Over the last several years, we have pointed out in our commentaries many times that the U.S. dollar is due for long-term decline in price. Please visit our archive of our commentaries to review the reasons that we have held, and continue to hold, this opinion.
The following summarizes our opinions about some of the attractive opportunities U.S. dollar based investors have.
1. PROFIT FROM A DECLINING U.S. DOLLAR
U.S. currency holders may diversify into commodities that are priced in dollars. As the U.S. dollar falls, the value of such commodities will rise.
U.S. currency holders can shift their dollar cash and investments into stronger alternate currencies, which will move inversely to the dollar. As the dollar declines, these strong foreign currencies will rise.
2. PROFIT FROM CHINESE CONSUMER STOCKS
In China’s 12th ‘Five-Year Plan’, senior officials have announced that China will concentrate on building a stronger consumer economy in the years from 2011-2015.
China will reinforce their intention to increase the percentage of consumer spending from the current 35 percent of GDP to 45 percent or more. This will create many jobs in industries such as airlines, hotels, retailing, restaurants, educational services, and consumer services. Currently, China’s population of consumers is already increasing. The Chinese public is spending their new-found wealth and upgrading their dietary habits to include more protein. This plan will create a stronger, more diversified economy.
The industries that will benefit from this growth include:
· Food Production – Farm equipment, fertilizer, and farm products producers
· Travel – Hotels, travel agencies, airlines, and tour operators
· Education – For-profit schools and tutoring service providers
· Retailing – Restaurants and retail stores
· Manufacturing – Manufacturers of consumer products, including school supplies, electronics, automobiles, automobile parts, home appliances, clothing, sporting goods, and luxury goods
These industries and others will be followed by Guild Investment Management and we will be purchasing companies from these categories as opportunities arise. Our commentaries will continue to expound our investment ideas and suggestion.
3. PROFIT FROM THE CONTINUED LIQUIDITY FLOWING INTO RAPIDLY GROWING EMERGING ECONOMIES
Our favorite growth-bound economies continue to be Singapore, Thailand, Indonesia, India, Malaysia, China, Colombia, Chile, and Peru.
These countries are experiencing capital inflows as China and other countries decide to diversify their investments more broadly into growing countries’ currencies, stocks, bonds, resources, and real estate.
Investors in all markets should remember that any investment can (and will) decline from time to time. People periodically take profits. Markets correct as investors shift their attention from risk-taking to more defensive positions, and vise versa.
Investors can take a more deflationary market outlook. The argument will be that the world is falling into a deflationary depression, so they will sell stocks in these fast-growing countries and seek the “safety” of European or U.S. bonds. This same psychology caused some to incorrectly predict an economic decline in China in the second half of 2010, this has not happened. China’s economy continues to grow rapidly.
We hold the view that no government in existence will knowingly act to create a deflation, and that all governments will act to stimulate economic activity and reverse deflationary trends. We believe that it will be a wise course of action to buy the markets mentioned above during periods of correction with a five-year investment horizon.
4. PROFIT FROM PURCHASING GOLD AND HARD ASSETS DURING PERIODS OF WEAKNESS
Gold is the ultimate currency and the store of value that will benefit most from a U.S. dollar decline. Investors should buy gold on dips and hold gold for part of your portfolio.
Investors should also look for opportunities in income-producing real estate properties with strong rental demand.
WHAT ARE THE LESSONS FROM THE RECENT MOVEMENTS OF COMMODITIES PRICES?
Inflation is creeping up, in many growing countries. This inflation will gradually be imported to the U.S. and Europe through higher priced imports due to rising commodity prices, and a weak U.S. dollar and Euro.
The prices of commodities priced in dollars or Euros are rising. As you know, many global commodities are priced in U.S. dollars. Below, we examine four commodities: gold, oil, copper, and corn. They are all up in U.S. dollar terms over these past few months. They are also up versus the U.S. dollar index, which is an index that represents the U.S. dollar’s value versus a basket of other currencies. Currently, the basket represented by the index is weighted as follows: Euro (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swiss Franc (3.6%), and Swedish Krona (3.6%).
