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It Ain’t Over Till It’s Over…And That’s Not Happening Soon

It Ain’t Over Till It’s Over…And That’s Not Happening Soon

Don’t expect the current crisis of budgetary deficits and spending restraints to stop any time soon. Instead, think in these realistic terms: the era of fiscal restraint and spending limits has come, and will be with us for at least ten to twenty more years.

It is obvious to veteran observers that Europe and America are facing hard choices that will result in slow growth and increased suffering for the people. And for that we have our incompetent legislators – past and present – to thank. They have misused their mandates, grossly exceeded their budgets, and are loath to correct wayward behaviors.

Barry Eichengreen, an economist at the University of California, summed up the situation thusly: “The U.S. and Europe have to make hard choices because of two things: slower growth and aging populations.” And Europe’s choices are harder than America’s, he adds, “Because the prospects for growth are more dubious.”

If action were to be taken quickly, it is easier to see progress; if not, there appears little else ahead except decades of slow and stagnant growth, declining social safety nets, and less military influence in the world. Oh, and don’t forget to add deflation to the equation, a result of deleveraging an over-leveraged banking system. It is not hard to see our future by looking at Japan, which entered the same rut more than twenty years ago and is still stuck in it.

Even the mainstream U.S. press is belatedly getting the message that we are in an era of spending limits. This reality doesn’t stop special interests doing what special interests always do: tempting congressional representatives with offers of money to support their specific area. Such money may be intended for election campaigns , but let’s not kid ourselves. It is still a form of paying for special favors. The ranks of federal, state, and local governments throughout the world are brimming with self-interested individuals. This is the reality. Moreover, most politicians are pre-eminently, emotionally, and intellectually designed to do what’s needed to get elected and re-elected but not to do the right thing for the electorate. They like to spend money today to help favored constituencies. The more cynical ones see the problem, but think along these lines: “Well, I will be gone when the crisis erupts, so…” The more naïve ones just hope for the best in the future while spending irresponsibly today.

Not surprisingly, the approval ratings of politicians in the developed world are at multi-year lows. A recent New York Times/CBS News poll gave a beyond-disgraceful 9 percent approval rating to members of the U.S. Congress. Politicians in Europe and Japan wallow in a similar level of public contempt.

The steady stream of lies from U.S. and European politicians continues apace. With elections on the horizon in many countries we can expect a lot more hot air and fiction. What we all knew has been reinforced by events. Politicians cannot be trusted.

European Central Bank Cuts Interest Rate

This week the new European Central Bank (ECB) president Mario Draghi’s first action was to cut European rates by a quarter-point to 1.25 percent. Such action is long overdue. It sent a strong signal that Mr. Draghi will be more willing to cut rates and focus on the economy instead of inflation in Europe. His predecessor, Jean Claude Trichet, raised rates twice in recent months in the face of an oncoming decline in European GDP. ECB board members unanimously supported Mr. Draghi and if the cutting continues we can expect the following results:

1) The creation of more quantitative easing (QE), meaning the printing of more money, and

2) The rate of inflation will rise in Europe.

These consequences support our recommendation to own gold and emerging market equities. The change of direction for the ECB is a positive psychological underpinning for Europe, which is now admitting that the banking crisis, not inflation, is the most immediate and pressing problem, and that actions need to be taken to address this problem.

New Development

An even more positive late developing prospect is the fact reported in the German newspaper Handelsblatt that the largest political party in Germany, Angela Merkel’s Christian Democratic Union [CDU]  are beginning to work a clause allowing countries to exit the Euro in their platform.  The way it would work is that a Euro member that does not want to or cannot comply with the common currency rules could leave the Euro currency regime without losing membership in the European Union.

Should this amendment progress from a German plan to a Europe- wide plan, it would allow any state to exit the currency area [this is not currently allowed], while still enjoying the membership benefits of being in the European Union.

Any country that left the Euro currency would revert to using its own currency, which could be devalued. They would be able to issue debt and pay debt in their own currency.  Thus, their financial decisions would reflect upon them and they would not be able to demand that other members of the community lend them money or guarantee their debt.

