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August 2, 2012

August 2, 2012

Important Note:  Over the long term, the actuality is that the price of gold is not rising after considering inflation.  We anticipate that over the long term gold will rise at rate of inflation.  Data shows that, over the long run, the buying power of the currencies of all countries are falling when adjusted for inflation.  Since the buying power of your home currency is falling, your buying power is falling — and this has been going on for decades.


Draghi, Merkel & Hollande… vs. Deutsche Bundesbank?

Last Thursday the 26th, ECB President Mario Draghi assured concerned Europeans that all necessary measures would be followed to buoy and protect the Euro.  In his own already-famous words:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro, and believe me: it will be enough…”

Unsurprisingly, German Chancellor Angela Merkel and French President François Hollande immediately threw their weight behind Draghi’s pledge. In effect, they endorsed the ability of the ECB to use the printing press to create money with which to buy the bonds of beleaguered nations.  Also as expected, German Finance Minister Wolfgang Schäuble signaled his support.

However, Jens Weidmann, head of the German federal bank, Deutsche Bundesbank, is not necessarily so enthusiastic.  The key event for endorsing massive money-printing in Europe will be a meeting this week between Draghi and Weidmann.  They will discuss the possibility of the ECB buying government bonds in concert with the Eurozone’s bailout fund.  In the past, Deutsche Bundesbank has opposed these types of measures, fearing both money printing and the proposed bailouts of its European partner banks. Perhaps the nation’s fear comes with good reason, as memories of the destructive Weimar inflation in the 1920s is still deeply etched in German consciousness.

Nevertheless, the bottom line is this: if Weidmann does nothing, Europe’s problems grow, and the collapse of the Euro community becomes a probability.  If he agrees to actions now, Quantitative Easing (QE) — in the form of money-printing — will ensue.  Along with it will come the rapid rise of stocks and gold.

In our opinion, Germany (as represented by Bundesbank) will eventually cave in.  This caving may be indirect; perhaps Europe will structure a vote which Germany cannot possibly win.  We remind our readers: do not underestimate the political capital of German and French leaders who, among other leaders, have built the Euro and will fight to keep it intact.  The ECB mandate currently does not allow more bond-buying without certain approvals.  This mandate can be changed, and we believe that it will be.  In fact, we foresee a likelihood of multiple changes in the mandate before European QE is over which will allow the ECB and other institutions to buy many types of bonds, to buy common stocks, and to make direct investments in banks and companies within Europe.

Why would Europe stretch the mandate of the ECB so radically?

Well, let’s consider the alternative: a depression and/or a deflation.  Neither is a favorite of the average politician, whose focus is twofold: delaying blame on himself or herself, and getting reelected.  Depression would both increase blame and assure electoral defeat.  We recommend, dear readers, not underestimating the tactics and strategies that will be implemented.  As the old saying goes, “All is Fair in Love and War” — and the war to keep the Euro intact is no exception.  This war will be one of verbal commentary as well as monetary and fiscal manipulation — including much more QE from many sources.


June Quarterly Corporate Profits Have Been Globally Good…

Why?  Corporations have figured out how to maximize profits by cutting costs, waste, and inefficiencies.  They have implemented automation, focused on their more profitable lines of business, downsized loss-making sectors, and hedged their currency risks.


Mega-Companies Have Done Very Well, & Consumer Mega-Companies Have Done the Best

The very big companies have had the best earnings.  The bigger the company and the more established the brand name, the more leverage it has in the consumer marketplace.  In status goods, this is especially the case.

Asia is the world’s fastest-growing region.  Interestingly, in Asia — and especially in East Asia — brand names are immensely important.  Consumers in East Asia are collectively more brand-name-conscious than any other major world region.  For example, two days ago, Coach, a high-end retailer and manufacturer, reported earnings that were slightly disappointing due to weak sales in its U.S. operations.  However sales grew by 50 percent in China and 40 percent in Japan.


Investment Strategy Alert: The Bradley Cycle

Learn about Bradley cycles, find out the most recent Bradley date, and what it could mean for your portfolio…

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Asia Economies Continue to Move Ahead

Even though the headlines are full of news about Europe’s travails and a contentious election and fiscal debate in the United States, Asian businesses remain upbeat.  While Asian nations keep an eye on the developed world’s challenges, it does not deter them from their laser-focused intention to take advantage of the economic growth in their region.  Yet it isn’t growth alone that makes Asian nations more ebullient these days: it is the fact that they have much stronger cash positions and balance sheets.  The banking systems of Asia are not deleveraging.  Expanding and building is much easier when the countries, companies, and people are not fighting the banking and sovereign debt headwinds that slow growth in the U.S., Europe, and Japan.

Within Asia, growth continues even though its pace has slowed.

Observations of Tony Danaher, who is Currently Traveling in Asia…

Short notes on Malaysia, the Philippines and India…

We Reiterate Our Views on China

As we have stated in many recent letters GIM believes that China’s much-feared slowdown and falling stock market may be turning a corner.  Beijing is likely to keep easing credit and boosting spending on railroads, infrastructure, and affordable housing.

Fixed asset investment growth is over 20 percent year-over-year as the Chinese government pushes more investment projects.  Inflation is decelerating, and new bank loans are growing again.  Higher wages are boosting domestic consumption and reducing the importance of exports in Chinese GDP growth.

Another positive is that the government is relaxing the cap on overseas investors’ combined stake in any A-share company from 20 percent to 30 percent.  Bullish data points in China are accumulating and China remains the world’s fastest growing major economy.


Monitoring China via Oil Consumption

Does China need oil?…


Guild Basic Needs Index (GBNI)

For several years, we have been writing up the GBNI every two weeks in this letter.  We suggest that you pay close attention the GBNI in coming weeks and months.  There are many factors that point to a rise in the GBNI in coming months, including: the major changes in world food commodity prices; stable world energy prices; the fact that cotton and other apparel component prices appear to be bottoming; and the fact that shelter prices in the U.S. appear to have bottomed.

This, of course, means the cost of your basic needs: food, clothing, shelter, and energy for heating, cooling and transportation will begin to rise.  It is important to remember how much the buying power of all major currencies has shrunk.  Although we have been watching global economics for 50 years, we constantly have to remind ourselves of this fact.  According to U.S. government statistics, CPI has risen from 30 to about 229.5 — about 600 percent — in 50 years.  We know that the government is always shifting the components of the CPI to minimize its impact.  Presidents Reagan and Clinton, among others, have instructed government statisticians to adjust the CPI by statistical methods.  These statisticians, by changing components and the statistical analysis techniques, have been able to minimize the amount of inflation that was reported to the public.

It is a known fact that the U.S. government states that inflation has been 600 percent over the last 50 years and private forecasters — such as the well-known http://www.shadowstats.com/ — say that had government never changed its statistical approach, the components of the CPI, and the inflation rate, would both historically and currently be much higher.

Track the price of basic needs www.gbni.info

Click the graph below for more details

R June 2012 GBNI.jpg

 


Gold Will Do Well

Over the years, decades, and millennia, gold has been the best and most-oft used mechanism to protect investors from the corroding influence of inflation in their daily lives, and the futures of their children and grandchildren.
Technically, gold has cleared several hurdles, with the next major hurdle at $1648 per ounce.  We remain very bullish on gold and expect it to at least regain the highs of 2011 — about $1,900 per ounce within the not-too-distant future…

5 Year Chart of Gold

R Gold 5 yr .jpg
Source: Bloomberg


Summary…


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