Price Change of Four Commodities June7, 2010 through October 1, 2010
% Change vs. U.S. $ % Change vs. basket
Corn (from $340 to $470/bushel) +38% + 27%
Gold (from $1,240 to $1,317/oz) + 6% – 5%
Oil (from $71.44 to $81.30/barrel) +13% +2%
Copper (from $2.77 – $3.67/lb) + 33% +22%
We learn two major things from this:
1. The price increases of gold and oil have lagged the price increases of food and copper over the period. We expect the gold price to catch up.
2. Those who buy commodities using some foreign currencies have not seen the rise in prices of commodities that U.S. dollar based purchasers have seen.
CHINA PLAYS ITS EURO CARD
China’s premier, Wen Jiabao, announced recently that the Chinese government will support the Euro system’s stability by not selling any of the Euros that the Chinese government owns. China announced this action to improve their political and public relations’ status in Europe, which happens to be their biggest non-Asian export market.
VERY IMPORTANT FED PRONOUNCEMENT—WHICH WE INTERPRET AS MEANING QUANTITATIVE EASING AND INFLATION AHEAD
Several Federal Reserve voting members have aired their views in speeches in the last few days, but no statement was as important as the remarks made a few days ago by William Dudley, the President of the Federal Reserve Bank of New York. Mr. Dudley clearly stated that he was in favor of more quantitative easing and that he also suggested raising Federal Reserve’s stated inflation goal. He stated that one option would be to copy the UK and set an explicit inflation target, and he expressed that being more explicit about the inflation goal would “clarify the extent to which the current level of inflation falls short of that rate.” Our guess is that the Federal Reserve Bank of New York would initially raise the goal to 2% from a current level of 1%.
What is interesting to note is that this is actually a reversal of the last 30 years of Fed policy where the Fed has worried about excess inflation and has sought to hold it down. Now, Mr. Dudley is proposing that we try to raise the inflation level to avoid a deflation, which is exactly what we have been stating that the Fed would do as deflation became a concern. In essence, he is suggesting that the Federal Reserve engineer a change from a very small inflation to a larger rate of inflation. If this became the policy (and we believe that it will become the policy very soon), it will have great consequences for investors and their appropriate investment selection. It will favor the countries, stocks, currencies, and commodities that we have mentioned in this letter.
The new Chinese 5-year plan is promoting more consumer spending and a focus on development in smaller inland regions. China is working on increasing itself in the areas of lower-income housing, consumer spending, and continued the build-out of massive travel, communications, and physical infrastructure.
China is on record as supporting the Euro by not selling any of the Euros that they hold. China announced this action to improve their political status in Europe, which is their biggest export destination outside of Asia.
Inflation, which has heated up in countries like Brazil, India, Indonesia, and many others will make its way to the
U.S. and Europe.
Attractive areas for investment include:
· Chinese consumer stocks and currencies.
· Stocks and bonds of nine growing countries in Asia and Latin America, namely India, Indonesia, Thailand, Singapore, Malaysia, China, Chile, Colombia, and Peru. (We may later add Brazil, Australia and Canada to our countries of interest, however we are monitoring political events before doing so.)
· U.S. Stocks
· Gold. Buy dips and sell rallies with your trading positions, but continue to hold a long-term core position that you do not trade.
We still think the Japanese yen is a short. Today’s announcement of further quantitative easing (QE) in Japan is bearish for the yen. Japan’s announcement is a complete turn-about for them. They have announced a 60 billion dollar fund allowing them to purchase a list of riskier assets, including ETF’s, Japanese REITS, commercial paper, corporate paper, and government securities. This is a clear attempt to stimulate the economy away from the stagnation it has been experiencing, and to lower the value of the yen. Japanese interest rates are at zero percent.
Japan’s QE when combined with the QE going on elsewhere provides a strong impetus for price increases in commodities, gold and stocks.
Thanks for listening.
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