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FOREIGN AFFAIRS

FOREIGN AFFAIRS

FOREIGN AFFAIRS: IRAQ

Some of you may object that I read Foreign Affairs magazine. Some say that it has a left wing slant. I like to read everything whether it’s left wing, right wing or no wing. I am in search of the facts. Therefore I am skeptical about every political philosophy.

Facts brought to light in the last issue of Foreign Affairs describe how the British left Mesopotamia in 1932 after occupying it for 12 years, under a mandate from the League of Nations. This very expensive and unpopular occupation led to no conclusion and finally, the British declared victory and abandoned Iraq in 1932. Soon after the British left, neighboring nations began to divide up the country.

The obvious input from the article is, whether you stay or go, this is a volatile, warlike, contentious and unstable region of the world, and has been for many, many centuries. Reading the historical account is like reading today’s newspapers. What will the outcome of the current Iraqi situation will be? It may be very much like the British experience from 1920 to 1932.

OUTSOURCING

Another very good article is on outsourcing and why and how it will change the world. It argues that outsourcing is creating a third industrial revolution. The upshot is that it will be, similar to but different than, the manufacturing led first industrial revolution, and the services led second industrial revolution. This article is important reading for anyone interested in understanding global trends.

ELECTION YEAR BALDERDASH

This is an election year in the U.S. and in many other countries as well. Today, eight months before the election of November 2006, the most amazing and disheartening combination of populist idiocy, free trade bashing and out and out political demagoguery is filling the newspapers and the airwaves.

Some examples include: “China is no good because they sell more to us than they buy from the US.” “India and China are no good because educated people there work for less than we work for, and consequently are taking our jobs.” “The rich are no good because they have more money than we do.” “The immigrants are no good, because they work hard for less money, and use our social services without paying their fair share of taxes.”

WORLD ECONOMIC GROWTH IS THE RESULT OF CHANGE!

If we review the facts of economic history we begin to develop a clear picture. Creative destruction and the law of comparative advantage are the reasons the world economy has grown and we no longer barter for animal skins and eat the game we killed.

Old industries and inefficient methods of production die out and are replaced by newer better methods. People are dislocated, some fall in income and others rise in income–this is creative destruction.

Some countries are better at mining copper and others are better at programming computers–this is comparative advantage.

Remembering the historical facts is unpopular at election time. I think we have to remember that many of the politically expedient political fixes being proposed today, have a bad track record. They have historically led to: economic shrinkage, the loss of personal freedom, the collapse of individual incentive and the desire to achieve, when they have been implemented in nations in the past.

5 YEAR CHART OF THE MSCI WORLD INDEX EXCLUDING THE U.S.

WE NEED TO THINK ABOUT A LOT OF THINGS IN THE NEAR FUTURE

A. Iraq will not work because all 3 major groups (Shiite, Sunni and Kurd) fear annihilation and will not cooperate with one another. Moreover, they even fight within their own groups.
B. Global oil transportation security is diminishing with Al Queda focused on destroying transportation, processing and storage facilities especially in the Mid East.
C. Continuing problems: Iran, Nigeria, Venezuela, Bolivia, Iraq, Saudi Arabia, and U.S. Gulf of Mexico are all energy producing countries and areas. For different reasons energy supplies, are in danger in each.
D. There is a need for energy alternatives such as coal, uranium, wind, ethanol, solar, and electric.
E. For growth which has already been planned in Asia, the world will need metals: nickel, copper, zinc, and uranium.
F. Individually, we need to have a plan if bird flu hits major industrialized countries like it did in Italy in early February. What happened in Italy when a few wild swans died is instructive. No humans caught bird flu there but not much got done. People stayed home, and consequently there where almost no retail sales, no restaurant sales; people did not want to congregate in public places or even go to work. After a few days business resumed. However, there was no human outbreak. If even a few people become infected, what will it do to economic growth?
G. How will the world look after the recent outsourcing revolution takes place?

COAL IS COOL

Why would we say that? Coal has many advantages. It has already been discovered. It is not hidden from view and no one has to guess where it is and drill wells hoping to discover coal. It just has to be mined, transported and delivered. It is available locally in North America, Europe, and Australia. In a world of increasing political risk, this is important.

SUMMARY

We are sticking to our favorites: oil, energy service, coal, gold, silver, metals, European financials, Japan, and some medical areas. Among industries that we also like are health care companies that will be benefited by bird flu and an aging population in the developed world. The way to invest in this sector is in Bio-techs and pharmaceuticals not hospitals or HMO’s.

Bird Flu probably won’t be a problem, but we should be prepared for the possibility. Make a list of short sales. Short medical insurance companies as bird flu would be the equivalent of a major hurricane for them. Have a short sale program ready to implement, focus on big capitalization stocks, retailers, and restaurants especially retailers in the crowded countries like India and China. If there is a large scale bird flu outbreak in Australia, North America, Europe or Asia people will stay away from public places in droves.

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You can also read Monty Guild’s past periodic market and economic commentary articles by going to the Commentary Archive on our web site www.guildinvestment.com.

Monty Guild is Chairman and CEO of Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.