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The Debt Ceiling Raised, but Mega Problems Still Unresolved

The Debt Ceiling Raised, but Mega Problems Still Unresolved

The Debt Ceiling Raised, but Mega Problems Still Unresolved

Congress has voted to avoid a short-term default on its obligations.  Thankfully, the operatics are behind us; at least for a while.  More importantly, the U.S. is still no closer to finding a long-term solution to its dire fiscal problems. The legislation that was passed does not even attempt to address the structural deficiencies in the tax code, the eroding job market, or the burgeoning and no longer affordable entitlement programs.

Next year’s election shapes up as a referendum between taxpayers and government benefit recipients. We expect the ideological warfare to continue and intensify as the election gets closer.

Your Cost of Living — Don’t Believe the Government Data

We’ve written about this before, but it is worth mentioning again. There’s an election campaign up ahead so be alert to all kinds of economic statistics coming your way — via blogs, airwaves, TV commercials, town hall meetings, and endless speeches — on behalf of government. A consistent theme will emphasize an understatement of the inflation situation.

Governments understate inflation to:

1) calm the public and avoid instituting an inflation psychology because inflation psychology causes hoarding and shortages,

2) control the rising costs of payments by the government to pensioners, Social Security recipients, and other groups whose payments are indexed to the inflation rate.

Historically, presidents from both major parties have authorized the use of statistical trickery to minimize government payments and to understate the inflationary impact upon the consuming public.  In this current period of growing awareness and concern about fiscal conservatism and limits on government spending, there seems to be a growing willingness by some politicians to openly discuss the need to control payments through manipulation of statistical measures…something that they had tried to hide in the past.

Government Statistics: Caveat Emptor

As manipulation increasingly becomes the order of the day, it is appropriate to trot out one of Abe Lincoln’s best-known sayings: 

“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

It seems to us that less and less people these days are being fooled.  People, institutions, and governments around the world have in the last few years begun to buy gold, oil, food, foreign currencies, and foreign stocks to protect the buying power of their assets from inflation that is quite real, even if it is not recognized by official record keepers here or elsewhere.

The U.S. has manipulated the way data has been statistically analyzed, and the way it has been included and removed from the Consumer Price Index (CPI) and other indices for decades.  Talk about a stacked deck, the CPI is a total statistical stacked deck.  Rather than go into a boring analysis of the behaviors of the past, let us point out the most recent proposal to lower the actual inflation rate.  A New York Times article published this last weekend discusses how the use of an inflation measure called chained CPI will effectively cut benefits to Social Security recipients.  It’s worth reading, so here is the beginning of it:

Muddying the Budget Waters
-By Tara Siegel Bernard

All the political wrangling over the budget in Washington has been focused on one theme: how much the government should cut and when those cuts should take effect.

But for all of the difficulty lawmakers are having now, their
hardest decisions may come this fall when they do battle over which government programs to cut back. And one program that has already been put on the table for discussion is Social Security, even though it has not contributed to the budget deficit.
There is no question the program needs to be tweaked so it can remain solvent for decades to come. And experts say the problem is not that difficult to solve, as long as it is dealt with relatively soon.

The proposed changes would have tinkered with one of the most beloved features of Social Security: the cost of living adjustment, which helps benefits keep pace with inflation so the elderly maintain their purchasing power. The proposed changes would link benefits to a new measure of inflation — one that is projected to rise more slowly than the current index.

“It amounts to a benefit cut,” Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, said.

The proposal, which emerged as a potential bargaining chip earlier in the budget debate, caused Social Security preservationists to cringe. And that is a big reason they argue that any changes should not be fast-tracked as part of the broader deficit debate.

If no changes are made, the program’s reserves are now projected to be exhausted in 2036, a year earlier than last year’s projection. Then the taxes collected would be enough to pay only about 75 percent of benefits through 2085, according to the latest annual report from the agency’s trustees.

The shortfall can largely be attributed to demographic shifts. The coming wave of baby boomers will strain the system, while the number of workers paying into the system is declining. On top of that, people are living longer, and the weak economy is not helping matters.

Changing the cost of living adjustment is just one of several ways to bolster Social Security’s finances. Suggestions have included gradually increasing the retirement age or raising the amount of income subject to Social Security payroll taxes.