In our opinion, this approach should be implemented immediately. We believe that there is a very high probability that this alternative will be instituted via an amendment to the current Euro currency treaty.
Something Wrong With This Picture?
High U.S. Unemployment, Yet Many Good Jobs Go Unfilled

The Society for Human Resources Management, a Virginia-based professional organization for human resources professionals, conducted a revealing survey. It showed that employers are having difficulty filling good-paying jobs at professional, managerial, and executive levels. There are numerous openings for skilled engineers, medical and IT professionals, scientists, managers, sales representatives, accountants, HR executives, drivers, administrative support staff, and customer service reps. An article summarizing this eye-opening situation appeared earlier this week in the Wall Street Journal.

According to the article, professionals can qualify for many jobs simply “by upgrading their skill sets, moving to another part of the country, or just rewording their resumes.” It turns out that some parts of the U.S. are very short of workers. One example is Tulsa, Oklahoma, where the city has actually hired a specialist to retain a strong workforce. Now that’s a neat sign of life in the otherwise grave municipality condition. Tulsa, in fact, generates more than 1,500 new aerospace / aviation jobs every year. It also has gaps to be filled in healthcare, manufacturing, and other industries. According to recent statistics, about 3,450,000 jobs currently remain unfilled in the U.S.!

Courtesy of SHRM, Getty Images/ Maximilian Stock Ltd., Wall Street Journal, and Julie Bennett

 

Corruption Rankings: Where Does Your Country Stand?

Take a look at the chart below – a “bribe payer’s index” – that ranks countries according to the way their national enterprises do business abroad. We found the information, collected by Transparency International, quite fascinating. Transparency International is a global network of more than 90 national chapters with members from government, civil society, business, and the media dedicated to promoting transparency in elections, public administration, procurement and business.

Courtesy of the Economist

 

Please click here to see the full article.

Russia and China are top bribers and bribe recipients, followed by Mexico, Indonesia, Turkey, and India. Nevertheless, executives of all countries play the game, especially when operating in the developing world.

Many years of investing in global markets has reinforced our belief that country selection is a key factor, and that when evaluating the reward/risk of a country, you must always consider the corruption element.

 

Guild Basic Needs Index TM

Guild Investment Management has long believed that the existing
indices used to measure cost of living changes in the United States are inadequate and misleading.

For instance, the widely quoted inflation index, the Consumer Price Index, is currently based on data collected from spending surveys given by the U.S. Bureau of Labor Statistics from approximately 14,000 urban families. In addition to basic needs, the CPI includes other expenditures, such as insurance and taxes. However, it also includes discretionary spending items such as personal care services and entertainment purchases such as the latest flat screen televisions and consumer electronics.

Another point about the CPI is that the Bureau of Labor Statistics periodically alters its content, making adjustments to the weighting of the components, and smoothing seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost of living index.

We believe a simpler index is necessary for tracking the price changes of basic needs. No such index exists. So, we have created one: the Guild Basic Needs IndexTM. The GBNI will not reflect spending patterns of one segment of the population. Rather, it will measure the changing prices of essential living expenditures. Another key differentiator between the GBNI and the government’s measures is that the components of the GBNI do not change. They are not adjusted, statistically smoothed or manipulated.

The October numbers are still being compiled, however we will have a changed index in our next week’s commentary.  Please stay tuned.

China News

The China Securities Journal reports that China’s gold demand for 2011 is expected to reach 400 metric tons up from 270 metric tons in 2010. According to Sun Zhaoxue, chairman of the China’s Gold Association, the increase is due to rising income levels and investment demand which has boosted jewelry and bullion sales.

