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JAPAN

JAPAN

We send our condolences and prayers at this very difficult time for the Japanese people and for the nation.

Although this is a huge tragedy with many complexities, Japan is a strong and vital nation and the Japanese people are often at their best during times of crisis.  We point out that Japan’s central bank, the Bank of Japan, took the correct action to add liquidity to markets.  The Bank of Japan had been acting more expansively for months, and the events of this past week ensures that they will continue and accelerate their expansionary monetary policy.  We expect purchases of stock market index ETF’s, real estate investment trusts, and other assets.  We also expect the BOJ to undertake other activities to stimulate stock market investment and help recovery in the impacted areas and the Japanese economy as a whole.

We anticipate that the destructive effects of the earthquake, tsunami, and subsequent nuclear threats will eventually give way to faster economic growth than previously expected.  Considerable sums of money will be printed and spent on rebuilding beginning in the second half of 2011.


Libya

Gaddafi may win in Libya, but the revolution against oppressive autocrats and corrupt governments around the world is just getting started.  Whatever happens in Libya, we expect the social media-led uprisings against corruption worldwide to continue.  Highly oppressive regimes like Libya’s may win some of the battles, but the uprisings will continue and grow for the next few months, and perhaps through 2012.  We see gold and oil moving much higher and will use declines in prices to add to positions.


Our Investment Themes Create Long-Term Prosperity – Here’s Why

Our global investment themes emanate from our view that there are two distinct groups of countries, states or provinces: surplus and deficit.

China and Brazil are two examples of surplus countries.  The U.S., Japan, and Europe are definitely in the deficit group.  Within the U.S., Wisconsin, California, New York, New Jersey, among others, are deficit states.  Within Europe, you have several deficit countries and a few surplus countries.

Surplus entities earn more than they spend and have money to invest.  For example, China has been spending part of their surplus buying U.S. T-bonds for several years.


Deficit Countries – Borrowing to Survive

The deficit countries can be further divided into two groups: those who have control over their currencies, and those who do not.  Countries in the European Union who do not have control of their currency, such as Portugal, Spain, Ireland and Greece—and others soon coming—cannot control their currency unless they drop out of the Euro.  Alternately, those deficit countries that already have their own currency, the U.S., UK, and Japan, for instance, have control over their currencies.  This second group can devalue their way out of their deficits, meaning that they will borrow now to pay their bills and pay creditors back later with devalued currency.  Beware of lending to these types of entities.  The countries in the first group not managing their own currency also borrow, but in order to repay, they have to cut costs and accept a lower standard of living for many years until they get their financial house in order.  While this is more responsible, it can often take decades.


Guild Guide

In general, you can make money over the long-term by buying the currencies of the surplus countries and selling the currencies of the deficit countries that engage in devaluing their currency.

Further, you can make money buying stocks, commodities, and gold which will rise in value when the currencies in which they are denominated are devalued.  Most commodities are denominated in U.S. dollars.  So as the dollar falls, commodities rise.  They also rise as holders of the deficit currencies seek to hedge their own declining currencies into something that can appreciate.

Historically, stocks, gold, and commodities all rise while currencies are devaluing.  Hence, over the last 60 years, gold, oil, and many other commodities and stocks have risen significantly in value versus the U.S. dollar, but have risen much less versus a surplus currency like the Swiss Franc.


What Happened in Europe this Past Weekend?  QE2 – Euro Style!

While Japan was adding a great deal of liquidity to the world system as a result of the tragedy, Europe was in effect doing the same.

We’d like to direct your attention to an article that was carried on Bloomberg newswires on Saturday March 12, 2011.


Euro Leaders Turn Fund Into Bond ‘Firewall’ as Greek Rates Cut

2011-03-12 13:33:42.838 GMT

By Alan Crawford and Simon Kennedy

March 12 (Bloomberg) — European leaders widened the scope of the euro’s rescue fund, authorized it to buy government bonds and eased the terms of Greek bailout loans as they unexpectedly pushed through fresh measures to end the bloc’s debt crisis.

Under a pact struck at 1:30 a.m. in Brussels after eight hours of talks, the bailout facility will now be able to spend its full 440 billion-euro capacity ($611 billion) and to buy bonds directly from governments. In a blow to European Central Bank President Jean-Claude Trichet, it won’t be allowed to purchase debt in the open market or to finance debt buybacks.

To read the full article please go to: http://www.bloomberg.com/news/2011-03-12/europe-boosts-bailout-fund-with-firewall-bond-purchases-eases-greek-aid.html


In summary, the article indicates that rather than forcing the profligate countries of southern Europe to cut costs, collect taxes from evaders and tighten their belts, the European governments are going to allow the irresponsible spending in these countries to continue. Greece, Portugal and others will still be allowed to sell bonds at market prices, which will be bought by the stability fund.

