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August 23, 2013

August 23, 2013

In past letters, we have provided our analysis on the Canadian and U.S. energy sectors.  This week we focus on energy developments in a third country.  This development may change the way we look at energy — and may take North America one step closer to energy self-sufficiency.  With energy supplies tightening due to price increases, and turmoil and uncertainty in the Middle East, this  could be a very exciting opportunity. 

To read more about this exciting development, upgrade to our Gold Subscription today. 

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Emerging Markets’ Catalyst: U.S., European Demand

Life hasn’t been rosy for emerging markets.  Starting in China, and moving through Asia and across the EM universe, sentiment has been deeply bearish.  Emerging market currencies and equity markets have moved sharply down in recent weeks.

While our view of the emerging markets isn’t all sunshine and lollipops, we think that the position of the hardcore bears is unduly pessimistic — and that it misses what is potentially the most significant catalyst for improved emerging-market performance.

We observed recently in this letter that developed-market demand is ultimately more significant for global growth than emerging-market production.  That’s the same potential catalyst that could help emerging markets out of their doldrums.

Is an EM Apocalypse at Hand?

This is assuming that the present downturn in emerging markets doesn’t presage a disintegration so complete that no catalyst could take hold.

We’ll briefly run down the list of the bears’ concerns…

Elements of Truth; Just Not the Whole Story…

All of these concerns are rooted in reality, but taken to extremes… 

The Catalyst?

Green Shoots?

We see encouraging signs.


Europe: Emerging From Recession, Driven By Germany and France

Meanwhile, Europe is emerging from the longest recession since the currency zone was established in 1999.

GDP Growth: Check

Europe GDP.jpg


Europe Recover.jpg
What does this mean for Europe?


Are Interest Rate Increases Signaling Higher Inflation on the Horizon?

Since bottoming in 2012, U.S. interest rates have been rising — the exception being short-term interest rates, which are set by the Federal Reserve.  There are a few key reasons for the rise in rates.  The most often cited reason is the feared end of QE by the Federal Reserve.  If the Fed stops buying bonds, who else will fund the U.S. government.  The bottom line is that after declining for 32 years, interest rates got too low, and now the interest rate that investors require to buy bonds maturing in three years or more have gone up significantly…and look like they are headed higher still.  Another reason for the rise is the fact that investors believe the low returns on bonds in recent years are not enough to protect their principal from the purchasing power decline that comes from a rising cost of living.  This is not just a U.S. phenomenon.

The rapidly rising U.S. interest rates are having important effects on world markets; one of them is the sudden decline in certain emerging market currencies.  India, Brazil, Turkey, Indonesia, and other countries have seen their currencies slide in recent weeks.  Central banks are acting to slow currency declines to fend off uncomfortable increases in inflation that result.  Inflation can be hard to contain and can spill across national or regional borders. 

Last year and earlier this year, we wrote about how inflation around the globe had moderated.  However, it appears that this trend may be coming to an end.  While not yet high in the developed world, price increases in the developing world should be closely monitored to see when they will arrive on our shores.  For example, food commodities rising in price in India due to poor rainfall during the annual monsoon will effect the price of food commodities on the other side of the world.  This is one reason we are watching the prices of certain basic needs closely and are tracking them in our Guild Basic Needs IndexTM (GBNI) to see if and when price changes abroad spill over into the U.S.  You can follow the GBNI in these letters each month or on the web at www.gbni.info.

 

Guild Basic Needs IndexTM
Since 2000, the cost of basic, essential needs in our GBNI have risen over 87%, while the consumer prices (CPI) are up less than 39%.

July GBNI.jpg

Track our analysis in these letters and at www.gbni.info.


In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:

  • Executive Summary 
  • Guild’s Premium Global Market Summary

    How About the U.S. Stock Market?  How long will the correction last?

Gold Subscribers have full access to all Premium content.  In addition, Gold Subscribers can participate on Guild’s periodic conference calls where participants can ask direct questions to Guild’s portfolio managers and research team.  We will be announcing our conference call date and time in the coming weeks.

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