According to Ting Lu Bank of America Merrill Lynch’s chief China economist the details of China’s inflation which fell from 6.1% annually in September to 5.5% annually in October are as follows; food price inflation fell to 11.9% from 13.4% in the previous month. Non food inflation fell to 2.7 % from 2.9% and housing costs fell to 4.4% from 5.1% year over year. In essence, many costs are falling in China and this will allow the country to fine tune their monetary policy and perhaps cut interest rates. Today it is hard to find the bears whom a year ago were calling for double digit out of control inflation and a major hard landing in China. Now that it is becoming more obvious that China will experience a soft landing and that the economic bulls have triumphed, perhaps the bears have returned to their caves to lick their wounds.

Investment Focus

Our primary advice to investors is to generally ignore the deafening scare and crisis screech emanating from your television screens.  The headlines and hype are meant to attract viewers. Fear and greed make good bait for attracting unsophisticated viewers, newspapers do the same. We look beyond the surface babble and stay focused on our own investment strategies.

In our opinion, Europe has no choice but to eventually print money to solve its problems. The statements you commonly hear on the TV about Europe not having enough money to recapitalize its banks and bail out the sovereign debt crisis miss the point.  It is true that currently there is not enough money to solve these serious fiscal problems. Europe, however, has the power to print money and will use this power when the crisis comes to a head. At that time, Europe will create QE in a major way to keep the union alive.

At Guild Investment Management, we watch Europe’s seemingly never-ending financial fits. It seems obvious to us that gold, oil, and many stocks will soar when Europe finally announces the inevitable money printing exercise to bail out European banks and sovereign nations. This expectation reinforces our long-term bullish view on gold, oil, wheat, emerging markets, and U.S. stocks. Historically, money printing boosts commodity prices, creates demand for income-producing real estate, and for the stocks of public companies that can grow. Such companies are often, but not always, producers of commodities such as foodstuffs, oil, fertilizer, or key industrial minerals.

Would You Like To Join The Guild team?

Would you like to join the Guild team?
•    Are you a news hound who reads and reflects upon global social, political, financial and economic trends?
•    Do you have a masters or PhD in economics or international affairs?
•    Do you follow world investment markets?
•    Do you enjoy performing economic, social, political and financial research?
•    Can you write?
If you are interested in being part of our research team, are interested in seeing your work in print, please do not hesitate to email your resume to careers@guildinvestment.com or fax it to 310-826-8611.

Thank You To Our Readers

It has been 40 years that we have been managing investment portfolios for clients.  We hope the newsletter serves to sharpen your investment perspectives and strategies.  Please feel free to forward our commentary to friends, family, colleagues.

To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email us at guild@guildinvestment.com

Our Recommendations

Date

Date

Appreciation/Depreciation

Investment

Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations
Gold

6/25/2002

Open

+438.9%

Oil

10/24/2011

Open

+11.5%

Wheat

10/24/2011

Open

-1.9%

Corn

4/20/2011

8/3/201

-6.3%

Oil

2/11/2009

8/3/2011

+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%

CurrencyRecommendations
Long
Canadian Dollar

10/24/2011

Open

-1%

Long
Singapore Dollar

10/24/2011

Open

-1.4%

Long
Canadian Dollar

9/13/2010

9/21/2011

+2.2%

Long
Chinese Yuan

9/13/2010

9/21/2011

+5.8%

Long
Swiss Franc

9/13/2010

9/21/2011

+12.1%

Long
Brazilian Real

9/13/2010

9/1/2011

+6.4%

Long
Singapore Dollar

9/13/2010

8/3/2011

+10.9%

Long
Australian Dollar 9/13/2010

6/29/2011

+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 MarketRecommendations
I Shares MSCI Emerging Market Index

10/24/2011

Open

+2.5%

U.S.

10/24/2011

Open

+0.3%

U.S.

9/14/2011

9/21/2011

-2.3%

India

4/6/2011

9/21/2011

-21.6%

Malaysia

6/29/2011

8/3/2011

+0.1%

U.S.

6/29/2011

8/3/2011

-4.6%

Japan

2/15/2011

8/3/2011

-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 MarketRecommendations
 30 YR Long Term
U.S. Treasury Bond

8/27/2010

10/20/2010

0.0%