An alternative option would be buying older, lower interest rate bonds of the same nations that are currently selling in the open market for low prices. This would retire more bonds per Euro spent. However, instead of choosing this approach, Europe has chosen to allow more bond sales and more purchases of bonds by the European fund. This is…printing money, and is inflationary.

Last year’s sovereign debt stability fund bailout in Europe was their QE1. Now we have Euro QE2. The U.S. is also in the middle of their own QE2. With oil prices rising, there is a strong possibility that QE will continue beyond these current programs in the developed world. As we mentioned, Japan will be among these countries, especially in the wake of their recent tragedy. Yet all three major developed country blocks: Europe, the U.S. and Japan are engaging in very expansive QE which is adding large amounts of liquidity to the world markets.

QE expansion = higher oil and gold prices and higher stocks in those and other industries that are benefitted by massive money printing.


“Money Makes the Mare Go”

Fed Chairman Ben Bernanke has often alluded to the fact that “money makes the mare go” in his periodic congressional testimony. This memo has not been missed by congress.

The more money available for liquidity, the higher the stock market goes, the more likely the electorate will feel in a charitable mood toward sitting politicians at election time. Why? Because most Americans own stock these days, often indirectly through their retirement plans. Further, a rising stock market adds to a positive national mood and higher consumer confidence.


More Inflation Lies Ahead for the Developed World, Inflation May Moderate in the Emerging World

The developing world has dealt with inflation for up to a year and a half now. After this initial rapid rise in inflation we may see a temporary cooling of inflation for the next six months due to the possibility of lower prices on crops coming to market in the coming months.

For the developed world the decline of inflation will not be noticed. Food does not make up as much of the cost of living for developed countries as it does for the emerging world. In the developed world, inflation is gaining a foothold. This is partially due to the fact that the U.S. dollar has declined in value and commodities are priced in U.S. dollars.


As Inflation Expectations Moderate in the Emerging World, We Expect a Rally in Emerging Market Stocks

We expect that sometime in the next few months the emerging markets will begin to rise as the pressure of inflation will be moderated. This will allow these nations to stop raising interest rates, and maybe even lower them. When rates decline, money will flow back into stocks and out of bonds. Accordingly, we are carefully watching for a rally in the stock markets of the emerging world.

In general, world markets remain in correction mode. We recently sold our agriculture shares and many of our stock in the U.S. and Canada. We continue to old gold and oil even though they have had temporary declines. We view these declines as buying opportunities.


Our Recommendations—In Review

Oil

Hold and add on dips. Turmoil in oil producing countries will continue for months, if not years.

Gold

Hold and add on dips. Global economic problems and turmoil in oil producing countries will continue.

Japan

Hold and buy on dips. Japanese government response to the crisis will lead to higher stock prices.

Australia

Hold and buy on dips. Australia will sell LNG, raw materials and coal to Japan and other Asian nations


Please see below for a list of our current recommendations and how our closed recommendations have done.


Investment

Date Recommended

Date

Appreciation/Depreciation

Closed

in U.S. Dollars

Commodities

Gold

6/25/2002

Open

+331.2%

Oil

2/11/2009

Open

+182.2%

Corn

12/31/2008

3/3/2011

+81.00%

Soybeans

12/31/2008

3/3/2011

+44.10%

Wheat

12/31/2008

3/3/2011

+35.00%

Currencies

Singapore Dollar

9/13/2010

Open

+4.6%

Thai Baht

9/13/2010

Open

+6.8%

Canadian Dollar

9/13/2010

Open

+4.3%

Swiss Franc

9/13/2010

Open

+11.4%

Brazilian Real

9/13/2010

Open

+2.0%

Chinese Yuan

9/13/2010

Open

+2.7%

Australian Dollar

9/13/2010

Open

+5.2%

Countries

Colombia

9/13/2010

Half Original Position sold

-0.6%

Australia

2/15/2011

Open

-4.0%

Japan

2/15/2011

Open

-4.6%

Singapore

9/13/2010

12/16/2010

+4.80%

Malaysia

9/13/2010

12/16/2010

+1.30%

Indonesia

9/13/2010

12/16/2010

+9.50%

Thailand

9/13/2010

12/16/2010

+11.90%

Chile

9/13/2010

12/16/2010

+8.90%

Peru

9/13/2010

12/16/2010

+32.20%

India

9/13/2010

1/6/2011

+7.90%

China

9/13/2010

1/27/2011

+5.20%

South Korea

1/6/2011

3/3/2011

-2.90%

U.S.

9/9/2010

3/11/2011

+18.10%

Canada

12/16/2010

3/11/2011

+7.90%