WAR AND TERRORISM ISSUES WILL IMPACT ON THE SEVERITY OF THE COMING RECESSION
Victor Hugo

We are hearing from plenty of readers who are trying to decipher the morals and realties of geopolitics, that last weekend the Iraqi war took a turn in favour of the US and UK Forces. More confirmation could be good for the markets for a while. But confidence still swings quickly to negative as well - at any time.

A rally for somewhat more than a month, perhaps into July on minor cycle indicators e.g. on US military successes - to DJIA 8850 or 9285 would be typical of the swings in the downward trend profile since January 2000.

Yet momentum swing points still suggest a vulnerable Wall Street - for instance - trend and momentum bias on any weekly close of the Dow Jones Industrial Average below 7715 will signal increasingly likely scope for falls to probe 3000 or 1850 - in months or years. Think about the implications of this scenario for the global economy.

The world is having to look at itself very closely at the moment. Does it want the have-nots to teach the have's an expensive lesson? Does the world want global financial instability? Or does the world want an environment of stability in which to do business and pursue growth?

A war is ugly and hurtful and messy and many are being killed. But the years of increasing uncertainty for the world economy and the millions at risk of being killed if tools of mass murder get into the terrorist networks - many openly supported by Iraq - made the choices pretty clear to suppliers of capital.

Serious investors all over the world want stability. They want to get back to business.

So what now? Well for those you haven't yet had the chance to read our "Scenarios" Market Strategy article of last week -- have a look at www.HugoCapital.com/strategy . Briefly, our indicators are saying that a recession or depression is underway - which with rallies in between, will last for between one and five years. Or if intense, for 9 years on various cycle evidence. War issues can affect the severity of the recession but not the investment strategy needed to deal with it.

A successful war leading to relative stability and renewed hopes of a global growth phase will provide a brief euphoric respite -- but too many economic indicators suggest that even if the costs of war and terrorism reduce soon, the US still has to deal with huge systemic debt -- and slow growth. Europe and Asia are in difficulty as well. The recession will be worse if the world does not stand together on war and terrorism issues. An end to the war does not equate to the beginning of global growth as consensus is hoping. But a quick end to the war will reduce the severity of the coming recession.

The "Scenarios" article at www.HugoCapital.com/strategy shows pointers for JSE and global investors how to invest to protect capital and how to be ready to benefit from the recovery.

Wise investors will go defensive now or in rallies with military successes -- and will not assume that the worst is already over.

Those planning to protect and grow capital for both retirement and wealth building purposes -- need to take proactive steps to position defensively. That can mean switching from bonds and stocks and current "value" and "growth " retirement and mutual funds and life assurance policies - to cash and to safer funds in the same family, where feasible. It means investing in structures which guarantee capital and in some cases guarantee returns. It means not trying to ride out the bear which may last for a year or nine years or more, as the roughly 12 year cycle 1929 to 1942 showed. Years of negative or non-performance have a huge opportunity cost.

Our long term indicators warn that the investment strategies of looking for growth and value in a bull market - which worked from 1974 to 2000 -- won't be working during the next few years, despite the earnest hopes and assurances of the investment management industry. Dividend yields and stable earning prospects will become more important than hoped-for growth and recovery prospects.

Successful investment managers will follow proactive strategies, both short and long -- identifying trending market sectors and currencies and bonds and investing in them -- often for only a few weeks or months at a time. They won't be buying "value" all the way down and risking stagnancy or more downside along the way.

It will take those with vision to adjust to new paradigms to believe in formerly pariah sectors such as gold shares. To stay away from IT's for a while yet. To believe in previously suspect strategies such as active ones.

Whom except the most confused analyst would possibly forecast that the US $ can weaken by more than 30 % in the next two years and that the Dow will go 62 % or more lower to near 3000 or to a 1850 hard landing before the next bull market - and the domino effect that will create for the global economy and the status of gold?

I do. If I am wrong I will be pleased.

Best regards
Victor Hugo
www.hugocapital.com