Uncertainty — A Drag on the U.S. Economy
One thing is becoming quite certain in the current U.S. economy: uncertainty.
In conversation after conversation with CEOs, we are hearing a similar litany of frustration. They want to expand business, hire more employees, and procure more equipment. All such undertakings would obviously help the economy. However, but they are afraid to follow through because of three major uncertainties:
1. Uncertainty about the gridlock in Washington.
We are smack in the middle of a prolonged dogfight between ideologues on the left and the right of the political spectrum. The warfare almost kept the debt ceiling from expanding, which could have resulted in the U.S. default on its obligations.
Business leaders are expressing their exasperation. They wonder: what ever happened to compromise and moderation? How can anything be accomplished with polar opposites at war with one another, locked in stifling political discord that causes economic growth to suffer?
2. Uncertainty about the government regulatory environment.
Many CEOs complain about the unceasing and accelerating growth of regulations at the local, state, and federal level. They perceive the federal government as generally unfriendly towards business and business success.
3. Uncertainty about the minute-to-minute volatility of their stock prices due to an erratic marketplace.
High-frequency, computer-driven operators cause problems in the marketplace. They make money at investors’ expense. They push stocks down to unreasonably low prices that have nothing to do with the fundamentals. They undermine confidence in the markets. The volatility they exacerbate is destroying investor confidence little by little. Such unchecked price manipulation will ultimately sabotage the value and respect of the U.S. markets.
The high-frequency traders are permitted to operate because they make money for the stock exchanges. We assume they must have political clout because the SEC has done nothing to stop their corrosive activity. Business leaders we speak to are uniformly concerned that the market mechanisms are breaking down, and that the regulators just don’t seem to care.
As we write this letter, world markets are completing another month of high volatility. That’s bad for investor confidence and bad for corporate growth. If you can’t approximately forecast your stock price or valuation of your company, how can you plan financing, expansion, acquisition, or growth strategies? You can’t or you can’t do it well.
Such volatility is also bad for retirees and owners of pension funds and other retirement accounts. How are companies to judge how their retirees will be compensated?
Today’s uncertainty is putting business leaders in double handcuffs. They are having a hard time making important decisions. Job creation in the private sector requires the ability of employers to forecast and plan. That isn’t happening. Add in the regulation burden and stock market volatility and it’s no wonder expansion plans are getting shunted not just to the back burner, but to the freezer. The economy is lousy and all this is just making it lousier.
News Media: Ratings Trump Meaning
It’s no secret that the news media tends to exaggerate and emphasize here- and-now stories, often at the expense of more significant and far-reaching developments. That’s the nature of the business they are in. It’s all about ratings and counting eyeballs, and, alas, entertaining the folks. The U.S. media continues to focus on events within the U.S., often ignoring many important developments and events.
We in no way wish to minimize the real pain and suffering that hurricane/tropical storm Irene caused and is still causing in some areas, but the media seems to have missed the story. They mobilized their camera crews on the coastline days in advance, and then lost interest once the storm moved inland. It seems to us that the media’s primary efforts were at creating dread in advance of the storm. Many people have been negatively impacted by this storm, and their process of recovery will be a lengthy one, but to the media, cleanup and repair just aren’t glamorous stories.
With some exceptions, the media in general (especially television) seems unable to decipher and present stories with real impact. They don’t report on them until it’s too late. They often focus reporting on relatively short-term or less significant events meant to satiate viewers’ desires for entertainment and instantly-gratifying information.
We generally eschew television as a source of knowledge. We read a lot but are extremely skeptical about what we read in the press. We have a limited number of preferred media sources. The list includes the Financial Times, the New York Times, Wall Street Journal, the Economist, Barrons, Bloomberg BusinessWeek, Forbes, and Investors Business Daily. We read news dailies from several countries as well as industry-specific publications. The latter provide us good information, for instance, on energy, basic materials, technology, gold, medical, and other areas of interest to us. In addition, we review a significant number of individual country, industry, and company-specific research reports.
Talking to people in the trenches of commerce and industry is very valuable. Each year, we speak with hundreds of company executives either face-to- face at conferences and road shows, while travelling the globe, or on conference calls.
Investing is a very serious business. We have learned to be extremely careful about our information sources and what we believe. We always consider the source. You should do so as well.
Europe Closer to a Major Financial Crisis
European banks were not helped by the speeches last weekend of European Central Bank President Jean-Claude Trichet and International Monetary Fund Managing Director Christine Lagarde at the Jackson Hole conference of central bankers this past weekend.
Europe is in a major banking crisis. We’ve been following this shipwreck-in-the-making for many weeks now. Let us instead offer an excerpt from a report about a German court that may have a very big impact on the future of the Euro community, the Euro currency, and the European banking system.
