Europe Cannot be Trusted to take any Decisive Action to Correct its Sovereign Debt & Banking Crises Until…
European leaders will not act to solve the region’s problems until all European nations can come to an agreement to give up national sovereignty over their banking systems and their conduct of monetary and fiscal policy within their own country. Since neither of these events will take place soon (although some promise Europe-wide baking regulation will be forthcoming by the end of 2012), any claims by Europe that it can solve its financial problems by any behavior except austerity should be taken with more than a grain of salt.
The charade in Europe is that all events are met with negotiation between those who want handouts without earning them — by changing their history and exhibiting fiscal responsibility — and those who do not want to have to pay for their neighbors’ handouts. Historically, Europe has shown that it will depreciate the value of the euro and try to export its way out of its problems. This will not work, but it will delay a solution by delaying the process of centralization of banking, monetary, and fiscal activities.
August is Approaching
To aggravate the problem for investors, Europe is approaching its yearly month-long holiday period in August. It is probable that, like last year, Europe’s politicians will leave for holidays with a major crisis hanging over them. Like last year, they will do nothing to solve the crisis. The citizens of Greece, Italy and Spain will not suddenly start to pay taxes and their politicians will not start to act more responsibly. Germany, Finland, and Holland will not suddenly start to give handouts to the European periphery. Nothing is going to change and August will once again bring suffering to Europe and to most other world markets because as negativity flows from Europe everyone gets on the band wagon. Whether it is true or not, many expect the worst and the media comes along for the ride.
Outside of Europe Growth is Fine
The worst will not occur outside of Europe. China and other strong emerging countries, as well as developed countries, will continue to shudder when Europe has problems. This will create market volatility but will not create long term problems for China or for other fast growing areas like Russia. If one carefully watches the economic statistics, and can ignore the panic in the media, China is doing very well. They reported very good GDP growth in the June quarter, growing by 7.6 percent. This is a highly respectable growth rate and there is reason to believe that the Chinese governing authorities are gradually implementing programs to grow, while not setting off housing inflation. By carefully following Chinese economic statistics and their trends, we are confident that things look good for China. Wages are rising, employment, and many other data points are quite strong.
We dispute the oft stated view that global growth is collapsing. China, Russia, Brazil, India and many other countries are growing and it is only when Europe alone is considered that one can assume a pessimistic view. As we pointed out last week in our comparative GDP growth table, there is currently and will be plenty of economic growth in the world.
Second Quarter 2012 Corporate Profits
In most of the world, the second quarter corporate profits reporting period has begun. It is our expectation that taken together, U.S. corporate profits for the second quarter will be better than the estimates. The only impediment to rising profits is the rising U.S. dollar, which makes exporting more difficult. In Asia, a strong dollar makes Asian exports cheaper and worldwide we expect many industries to benefit from falling energy costs. A resurgence of manufacturing in Canada, the U.S., and Mexico could help North American profits. Japan will report good profits, as will many developing countries. Countries that sell coal, as well as iron and other base metals, will have a somewhat dampened profit picture — and those countries that rely exclusively on exports may see corporate profits under pressure. Singapore, Taiwan, and Korea are in this latter category.
Food Inflation on the Upswing
We anticipate that world corn, wheat, and soybean prices will rise and meat prices will rise even faster through 2012 and 2013…
After a Lull, will Prices of Basic Needs Resume their Ascent?
In the Guild Basic Needs IndexTM (GBNITM), we track several components in the areas of food, clothing, shelter, and energy. Food, as we discuss above, is likely to get much more expensive unless global weather trends improve quickly. There is evidence that suggests the prices of other components that impact the prices of clothing, housing and energy have bottomed.
Given the amount of money that has been printed in recent years around the globe — and the even larger amount of money that will be printed in coming years — prices of items that are both limited in supply and necessities for living should rise. We expect price rises in such necessities will lead to a rising cost of living that will far outpace the official inflation data proffered by governments. You will be able to track this rise here in these letters and at a new web site devoted to tracking the rising cost of basic, essential needs in America: www.GBNI.info.
Consumer Price Index (CPI) data reflects the prices of thousands of items that American consumers choose to spend their money on. The GBNITM reflects the changes in price of components that make up what all American have to spend money on in one way or another. Since more and more Americans are getting government assistance to help pay for these items, a continued understatement of the rising cost of living is to be expected.
We bring this to your attention, not to disparage government data, but so you can better prepare for what lies ahead. Spending patterns will be changed by what is happening in these GBNITM charts and tables. If necessities take up more of your budget, discretionary spending on other items must be curtailed.
Banks, Brokers, and Futures: Brokers are Happy to Take Your Money –It’s Up to You to Know if You’ll Get it Back…
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Analyzing Europe from a Different Perspective…
In Summary, Europe will not Come to a Coherent Agreement
Germany has a powerful interest in seeing the Euro experiment continue, since it has prospered so mightily from it. Continent-wide, elites and bureaucrats devoted to European unity for ideological reasons also have such an interest. In the long run, however, Europe lacks the cultural and strategic cohesion that would push them together — and much of their history is a strong countervailing force against unity. It seems unlikely that Europe will be able to produce a Hamilton capable of leading them to the historically proven solution to their problems — or that, even if they did, anyone would listen to him.
The U.S. stock market is underpriced, as are Canada and Japan. Companies that can grow throughout the developed world will find investor favor. We believe that China, and some other emerging markets are inexpensive. We anticipate that emerging markets as a group will outperform developed markets in the second half of 2012.
Gold will continue to be a stalwart as central banks increase their acquisitions. Oil will trade in a trading range between $70 and $100 per barrel in the U.S. unless a crisis erupts in the oil producing world. Income producing companies especially those which earn income form the production of energy will continue to provide strong dividend income.