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WORLDWIDE INVESTOR PSYCHOLOGY UPBEAT

WORLDWIDE INVESTOR PSYCHOLOGY UPBEAT

Chalk it up primarily to three factors:

1) Stock prices on the rise, from which people tend to draw optimism;

2) Money printing, also known as quantitative easing (QE), continues unabated in the U.S., Europe, and Japan;

3) Liquidity flowing from the developing world. 


In Europe, auctions of Portuguese and Spanish government bonds have fared well as a result of major purchase commitments from the European Central Bank, China, and Japan.  Clearly, the Chinese and Japanese are looking to ingratiate themselves with the Europeans and improve trade ties. The strategy looks like a winner. Overall, the liquidity pouring in from bond purchases and open QE spigots eventually find its way into stocks, commodities, and precious metals.


In the U.S., the new tax bill is stimulating investor and consumer psychology, serving as something of an anti-depressant. The result: more willingness to spend out there. This mood shift will eventually lead to improvements in the economy, particularly increased capital spending and job creation. A positive direction for the economy, yes indeed! But don’t look for it to happen overnight.  There are years of forward slogging for the U.S. to return to the low unemployment levels existing before the financial crisis. 


Planet-wise, confidence is busting out all over. Companies are expanding, banks are lending, consumers are spending, and investors are investing — exactly what they are supposed to do. We believe three investment categories (stocks, commodities, and precious metals) will appreciate in 2011. 

For more details on the uptick in investor psychology, check out the front page article in the January 13th issue of the Investor’s Business Daily.  Click here to read the article: http://www.investors.com/NewsAndAnalysis/Article/559553/201101112000/Americans-Upbeat-First-Time-Since-09-Tax-Cuts-Aid-Morale-.aspx 

What This Means to You 

Stocks are cheap in the U.S., Europe, parts of Asia, and Latin America and should continue to perform well over the long term. The biggest negative in this picture is the over-enthusiasm of some investors and the highly bullish view of most advisors. World stock markets can fall by 10 percent at any time without disturbing the long-term uptrend. We plan to exploit market declines by adding to positions in stocks, commodities , and precious metals shares.


China Watching: The Renminbi as The Next World Reserve Currency?

Bye bye, dollar?  Hello, renminbi?

The Chinese government is doing a lot of big money muscle flexing these days.  Here’s what has been going on lately:

1) it is allowing Chinese companies to move offshore the country’s official currency — the renminbi — for investment purposes.

2) allowing the currency to appreciate versus the dollar at a more rapid rate than in the past. 

3) allowing yuan (the primary unit of renminbi) denominated bonds to trade in Hong Kong, a baby step on the way to creating a deep, global, and more liquid bond market. 

4) Chinese officials are globetrotting, meeting with national leaders to promote China’s image of a more statesmanlike and globally-friendly country. During these travels, officials spare no opportunity to disparage the dollar and discuss how the dollar’s days in the sun as the global reserve currency are numbered.

For a good read on China’s financial flexing, check out last Tuesday’s Financial Times front page article: http://www.ft.com/cms/s/0/488c60f4-2281-11e0-b6a2-00144feab49a.html#axzz1BRWnuE3D  In the article, the authors discuss how China is using its wealth to improve its standing abroad and secure natural resources for its rapidly expanding economy. 


Empires on the Edge —

What History Says about Deficit Spending and Debt Service

We thank our friend and fellow investor Barry Sahgal for bringing to our attention a recent speech by Dr. Niall Ferguson entitled “Empires on the Edge of Chaos.” Niall Ferguson, Ph.D., is a professor at Harvard University and historian and commentator on current events. 

In his talk, professor Ferguson discussed how deficit spending and debt service eventually dooms empires. He pointed out that:

*  the 16th century Spanish Empire went from 66 percent of revenues to service debt, all the way to 100 percent in 19 years.

* the 18th century French Empire went from 25 percent of revenues to service debt to 62 percent in 10 years.

* the 19th century Ottoman Empire, from 17 percent of revenues to 50 percent in 10 years.

* the 20th century British Empire, from 44 percent of revenues to 65 percent, also in a 10 year period.

Our take on Professor Ferguson’s commentary is that empires expanded and gained power by generous funding of military activity. Sooner or later they began to value the power and reach so much that they wound up spending an excess of total revenues on the military. They also poured money into ‘righting’ social injustices as perceived by the populace and by their governments. All of the above-mentioned empires have long since fallen from the ranks of empires.

When military and social spending become too great a burden, the empire has two choices: cut spending in these areas or tax more. In today’s international business world, increasing taxation is inefficient and leads to the flight of capital and business to more business-friendly locales. Another big mistake — especially if an empire is holding the world’s reserve currency — would be to do what Britain did in the previous century: print money and/or buy its own bonds to finance the profligacy. These measures, of course, serve to debase the currency, and promote laziness and a sense of entitlement. It eventually makes paupers out of the middle and lower income groups, and causes inefficient distribution of wealth.  Over time, empires collapse and their citizens live through decades, if not centuries, of declining standards of living and a loss of status and power in the world.

Are there lessons to be learned here in the U.S.?

*  the 21st century American “empire,” is currently going from 9 percent of revenues to a projected 20 percent of revenues in 10 years just to service debt.

 

Our Recommendations — In Review

(For stock investments throughout the world, we base our recommendations on careful study of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth.)

* Since September 9, 2010, we have been bullish on the U.S. stock rally mode.  We see this trend continuing because over the longer term, liquidity formation through QE will create demand for many assets, including American stocks.  A correction of 5-7 percent could occur at any time, serving us as a signal to buy.

* In developed countries, technology, precious metals, and commodity producers (food, oil, iron ore, and other base metals) will all benefit from an improving economy and a slowly developing back-to-work trend in the U.S. and Europe.

* Commodities are headed for higher ground still, fueled by the expanding liquidity and the oncoming inflation, already a growing problem in much of Asia and Latin America.  The U.S. and Europe stand to see increased inflationary influences later in 2011 and in 2012. Our favorite commodities are coal, oil, and food grains. We believe that investors can trade copper and uranium for a few more months.

* Various precious metals, including platinum group metals, may also rise, but silver and gold are our most favored choices.

* We favor technology, metals, auto and auto-related, agriculture-related, and energy, including oil and coal.

* We stand bullish on China, South Korea, and Colombia.  In Colombia’s case, it is due to the very low valuation of Colombian stocks.

* Investors should continue to hold shares of growing companies in China, South Korea, the U.S., and Colombia.

A summary of our current recommendations can be found in the table below:

Investment

Date Recommended

Appreciation / Depreciation in U.S. Dollars

   Commodities



Gold

6/25/2002

321.6%

Corn

12/31/2008

57.6%

Soybeans

12/31/2008

44.0%

Wheat

12/31/2008

30.7%

Oil

2/11/2009

152.8%

   Currencies



Singapore Dollar

9/13/2010

4.2%

Thai Baht

9/13/2010

6.1%

Canadian Dollar

9/13/2010

3.2%

Swiss Franc

9/13/2010

5.5%

Brazilian Real

9/13/2010

2.3%

Chinese Yuan

9/13/2010

2.5%

Australian Dollar

9/13/2010

6.9%

   Countries



U.S.

9/09/2010

16.1%

China

9/13/2010

5.5%

Colombia

9/13/2010

4.0%

Canada

12/16/2010

3.2%

South Korea

01/06/2011

2.1%


To view current and past recommendations, and see how we have performed, please go to our Commentary Archive and Recommendation Tracker at www.guildinvestment.com.

Warm wishes to all and successful investing in 2011.