The Obama administration’s deficit-reduction commission proposed switching to the new type of index because, members said, it would be more accurate. Unlike the current measure, it takes into account that people tend to change their buying habits when prices rise, substituting cheaper items for more expensive ones. If, for instance, the price of apples goes up, people may instead buy pears, if they are cheaper. The current index assumes that if the price of apples go up, people will just buy fewer apples.

But there is a question of whether the elderly and disabled can make the same substitutions as working people. “If you are down to paying your rent and your food, and the price of your food goes up, you probably just eat less,” Ms. Munnell said.

In addition, the slower rise in benefits would compound over time. That means the older that retirees grew, the bigger the pinch they would feel, especially people who depended heavily on the program. About 43 percent of single people and 22 percent of married couples rely on the benefits for more than 90 percent of their income, the Social Security Administration says. More than half of couples and 73 percent of singles draw more than half their income from the program.

To read the rest of the article click this link to The New York Times: http://www.nytimes.com/2011/07/30/your-money/muddying-the-budget-waters-with-social-security.html

In our opinion, this is nothing less than a managed decrease in the standard of living of the country’s retirees.  See for yourself what this does to a Social Security recipient’s benefits.

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We laughed as we read this particular comment in the article: “The proposal, which emerged as a potential bargaining chip earlier in the budget debate, caused Social Security preservationists to cringe.”  They should have been cringing long ago. Decades ago.  In reality, this type of manipulation is consistent with what they have been doing for 30+ years. Why the sudden outcry?  Because for the first time some U.S. policymakers are openly discussing the manipulation of the statistical measurement of inflation.

It is about time to stop the slight-of-hand applied to paper over America’s declining standard of living.  If reducing benefits is now a matter of prime national interest due to the deteriorating fiscal health of the country, then we believe that our leadership should come right out and tell the people the truth.  

Guild Basic Needs IndexTM

Due to our concern about the skewed inflation data from the Bureau of Labor Statistics, we decided recently to start publishing the Guild Basic Needs IndexTM.  Our regularly updated yardstick tracks changes in the cost of components within four critical consumer areas: food, clothing, shelter, and energy (needed for heating, cooking, and transportation).

As you can see from the following chart, price inflation of these four groups has far exceeded the stated rate of increase of the CPI since the turn of the century — January 1, 2000.

To gauge your own standard of living, we invite you to routinely utilize the Guild Basic Needs Index — posted on our website. Check the costs of your basic needs and see where your costs are headed. We do not trust the current CPI, or as the government calls it “CPI-E,” and we trust the “CPI-U” much less.

Some People are Saying That Gold is a Bubble

Is it?  We sure don’t think so.

Consider this:

• The central banks throughout the world appear to be nowhere close to stopping their purchases of gold.  See the article in The Wall Street Journal entitled “Central Banks Join Rush to Gold.” It was written following South Korea’s first gold buy in 13 years.
Click the link to read full article from WSJ Online.

• Global central bank gold reserves, IMF holdings, and gold ETF holdings total about 32,000 tonnes. That’s equal to about a mere $1.7 trillion at current prices.  The U.S. budget deficit for 2011 alone is expected to be $1.5 trillion, which required a big dollar printing exercise to fund.  Central banks of many nations are trying to diversify their reserves, but are unable to keep pace with the speed at which the world’s reserve currency is being debased. 

• The growth in the supply of gold pales in comparison to the proliferation of other financial instruments such as currency, bonds, and stocks. Here are the comparisons:

Current annual gold production adds only an additional 1.5 to 2 percent per year to the estimated 165,000 tonnes mined globally over the years.  Even with the recent strong price moves, the total value of all the gold ever mined is less than $9 trillion.

Global currency in circulation has grown over 10 percent per year since 2000, and exceeds $5 trillion.

Global stock market capitalization has grown to over $55 trillion.

Global bond markets are estimated at about $95 trillion.

As for the unregulated derivative market, it has grown rapidly to some unknowable, but very large number.

The bottom line: The supply of gold is growing at a much slower rate.  Given that gold has been a store of wealth by societies around the world for centuries, its current price rise appears quite rational, and far from bubble-like.

There are rumors today that the futures exchange regulators are going to increase the margin requirements for gold.  We don’t know when it will happen, but it will.  When gold falls on this news, we plan to be buyers on the pullback.  Central banks will also be buyers; they are not subject to meeting margin requirements.

