DO NOT FALTER IN YOUR COURAGE. LIFE IS ABOUT CYCLES…UP AND DOWN.
Those who have the wisdom to be prepared during the down phase, and have the courage to act when the cycle is close to its nadir, will end up the winners in the next up phase.
TO PRESERVE CAPITAL (AND COURAGE) WE ARE HOLDING MOSTLY CONSERVATIVE CASH TYPE INVESTMENTS AND GOLD SHARES IN THE PORTFOLIOS. FOR THOSE WHO CAN SELL SHORT, WE ARE SELLING SHORT.
IT IS A DIFFICULT TIME. MAY WE SUGGEST THAT YOU STAY BRAVE, BECAUSE OPPORTUNITIES WILL ARISE.
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 supposed to be the new watchdogs with respect to keeping lenders and brokers from influencing or exaggerating appraisals. According to a recent BusinessWeek article, some AMC’s are being run by “the same subprime players that helped inflate the real estate bubble in the first place.” Here is a link to the article by Chad Terhune: http://www.businessweek.com/magazine/content/09_07/b4119042628146.htm CHINA IS LOOKING FOR ASSURANCES THAT THEIR U.S. TREASURY PORTFOLIO WON’T DEPRECIATE. Below is a great article about the Chinese demanding guarantees from the U.S. that the value of China’s huge portfolio of U.S. Treasuries won’t be eroded by “reckless policies”. We guess that the Chinese don’t trust the bond rating geniuses at Standard and Poors and Moody’s. Also, perhaps now is not the time to complain to the Chinese about their currency being undervalued versus the dollar. Here is a link to the article.http://www.bloomberg.com:80/apps/news?pid=20601087&sid=aXWQEydhsoUI DERIVATIVES, WORTHLESS? YOU DON’T SAY. Many of the “investments” that were constructed by investment banks and then sold to investors, banks, insurance companies, etc. in recent years are merely side bets on the bill paying performance of borrowers who…have demonstrated poor bill paying performance. It is hardly surprising to us that so many of them are worthless. The Financial Times Half of all CDOs of ABS failed By Paul J Davies Published: February 10, 2009 Almost half of all the complex credit products ever built out of slices of other securitised bonds have now defaulted, according to analysts, and the proportion rises to more than two-thirds among deals created at the peak of the cycle. The defaults have affected more than $300bn worth of these collateralised debt obligations, which were built from bits of other asset backed securities (ABS) such as mortgage bonds, other CDOs and structured bonds, or derivatives of any of these, according to analysts at Wachovia and Morgan Stanley. So-called CDOs of ABS caused huge losses to banks such as Merrill Lynch, UBS and Citigroup, which held large amounts of the supposedly safest, top-rated chunks of them. They have since been damned by bodies such as the Bank for International Settlements as being too complex to risk manage effectively. CDOs of ABS were used increasingly at the peak of the credit bubble to keep the securitisation machine moving by recycling hard to sell bits of subprime mortgage bonds and other risky tranches into new structures with top-notch credit ratings. However, the ratings of these deals proved unsustainable, as evidenced by the fact they have accounted for 92.9 per cent of all 16,587 ratings downgrades globally from all rating agencies since the beginning of last year, according to Morgan Stanley. The way these complex and risky transactions were exploited at the peak of the bubble can be seen in data from analysts at Wachovia, who reckon that 47.6 per cent of all CDOs of ABS by volume issued since the market substantively began in 2002 have now hit an event of default. By their records, the first three years of the market saw less than 100 deals sold per year and less than 10 per cent of those have defaulted. The number of deals done rose to 133 in 2005, less than 20 per cent of which defaulted, and 89 in just the first half of 2006, about one-third of which have defaulted. However, the real peak of the market saw 147 deals done in the second half of 2006 and 172 done in the first half of 2007 – of which 68 per cent and 76.2 per cent, respectively, have now defaulted. The way these CDOs have performed has especially hurt the new wave of specialist credit hedge funds, which sprang up in recent years and became heavily dependent from creating and managing such deals. They were drawn to such business by a belief in the sustainability and predictability of the fees it would generate. However, about one-third of the CDOs of ABS that have defaulted, or almost $105bn worth, have been or are being liquidated – often leading to losses for investors and putting further pressure on market prices of the bits of mortgage bonds and other CDOs they are selling. REMINDER 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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