We would like to take this opportunity to wish you a very happy, healthy, prosperous New Year.
OUR OUTLOOK FOR 2009
A) The U.S. dollar will decline in 2009. This is a lynchpin for several investments.
B) Precious metals and grain commodities have bottomed. These are priced in dollars…as the dollar declines their prices will rise.
The above predictions are strongly held views. The next prediction depends upon events that are still unfolding, therefore we are waiting to establish the timing for this prediction.
C) Many stock markets will bottom in 2009, due to the fact that they have become very cheap. We will watch them and gauge their attractiveness based upon a number of fundamental and technical variables. We believe that when the bottoms do occur, they will be followed by rallies, which will carry many markets much higher. We do not believe that the time has arrived for most markets, but some markets may soon be ready for purchase. We plan to keep our readers updated on our views about the proper time to buy.
A) WHY THE U.S. DOLLAR WILL DECLINE IN 2009
We have been pointing out in our recent letters the huge increase in supply of U.S. bonds necessary to finance the U.S. budget deficits, the bail out of world banking system, and president elect Obama’s plan to create jobs for three million people within two years. If the dollar weakens as we predict, foreign currency bonds denominated in strong currencies will be good investments.
Argument 1: THE U.S. NEEDS TO ATTRACT BUYERS FOR THEIR BONDS.
To attract buyers for the huge supply of bonds, the U.S. will have to either cut the value of the dollar, or raise the interest rates the bonds pay. Because the Federal Reserve and Treasury Department’s plan to bailout the banking system relies on low interest rates, rates will stay low. Thus, the U.S. dollar will again be under pressure.
Argument 2: THE CHINESE ARE SENDING A STRONG SIGNAL …THEY BELIEVE THAT THE U.S. DOLLAR WILL DECLINE.
Recently, we have been hearing general disbelief in the future value of the U.S. dollar from China, the holder of the largest amount of U.S. bonds (and the expected buyer for most of the new bonds to be sold). In recent weeks, several key Chinese officials have made negative comments about the U.S. dollar. The first official comments were that China will not make new investments in U.S. banks, because they wanted to spend the money on growth within China. A second senior official said that the U.S. should not get complacent, and continue to believe that dollar would stay high just because it had been rising for a few months. The third comment was made this past week in Hong Kong’s largest newspaper, the South China Morning Post. It was made by Chinese Central Bank governor Zhou Ziaochuan. He said, “The U.S. dollar is unlikely to be stable next year and later…and the likelihood of the United States issuing more money in the near future adds to the depreciation risk in the U.S.-dollar-denominated assets and trade settlement.”
This is typical Chinese behavior. They repeat the message in different media through different senior officials. China obviously believes that the recent rally in the U.S. dollar will not continue, probably because they will be buying less U.S. dollar debt. I believe all investors should face the fact that China, who has been the largest buyer of U.S. debt, will be buying less of it in the future. If they do buy U.S. debt, they will want a cheaper dollar before making any commitment. This adds strength to our view that the U.S. dollar will fall in 2009.
Argument 3. RESTARTING THE ECONOMY IN THE U.S. WILL STRESS THE U.S. BUDGET FURTHER
A suggestion for President elect Obama:
If you want your program of revitalization to have quicker effects…employ tax cuts. Cuts in withholding taxes will immediately stimulate economic growth. Of course, tax cuts will mean more bonds will have to be floated to cover budget deficits, but many new bonds are being floated anyway. In our opinion, tax cuts will work better. Business will recover more quickly, and people will get more productive jobs.
Although infrastructure projects would fill a national need, they have historically been slow to effect economic growth. Much of Japan’s “lost decade” of stagnant economic growth (which really lasted over 13 years), has been blamed on placing too much dependence on infrastructure projects to stimulate the economy. By our estimation, it will take at least three years to employ three million people with steady paychecks. It will probably take one year just to identify and begin implementing the truly good projects, and to avoid the useless projects proposed by local officials. It could take two additional years to plan and ramp up employment for those projects that are approved. Every state, county, and city will have their own pet projects. Each must be vetted to avoid pork barrel projects such as building golf courses, and local swimming pools, instead of roads, schools, energy infrastructure, and information superhighways.
B) PRECIOUS METALS AND GRAINS HAVE BOTTOMED IN PRICE
PRECIOUS METALS-Precious metals provide some security in periods of war, economic hardship, and financial folly. Currently, all three are part of the landscape.
• War: Israel, Palestine, Iraq, Pakistan, Afghanistan, maybe Iran, and…India?
• Economic Hardship: Currently, we are experiencing the worst economy since the Great Depression in the developed world.
• Financial Folly: Here are a few candidates; the banking system collapse, the mortgage loan scandals, the mortgage derivatives crisis…we could go on and on.
In addition, the U.S. dollar will weaken, which raises the price of gold in U.S. dollar terms even if the gold remains constant in price against other currencies.
GRAINS-The world’s growing population needs to eat, and grain stockpiles are low. Expected global grain production will be moderate this year, and grain stockpiles will be even lower in a few months. Grains are also priced in U.S. dollars and will benefit as the dollar falls in buying power.
C) STOCKS ARE GETTING CHEAPER ALL OVER THE GLOBE
The long bear market that global stocks have been experiencing, have made them much cheaper and more attractive for long term investment. Based solely on current valuation, many are good values. However, the backdrop of a weak world banking system, and a severe global economic slowdown makes judging value and timing purchases more difficult.
We must be sure that companies and countries have adequate capital and access to liquidity to continue to finance their ongoing activities. The managements of the companies must be capable of operating in a challenging environment, and their products or services must have visible and enduring markets. Fundamental economic variables, technical, and psychological variables will also enter into the valuation/timing question. Some opportunities will be identified; we will wait patiently and review the evidence frequently.
In our opinion, 2009 could be regarded by history as a wonderful time to buy, certainly the psychology of fear today is the same psychology found at all major market bottoms. We plan to continue our active portfolio management style; looking for and evaluating opportunities, investing when we find acceptable reward/risk, and managing the portfolios’ exposure.
Guild Investment Management is a service business. We encourage our readers to contact us if you have questions about your investment portfolio, we will be happy to perform a portfolio evaluation for you at no cost.
Thanks for listening.
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