Summary

Politicians like to talk about transparency, but their actions are usually anything but transparent. This recent debt ceiling debate was the exception. It was quite a transparent and revealing display of dysfunctionality.

Large bureaucracies everywhere, and not just in Washington, suffer from congenital dysfunction. Big government, business, labor, and military — they are all riddled with it. They are just too big, too unwieldy, and too inefficient. In government, party ideology typically trumps the higher good. Politicians seem no longer to be statesmen or stateswomen. Too many are simply self-interested, and no amount of patriotic rhetoric from them changes the fact that their actions are primarily geared towards their own re-election.

The public’s behavior reflects the fact that people don’t trust their politicians or bureaucracies. They are increasingly drawn to gold, oil, food, currencies of better managed countries, foreign stocks, and stocks in the few industries that benefit from dysfunction in policies leading to a lower U.S. dollar.

The U.S. economy appears headed for a double dip recession. For that reason we are raising cash in the portfolios.  We are also recommending that it’s time for investors to take profits in oil, Singapore dollars, and to sell their U.S., Malaysian, corn, and Japanese equities.  Slowing economic activity from the over-levered U.S., Europe, and Japan are causing concern about profits. Even though we expect weak economic activity will lead to more money printing from central banks, the markets are going through a rugged period which makes us want to reduce our exposure.

However, we are not changing our bullish recommendations on gold and certain foreign currencies that are likely to keep appreciating versus the Euro and the U.S. dollar at this time.  See below for a summary of both our open and closed recommendations.

We thank you for your continued support. To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email guild@guildinvestment.com

Date

Date

Date

Appreciation 
Depreciation

Investment

Recommended

Closed

in U.S. Dollars


Commodity Market Recommendations


Gold

6/25/2002

Open

+411.7%

Corn

4/20/2011

CLOSED

-6.3%

Oil

2/11/2009

CLOSED

+157.1%

Corn

12/31/2008

3/3/2011

+81.0%

Soybeans

12/31/2008

3/3/2011

+44.1%

Wheat

12/31/2008

3/3/2011

+35.0%


Currency
Recommendations



 

Long




Brazilian Real

9/13/2010

Open

+9.6%

Long




Canadian Dollar

9/13/2010

Open

+6.8%

Long




Chinese Yuan

9/13/2010

Open

+4.8%

Long



 

Swiss Franc

9/13/2010

Open

+30.1%

Long




Singapore Dollar

9/13/2010

CLOSED

+10.9%

Long




Australian Dollar

9/13/2010

06/29/2011

+14.1%

Long




Thai Baht

9/13/2010

6/22/2011

+6.5%

Short


 


Japanese Yen

4/6/2011

7/27/2011

-9.7%

Short




Japanese Yen

9/14/2010

10/20/2010

-3.3%


Equity Market
Recommendations


 


India

4/6/2011

Open

-8.8%

Malaysia

6/29/2011

CLOSED

+.08%

U.S.

6/29/2011

CLOSED

-4.6%

Japan

2/15/2011

CLOSED

-9.5%

Australia

2/15/2011

6/22/2011

-0.9%

Canada

3/24/2011

6/22/2011

-7.1%

Colombia

9/13/2010

6/22/2011

+2.6%

Malaysia

4/6/2011

6/22/2011

+0.8%

Canada

12/16/2010

3/11/2011

+7.9%

U.S.

9/9/2010

3/11/2011

+18.1%

South Korea

1/6/2011

3/3/2011

-2.9%

Colombia

9/13/2010

2/2/2011

+3.9%

China

9/13/2010

1/27/2011

+5.0%

India

9/13/2010

1/6/2011

+7.9%

Chile

9/13/2010

12/16/2010

+8.9%

Indonesia

9/13/2010

12/16/2010

+9.5%

Malaysia

9/13/2010

12/16/2010

+1.3%

Peru

9/13/2010

12/16/2010

+32.2%

Singapore

9/13/2010

12/16/2010

+4.8%

Thailand

9/13/2010

12/16/2010

+11.9%





Bond Market
Recommendations








30 YR Long Term




U.S. Treasury Bond

8/27/2010

10/20/2010

0.0%