|Happy Holidays from Guild Investment Management
We wanted to wish our readers Happy Holidays from all of us at Guild Investment Management. We appreciate the support throughout the years and will continue to strive to inform, educate, and help our readers with their investment strategies.
Long-Term Strategy: Negative Real Interest Rates Will Push Many Asset Prices Higher
On December 12, U.S. Federal Reserve chairman Ben Bernanke announced that the Fed’s Open Market Committee’s interest-rate policy is now tied to economic markers. The Fed will be maintaining a target federal funds rate at zero to ¼ percent interest-rate policy as long as the U.S. unemployment rate remains above 6.5 percent, or until a year or two down the road. The Federal Reserve’s Board of Governors wrote in a statement last week,”…inflation between one and two years ahead is projected to be no more than a half percentage point above the committee’s 2 percent longer-run goal.”…
Source: Bank of America Merrill Lynch Global Research
Real Interest Rates in Negative Territory…
Who benefits from negative interest rates and what does it mean for investors?
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U.S. Federal Reserve has decided to set a policy for continuing QE that will not be reversed until unemployment falls below 6.5 percent, consistent with a vague inflation rate that it has set. Clearly, based upon the track record of the Fed, it will find reasons to keep printing after these hurdles are cleared. This is ultra bullish for gold over the long term. One need only look to at the long term chart for the U.S. dollar versus the Swiss franc to see the kind of damage that has been done to the buying power of the dollar since 1970. During that time, the Swiss franc has moved from about 20 cents U.S. to about $1.09 USD.
Why is this? Why has the Swiss franc risen so much versus the dollar?...
Who is Congress Kidding?
In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:
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Guild Basic Needs IndexTM
Official Inflation Data Says Consumer Prices Fell in November
According to the latest data from the Bureau of Labor Statistics, November saw a 0.3 percent decline in prices for all urban consumers. The basket of goods used to calculate consumer prices was primarily driven lower by monthly drops in the prices for energy, medical, apparel, and autos. Year over year, the Consumer Price Index (CPI) basket of goods showed a 1.76 percent increase in prices.
The basic, essential needs tracked in the Guild Basic Needs IndexTM(GBNI) also saw a decline from October as energy prices declined. However, the last twelve months saw an approximate 8.6 percent increase in the prices of the food, clothing, shelter, and energy components tracked in the GBNI (see charts below).
CPI is Being Engineered Lower to Help Balance the Budget
At Guild Investment Management, we have written for years about how inflation data is manipulated and adjusted to show a slower-than-actual increase in the cost of living. We believe that this process takes place in most countries that provide price data — not just in the U.S. This week, the Washington Post discussed one way the Federal Government hopes to reduce its budget deficits and future obligations, by reducing the CPI through the use of ‘chained CPI’. It is no secret that by reducing the admitted CPI, the Fed can slow the growth in outlays it must make for Social Security and other entitlement programs.
As we reported last year in our August 3, 2011 Global Market Commentary, chained CPI considers that when the price of a particular good rises, people ‘trade-down’ to a cheaper alternative. For example, in his Washington Post article, author Ed O’Keefe writes that people may substitute chicken for more expensive beef, or lettuce for more expensive arugula if prices rise. He states that “chained CPI attempts to account for how people react to inflated prices”.
How Many Times can Consumers Trade Down, Before their Standard of Living is Noticeably Lower?
So, if the government is going to artificially adjust down the published rate at which prices are rising, how long will it be before government benefit recipients will only be able to afford very low quality goods? Further, for the rest of the population, how long can adjusting inflation rate down hide the fact that their standard of living is being squeezed?
The GBNI tracks food, clothing, shelter, and energy (used for heating, cooking, and transportation), not a general basket of consumer goods that are easily traded down. Moreover, the components and weightings in our index will never be adjusted or changed. This index was constructed and the data is being published to inform; we have no reason to manipulate the number higher or lower. The charts in our GBNI write-ups clearly demonstrate that prices of basic, essential needs (food, clothing, shelter, and energy) may be more volatile, but have also risen much more over the past several years than the generally-accepted consumer goods basket represented in the manipulated-lower CPI.
To track your basic needs go to www.gbni.info
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