. So, we're cutting back on risk and positioning our clients to benefit from the summer/autumn contraction. Even if we're wrong, it is highly unlikely that the markets will rally hard from here, so we'll still have ample time to buy back into our preferred 'long' holdings in resources and Asian emerging markets. But for now, caution is the order of the day.