European Union GDP was down an estimated 5.9% annual rate in the fourth quarter of 2008. Japan’s GDP shrank at an annualized rate of 12.7% during the same quarter according to their announcement yesterday. Japan’s exports fell because their currency has risen so strongly against all currencies. The fact is that the world’s economy is in a steep slide.
In this letter, we are including a few recent articles that we would like to share with our readers. HOUSING, GUESS WHO’S PLAYING WATCHDOG NOW Appraisal Management Companies (AMCs) are
Later in this memo, we will share an opinion from one of our favorite U.S. economists on how long the economic malaise will last.
THE TIME FOR POLLYANNA NEWS IS OVER. PEOPLE ARE STARTING TO TUNE INTO STATIONS PLAYING ACCURATE ECONOMIC NEWS.
Those media outlets that discuss the view that the U.S. must print trillions of dollars to bail out the banks have a growing audience.
It is becoming more obvious daily to all careful observers that Treasury Secretary Geithner, Chairman Bernanke, and most certainly congressional politicians do not know how to bring the U.S. and world economies out of their current slide. It is also becoming clear that we can expect a long term trend toward lower world currencies (including eventually a lower U.S. dollar) and toward higher gold prices.
These days, there are a lot of frightening international political situations. Pakistan looks pretty frightening, as do many other countries in the Middle East. Saudi Arabia is moving further and further from the U.S. orbit daily. Iran remains a big problem. Iraq, Afghanistan, and other countries are continuing to be money pits for the U.S., which is spending large sums on wars within their borders. Russia has deep problems, and so do Poland, Hungary, and several other Eastern European countries.
WILL U.S. CREDITORS KEEP BUYING THE MASSIVE OFFERINGS OF U.S. DEBT?
We do not understand what could possibly tempt other countries, who are U.S. creditors, to continue buying U.S. debt. Perhaps it is the promise of U.S. military security and/or to ensure an end market for the creditor’s export goods. The Japanese are finding out that the U.S. is no longer a reliable end market for their exports. The Chinese have already stated publicly that they have alternatives to U.S. bonds for their huge accumulated reserves, as reported this past weekend:
CBRC Official Says U.S. Bonds Not Only Option, China News Says
By: Judy Chen
Feb. 13 (Bloomberg) — China Banking Regulatory Commission official Luo Ping said holding U.S. government bonds is not the only option for investing reserves, clarifying comments made a day earlier, the China News Service reported.
U.S. debt is one option in addition to gold and other government debt, Luo, head of the training center at the banking regulator, was quoted as saying in an interview with the news agency late yesterday. If the U.S. government issues too much debt in its efforts to revive the economy, all Treasury holders will suffer losses, he added, the Chinese-language report said.
Dow Jones on Feb. 11 cited Luo as saying that there are few real alternatives to holding U.S. Treasury securities. CBRC said late yesterday in a statement that Luo’s comments don’t represent the view of the regulator.
U.S. ECONOMIC OUTLOOK IN 2009 AND 2010
We read the economic models and reports from many economists around the world, and our favorite U.S. based economist is David Rosenberg of Merrill Lynch. We will try our best to paraphrase what he has been saying lately:
The U.S. GDP will decline 6.5% in the first quarter of 2009. Then, it will decline 4.5% in the second quarter 2009. After that, it will rise to 3.5 % in the third quarter, and 3.0% in the fourth quarter of 2009. In 2010, we will see slow up and down growth and if we are lucky, we will have a GDP equal to the GDP at the end of 2007 or early 2008.
We agree with him. In other words, we are 14 months into 48 months of no economic growth. In general Rosenberg expects that the 4 years of no growth in GDP will be made up of 18 months of very rapid economic shrinkage, followed by 30 months of slow up-and-down growth.
We wish President Obama every success, and we believe that his administration may well bring more social justice to the U.S. However, his speeches and early actions indicate that the U.S. will have a much more government-oriented economy, and a populist tone to economic activity. This recipe argues for slower economic growth in years to come.
Therefore, over the long-term, we look for 1% to 2% economic growth in theU.S., not the old 3% growth rate. The U.S. is too big and saddled with too many bureaucracies. When thinking of a comparison for future U.S. economic activity, we think more of France, not China.
FOREIGN HOLDERS OF US DOLLAR DEBT MUST BE VERY NERVOUS
Why do they continue to hold an asset which is being diluted like soap in a shower?
When you print more money, raise the money supply, and commit to quantitative easing (all three of which are going on in most industrialized countries), you dilute your currency value like soap in a shower. For more on this topic, see the following article:
The dollar’s direction is hard for us to call short term. Currently, many are seeking refuge from their own declining currencies in the U.S. dollar. Longer term, the dollar’s fundamentals are very poor…and in our opinion it can only decline over time. The same can be said of many other currencies as well. Thus, we hold gold related shares, as gold serves as a currency in difficult times.
We prefer to use gold mining shares to gain exposure to rising gold prices in our portfolios. The physical gold market has been tight for months, and we have questions about the asset coverage for some gold ETF’s. It does not appear to us that enough gold is being delivered from commodity exchanges to cover the amount of new share issuances of the gold-backed ETF’s, and we do not know why. Jim Sinclair, for whom we have the highest respect, as well as other professionals, are also questioning this conundrum.
