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WILL THE EUROPEAN MONETARY UNION CONTINUE?

WILL THE EUROPEAN MONETARY UNION CONTINUE?

WE ARE SORRY THE NEWS IS BAD.  GOOD NEWS IS OUR PREFERENCE, BUT WE BELIEVE YOU WANT THE FACTS.  HERE ARE THE FACTS AS WE SEE THEM.

WILL THE EUROPEAN MONETARY UNION CONTINUE?

When Eastern European economies and currencies began to implode, many analysts began to question how long the European Monetary Union can continue. The banking system in Europe is under tremendous pressure from bad loans to over-levered individuals, companies, and governments in the former Soviet Union and Eastern bloc states, such as Russia, Poland, Hungary, Ukraine, Kazakhstan, and the Baltic States to name a few.  I have been thinking of writing about this subject for some time.  Coincidentally, the cover article for this week’s The Economist magazine is a story titled "The Bill that Could Break Up Europe".  
The article has a few main points: 
1. Clearly, one of the big issues of coming years will be the survival of the European Monetary Union and the Euro.
2. Banks in Austria, Italy, and Sweden lent heavily to Eastern European nations, often in the lending country currency.  After the collapse of many Eastern European currencies, these loans are now more expensive to repay.
3. Greece and Ireland are also weak.
4. The European nations who have been slow to install real economic reforms, mainly former Soviet states, must do so immediately.

5. Regulators and banks must watch for and avoid:
a. Currency loan collapse,
b. Bank depositors panicking and removing deposits,
c. Bank shareholders panicking and collapsing the banks’ share prices,
d. The default of the $400 billion in loans owed by Eastern European borrowers that are due in 2009.
If these four problems are handled, most economists believe that the monetary union will hold. 
Many more cynical observers disagree and are backing up their opinions with short sales. European banks are widely shorted, European stock markets are collapsing.
OUR OPINIONS

In our opinion, Europe will break off its admission of unstable Eastern European states.  The monetary union may collapse altogether, but every effort will be made to rescue the system.  It is by no means a sure thing that the Union will collapse, but there is a good probability that at least the European Monetary Union, the Euro, will eventually fail.

Hungarian Forint-Globex CME

Currently, protectionism, a focus on national self interests and politics over regional interests is leading to the potential break up.  We will go into this in much greater detail in future notes.

THE GLOBAL ECONOMIC OUTLOOK IS NOT BRIGHT

As we mentioned in an earlier letter, the U.S. GDP decline for Q4 2008 was restated with a significantly larger decline.  We look for continued economic slowing and substantial declines in corporate profits worldwide for several more years.  As our readers know, we believe that corporate profits are the key determinate of stock market appreciation or depreciation.  A few industries may buck the trend.

Below is a summary of the past five quarter’s GDP as reported by the U.S. Government, and our estimates for the next two quarters.

Gold-COMEX
U.S. GDP (% change from the preceding period)
2007          2008                                    2009 (Guild’s Estimates)
Q4             Q1      Q2     Q3     Q4                      Q1         Q2
-.2%         +.9     +2.8*   -.5     -6.2                    -6.5       -5.0
* The first round of stimulus hit Q2 2008.
THE CURRENT WORLDWIDE RESCESSION/ DEPRESSION WILL PROBABALY CONTINUE TO WAX AND WANE FOR SEVERAL MORE YEARS.
IN OUR OPINION, MOST WORLD STOCK MARKETS WILL FALL SUBSTANTIALLY MORE BEFORE THE BEAR MARKETS ARE ENDED.
Global stock market rallies will occur and they will be selling opportunities.

THE TWO TRILLION DOLLAR DEFICIT
In the U.S., calendar 2009 could easily see a $2 trillion budget deficit.  The budget’s official projection is for $1.75 trillion, but the actual number will be higher due to the traditional rosy scenario modeling with unrealistic assumptions about tax receipts.

IN OUR OPINION, THE BEST INVESTMENTS CONTINUE TO BE GOLD AND AGRICULTURE

Gold-COMEX

For those who sell short we suggest that retail, finance, and real estate continue to be attractive industries from which to pick short sales.
THE U.S. DOLLAR

Continued flows into the U.S. dollar are keeping it strong, in spite of terrible domestic economic and financial problems that have arisen, and are growing, in the U.S.  At some future date, the dollar will roll over and decline substantially.  We do not know the date, but we believe that constant monitoring will allow us to identify dollar weakness, and to move to other currencies at the appropriate time.

REMINDER, FOR A LIMITED TIME…

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.  In recent weeks, we have received a number of requests to review investment portfolios and have been responding to them as time permits.  In order to provide a more meaningful evaluation of your portfolio, we will need additional information about your overall financial picture.  Please give us a call if we can help you in this regard. 

Thanks for listening.


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