Finally, Let Us Remind You That We Believe That The Europeans Will Do A Very Large QE To Solve This Problem
The QE will take place soon, and the stability of banks in Germany will be the reason that the German parliament will go along with the bail out and its long-term costs to the nation.
The QE is widely anticipated by the more sophisticated global investors, but others are still skeptical. It may cause a major market rally in many countries when it does take place. We believe that the world stock market rally of the last week is a prelude to what we could see when more people began to realize that QE is coming from Europe.
The Venezuela Mess
The Organization of Petroleum Exporting Countries (OPEC) recently announced that Venezuela may have more oil than any country in the world. Good news for Venezuela you would think, but not necessarily so. That’s because the oil is located beneath quite inhospitable jungles. It’s difficult and expensive bringing it to the surface. Moreover, the crude is heavy and tar- like and thus very expensive to handle, transport, and refine. All these confounders call for a whole lot more ability than the incompetent government of Hugo Chavez can muster.
Chavez may know how to run a Bolivarian Revolution but he is terrible at running an economy. As a result, Venezuela’s economy suffers from very high inflation and low growth.
Venezuela’s significant other problems include the following:
- a surplus of domestic currency that people believe will soon be devalued,
- a shortage of available U.S. dollar currency that can be used to buy assets,
- massive corruption, including the loss of 20 percent of the state oil company (PDVSA) pension fund to a Ponzi scheme fraudster connected to senior Venezuelan officials; $500 million was stolen,
- overstated government economic production statistics.
While Venezuela has huge oil reserves, the country’s production performance is anything but great. Chavez has taken over many companies and installed his loyalists to run them just like he did years ago to the state-owned oil company. His pattern is to fire those who protest and replace them with people long on ideology and short on competence and willingness to work. Thus, Venezuela has lost much of its capable technical oil industry people and suffers from less-than- competent management at almost all of the state-owned companies.
Recently, Venezuela recalled most of its gold reserves stored in unfriendly countries. One possible rationale for repatriation of the gold is a desire to clandestinely sell some of it to finance Chavez’s give-away programs, including building 2 million houses for the poor. He previously asked the PDVSA to fund the housing project from profits, but because of mismanagement the oil company doesn’t have the profits to do so. Could Chavez secretly sell some gold to finance his give-aways without telling the people of Venezuela? It wouldn’t surprise us. He’ll do whatever to create support among the impoverished class and help himself stay in power. We are not concerned that his potential sale will depress gold prices. You can bet that many countries would scramble to buy the gold if it reached the market.
The bottom line is this: despite its huge natural resources, Venezuela falls far short of making it to our buy list.
Gold Mining Stocks and a global stock market rally
In our opinion, growing mining gold stocks will be beneficiaries of higher stock markets. Recently, gold mining stock prices are moving partly with gold and partly with the stock market.
The recent rally in world stock markets is due to a belief that Europe, including Germany, has no alternative other than to do more QE, so the next QE on a big scale will be from Europe. Recent events in Europe and remarks from ECB President Trichet and the German cabinet confirm this. Markets believe that more QE is coming from Japan and from U.S.; all of this flows into world investment markets.
As money flows into investment markets and bond yields remain low, some of that money finds its way into stocks. Stock money will flow to growing parts of the world India, China, Indonesia, etc.
We have noticed lately that investment dollars from the developed world go first into dividend payers, and secondly it goes into natural resource investments that can grow their reserves with exploration such as oil, gold, and base metals. Thirdly it goes into growth companies that can export and sell to the growing parts of the world, such as construction and farm equipment makers, aircraft makers, food companies, raw material producers, high tech companies with new products, food retailers, entertainment companies and consumer brand names (as you know the Chinese love brand names).
Therefore, we expect gold and oil rich companies to attract capital and investors as the market looks for alternatives to hedge their declining U.S. dollars. Small and medium sized resource companies with growing reserves and a stable operating environment are the companies to own. With respect to stable operating environments, the drug war in Mexico and the political backdrop in Venezuela make those areas more difficult. On the other hand, Thailand, Malaysia, Tanzania, Indonesia, Philippines, Australia, Canada, and other safer resource provinces are going to attract attention.
We currently hold cash and gold. We hold some high-yielding Canadian and U.S. oil-producing companies. We are nibbling at attractive investments as they come down to our buy points. We are selecting specific companies in India, Norway, US, Canada, and several other markets. We expect to see more opportunities with time.
Changes will be coming so stay tuned!
To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email firstname.lastname@example.org.
We thank you for the continued support, if you would like to forward our commentary to a friend, please use the follow link Forward to a Friend.
|Investment||Recommended||Closed||in U.S. Dollars|
|Commodity Market Recommendations|
|30 YR Long Term|
|U.S. Treasury Bond||8/27/2010||10/20/2010||0.0%|