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Breakup Of The Euro…Greece Will Be The First To Leave…Germany Leaks A Bombshell Proposal

Breakup Of The Euro…Greece Will Be The First To Leave…Germany Leaks A Bombshell Proposal

In our opinion, global stock markets are beginning to price in a breakup of the Euro-Zone currency.  The Euro currency is bound to lose some of its 17 direct members and 5 small users who use the Euro but are not part of the EU in the next few years.  Some will quit under pressure or be forced out and possibly some will quit because they do not want to pay part of the bill to bail out less conservative more spending oriented sister states.

We anticipate that Greece will be the first to leave the Euro. The Greeks are perceived to be thumbing their nose at their European neighbors, and the Euro community could use Greece as an object lesson for other countries who might consider the role of non-cooperation.

Ireland is being complimented for its cooperation, and for beginning to put their fiscal house in order.  For Portugal, Belgium, Spain, Italy, and possibly three Eastern European countries, the jury is still out.

While a mechanism to remove those countries who fail to comply with the fiscal demands of their European neighbors and the IMF is in the works, another option has also been proposed…

Countries Unwilling To Institute Cost and Benefit Cuts May Be Offered Another Alternative…Yield Control Of Their Economy To Outsiders 

In the next 5 or 10 years big changes may be afoot in Europe.  Proof of that emerged in a November 18th article by Bruno Waterfield in the Telegraph.  The article makes visible a leaked memo written by the German Foreign Office. To quote from the article, “The six page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states.”

In addition, “The fund will have the power to take ailing countries into receivership and run their economies.  Even more controversially, the document, entitled ‘The Future of the EU’: required integration policy improvements for the creation for a Stability Union’ declares that the treaty changes are a first stage in which the EU will develop into a political union. The debate on the way towards a political union must begin as soon as the course toward stability union is charted, it concludes.”

“The negotiating document also explicitly examines ways to limit treaty changes to speed up the reforms. It indicates that Mrs. Merkel will tell Mr. Cameron to rule out a popular EU vote in Britain.”

“Limiting the effect of the treaty changes to the Euro-Zone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK), read the paper.”

What Led To Germany’s Frustration

Greece’s situation is almost two years old and it still is not cooperating with the mandates required of them.  Italy has yet to implement the changes that they have promised.   Spain’s fiscal problems are the latest to be targeted by the bond market vigilantes, and Europe’s ‘solution’, a levered up European Financial Stability Fund (EFSF) produced a lot of talk, but not a lot of action.

To quote what the new head of the ECB Mario Draghi said about the European bailout fund, “We are more than one and a half years after the summit that launched the EFSF… We are four months after the summit that decided to make the full EFSF guarantee volume available. And we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five.” Draghi wants the EFSF geared up, and operating, now!

The bailout fund needs to get going, however, the ECB does not want to bring down the borrowing costs of countries like Greece and Italy while the politicians on those countries refuse to cut costs as agreed.  The ECB has to provide strong leadership to get the countries perform and cut costs as agreed, but there is no question that the ECB will get stuck with the role of Bailer-Outer-In-Chief when the system begins to implode.  However, the deepest pockets in Europe reside in Germany, and Germans are loathe to allow for large scale money printing by the European Central Bank.

All of this has moved to provide the backdrop for the German proposal which showed up in the papers last week.  In spite of the many reasons for many Germany’s frustration, their proposal will be a bombshell.  We will unequivocally say that it will be hard for this proposal to pass in it s current form.  The proposal sets the stage for more negotiating, more bickering, more disputes… and more uncertainty.  Markets hate uncertainty.  While this proposal may be produce some long term benefits, it decreases market visibility in the near term.

We Expect Big Money Printing From Europe…But When?

We expect the printing to take place, but not until one or more major bank failures takes place, which could take place within the next three months. We believe that by the end of February 2012 a crisis will occur and liquidity from Europe will be expanded. The last big crisis started in the August period when European leaders were on an extended vacation. The next crisis could easily happen over the Christmas-New Year vacation period.

European officials often take an extended vacation during this period.

In fact, we would not be surprised if that was when the next big wave of money printing takes place in Europe.

There is bond buying and liquidity already being created in Europe as the ECB buys bonds. The ECB claims that they are sterilizing the purchases and thus avoiding quantitative easing.  We find that hard to believe.  We have no doubt that the ECB will eventually opt to print money to keep the banking systems of Europe from imploding…and admit it.

In actuality, there is no shortage of QE being done in many countries, and more is on the way.  Money is also being created by Britain, China, US, India, Japan, Brazil, and many other countries wanting a lower currency to spur growth.

Many Countries’ Bonds Will Have Debt Downgrades

Many countries will have debt downgrades for the next few years. We expect the major rating agencies to belatedly make up for downgrades that should have happened over the last few years. We further anticipate that they will be more vigilant to make additional downgrades when politicians continue their traditional foot dragging on reform in future months and years. In short many countries will see a series of downgrades of their credit ratings over the next few years. Look for France and Spain to be downgraded soon.

Global Gold Purchases In Q3 2011…Central Banks Are Buyers

On November 17, 2011 the World Gold Council announced its quarterly gold demand trends report. In summary, total gold demand was up by 6 percent from the year earlier quarter.

  • Demand rose from bars and coins, central banks, and gold ETF’s [up 58 percent].
  • Jewelry demand fell by 10 percent due to higher prices.
  • If prices are taken into consideration the total rise in gold consumption was up by over 30 percent.
  • Gold mines produced about 5 percent more gold than in the year earlier period. Gold production was about 746 tons while total demand was a whopping 1,053 tons…during the quarter; demand exceeded new mine production by 40 percent.

Central bank purchases totaled 148.4 tons, the most of any calendar quarter in 40 years. According to their report, the council did not identify the banks behind the buying, just saying “a slew of new entrants emerged wishing to bolster gold holdings”.  We know from earlier statements and from the news that Russia, China, Sri Lanka, Korea, India, and many other developing countries were in the queue to buy. For those who are not aware that before 2010 the last time that central banks were net buyers of gold was in 1988.

For the prior twenty years from 1989 to 2009 central bankers were heavy sellers of gold as anti gold financial officials and socialist leaning governments in many countries believed that gold was a useless investment. This view has changed as many countries are fighting inflationary and deflationary impulses and debt burdens threaten to bring down many of the worlds former leaders including Europe, Japan, and the U.S.

Please click here to view an article in the Financial Times about this subject.

 

The Guild Basic Needs Index Ticks Up In October

After declining for a few months, the basic needs that make up the Guild Basic Needs Index rose in price in October. The rise in prices of the GBNI components impacts all in America who live, eat, use energy, and clothe themselves.

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.

Summary

Uncertainty reigns and we are taking a very conservative and defensive position with our portfolios. We have high cash balances. We own some high yielding oil related stocks, and we own gold.

Recommendations

Date

Date

Appreciation/Depreciation

Investment

Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations
Gold

6/25/2002

Open

+442.6%

Wheat

10/24/2011

Open

+0.9%

Oil

10/24/2011

11/17/2011

+16.4%

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%

Currency
Recommendations
Long
Canadian Dollar

10/24/2011

Open

-1.8%

Long
Singapore Dollar

10/24/2011

Open

-2.0%

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 Market
Recommendations
IShares MSCI Emerging Market Index

10/24/2011

11/21/2011

-0.8%

U.S.

10/24/2011

11/21/2011

-1.6%

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 Market
Recommendations
 30 YR Long Term
U.S. Treasury Bond

8/27/2010

10/20/2010

0.0%