For no charge, as a service to our readers, we will be happy to examine your current investment portfolio, and explain how we might restructure it to meet your needs for income and capital appreciation in the current environment. Please give us a call if we can help you in this regard.
Thanks for listening.
REMEBERING VENEZUELA…BEFORE HUGO CHAVEZ
Shortly after Chavez took over in Venezuela ten years ago, we predicted that in a few years he would ruin the country. We further predicted that he would become increasingly authoritarian. It wasn’t a hard call, because he was implementing all the old shopworn socialist programs that have failed over and over around the world. Let us catch up with Hugo and his Bolivarian revolution today.
Hugo is presiding over an inflation rate of 31%, the highest in Latin America. Crime has risen. Last year, Venezuela had about 15,000 murders versus about 6,000 when he took office. The government has not been favorable to private property, so not much building has taken place, and there is a shortage of rental housing.
The upper and middle classes have been mostly dismantled. Many middle class technocrats have left the country after being fired by the national oil company, to make way for new employees who were more vociferous in their support for the Bolivarian revolution. For example, Venezuelan geologists and petroleum engineers can be found working in Canada and other oil provinces around the globe. Venezuelan oil production fell substantially when Chavez actively fired most of the knowledgeable energy technocrats who ran the oil industry.
In spite of this period of higher oil prices (as compared to ten years ago), the poor in Venezuela have been treading water economically. Now that the price of oil, the main resource for the Venezuelan economy, has fallen, signs of an economic implosion are becoming more visible. The state owned oil monopoly is months behind in payments to suppliers, and the currency has fallen in value. Also, as expected, Hugo is becoming increasingly authoritarian.
We anticipate that over the next few years the bad management, corruption, and incoherence of the Chavez administration, will lead to a severe economic crisis…even if oil prices recover. Sadly, the poor, who Chavez purportedly set out to benefit, will be sucked into the morass with everyone else.
A SUMMARY OF SOME OF OUR PAST PREDICTIONS
Increased protectionism will lead to lower economic growth and higher inflation. It will lead to a longer and stronger depression and much more suffering. WEKNOW THAT THIS PREDICTION IS NOT POPULAR TO STATE, but it will turn out to be true.
Eventually, most observers will agree that the protectionist policies that many countries are embracing will have been a major mistake. Unfortunately, this realization will dawn after much damage has been done.
Another unpopular statement that we made was that the recession began in November 2007. At the time, a lot of criticism came our way. However, recently, theU.S. government has admitted that it probably began in December 2007.
Equally unpopular was our statement in 2008 that the U.S. was in a depression, not a recession, and that it would likely not end in mid 2009 as many have predicted. We do not doubt that our view will be affirmed by many others in the coming months.
OUR CONTINUING VIEWS
NOTHING HAS YET BEEN DONE TO DIMINISH THE ONGOING DECLINE IN HOUSING PRICES, AND THIS IS THE BIG PROBLEM FOR THE FINANCIAL SYSTEM. THUS, GOLD WILL RISE. THE BAILOUTS IN EUROPE AND U.S. ARE MUCH TOO LITTLE AND TOO LATE. TRILLIONS MORE DOLLARS ARE NEEDED.
- The U.S. is in a depression, and it will continue.
- European and U.S. government programs thus far implemented have been too little too late, and therefore are not working. The U.S. banking system will not recover until at least $1 trillion more is contributed to its restructuring.
- Politicians have no idea now to solve the problem, and the appropriate solution flies in the face of their desire to give gifts to voters via pork barrel programs and handouts. U.S. politicians are sowing the seeds of disaster for their nation. The following article discusses the trillions already committed by the U.S.:http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok
- Worldwide money supply growth is very rapid. Money printing, to buy bonds, will be happening soon. This printing of money to pay for borrowing will eventually lead to economic suffering for current and future generations.
- Just as the Russian, British, Hungarian, Icelandic and many other currencies are in the process of collapse, the U.S. dollar will eventually collapse in value, and many loyal supporters of the U.S. status quo will be much poorer.
- The world banking system write-offs of bad assets are far from finished, and will continue for years.
WHAT ARE INVESTORS TO DO? OUR OPINIONS ON SOME INVESTMENTS WHICH WILL PRODUCE POSITIVE RESULTS
- Gold and gold shares.
- Food related commodities, especially soybeans. There are crop problems currently brewing in China and Brazil. If a drought occurs in the next two years, food prices could explode to the upside due to very small food stock carry-forward inventories worldwide.
- At some time in the next few months, energy prices should move upward because, although demand is falling, supply is falling fast as well. Global oil production is falling 2-4 percent per year in our opinion.
- Many currencies will come under pressure due to unwise government actions in Europe, and many other parts of the world. Recently, the Russian ruble, the Hungarian forint, other eastern European currencies have joined the British pound and the Icelandic crown in the dog house. We predict that it is a big dog house, and will eventually have many inhabitants including the U.S. dollar.
- World stock markets will get periodic rallies of 25%, and occasional rallies of 40%, even as the long term trends in stocks continues to be down. In other words, one must take profits periodically to survive.
Thanks for listening,
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