Most economists agree that there are four major economic regions of the world: China, Western Europe, Japan, and the U.S.  There’s some growth in Brazil (we anticipate 3 to 4 percent net of inflation), India (4 percent net of inflation), and a few others in Southeast Asia or the Pacific Rim.

Of the four major economic blocs, only two are currently showing growth; China is growing at about 7+ percent, and the U.S. at about 2 to 3 percent.  One thing the world economy could use is for Japan . . .
Continue Reading: May 16, 2013]]> The Two-Legged Stool of Economic Growth Seeks Another Leg

Most economists agree that there are four major economic regions of the world: China, Western Europe, Japan, and the U.S.  There’s some growth in Brazil (we anticipate 3 to 4 percent net of inflation), India (4 percent net of inflation), and a few others in Southeast Asia or the Pacific Rim.

Of the four major economic blocs, only two are currently showing growth; China is growing at about 7+ percent, and the U.S. at about 2 to 3 percent.  One thing the world economy could use is for Japan to be added as a new growth leg after its 23-years of stagnation.

Global economic optimists would like to see Japan grow and prosper and lend a hand to increase global economic growth because Europe, the potential fourth leg of the global stool, is far from healthy, and it will be a long time before it cooperates in improving world economic growth.

To read the full analysis, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Monty Recent Interview on Gold Seek Radio  

Monty Guild (Chief Investment Officer) of Guild Investment Management was recently interviewed by Chris Waltzek from Gold Seek Radio.  To listen to the interview and to hear Monty’s thoughts on gold and the global markets, please click the following link:

http://radio.goldseek.com/

The Japanese Plan

In order to stimulate their domestic economic growth, the Japanese government is promulgating a plan which includes a depreciation of the yen so that imports will improve and so that Japanese companies will move to raise salaries and hire more employees.

In the last eight months, the Japanese yen has fallen from about 77 yen per dollar to about 102 yen per dollar.  To put it another way, the yen fell in value from about 1.3 U.S. cents each to less than 1 U.S. cent each.

Many have argued that the Japanese yen can’t go through 100 easily because it has fallen so far so fast.  We think it can go to at least 125 to the dollar.  We are old enough to remember when the yen traded at 375 to the dollar in 1971.  We also remember that at the beginning of the decline of Japan in 1989, the yen was at about 150 to the dollar...

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Asia Pacific Economies Fight “Hot Money” Inflows

With the Bank of Japan and the U.S. Federal Reserve both engaged in ongoing aggressive monetary easing, many economies in the Asia-Pacific region are fighting a tsunami of liquidity which is elevating the value of their currencies to otherwise unjustifiable levels.

Everywhere, money is looking for yields that will protect it from the corrosive effects of inflation and of the real negative interest rates offered by the traditional safe-haven of government bonds.  In one way or another, the cost of yield is risk, and relatively riskier assets are the beneficiaries of this demand.  This includes equities, and also second-tier debt of all kinds — for example, non-investment grade corporate bonds, and bonds in emerging markets.

A World Bank brief on May 2, 2013 reported:

“At $64 billion, gross flows were up 42 percent from a year earlier, and 9.8 percent from March levels.  The increase in capital flows was largely driven by bond issuances, which doubled in April, reaching a record $44.4 billion.  Bond market access for noninvestment grade borrowers continued to improve, with Rwanda issuing its first bond.  Vietnam, Papua New Guinea, and Bangladesh are expected to follow suit to take advantage of investors’ appetite for higher yielding developing-country sovereign bonds.  Equity flows were up slightly…  Overall, for the first 4 months of the year capital flows are up 46 percent from year-earlier levels, with… both equity and bond flows up significantly from last year.”

Private Cash Inflows to Emerging Markets Are Steady…and Strong

Source: World Bank

Such inflows can be distressing to emerging-market economies.  The incoming cash can cause perverse increases in the values of their currencies, which is particularly damaging for export-reliant economies.  Further, much of it is ‘hot money’ which can exit just as quickly in a crisis, so its presence is potentially destabilizing to the banking systems even of responsibly-managed countries.

Central banks in countries that are the destination for hot money flows can respond with their own easing policies intended to mitigate the appreciation of their currencies, but this brings its own risks, including the creation of asset bubbles.  So while some central banks use interest-rate policies, others use intervention in currency markets.  However, the flows happening now are so strong that some central banks admit there is little they can do.  The governor of the Reserve Bank of New Zealand recently commented:

“We would not expect, given the strength of the flows, that intervention would materially change the level of the exchange rate, but we could take potentially the tops off rallies.”

As we noted last week, many of the nations poised to benefit from China’s economic maturation and higher unit labor costs are in Asia — and with Asia still being the best choice in the growth game, it is Asian economies with better fundamentals that are being challenged with hot money inflows…

To read the full analysis on Asia, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Inflation — Still Held at Bay

The April 2013 inflation data in the U.S. are being released, and it shows that prices are falling…not what the Federal Reserve wants to see.  Wholesale Prices, sometimes referred to as the Producer Price Index (PPI) data yesterday showed a decline of 0.7 percent in April, primarily due to a drop in energy prices.  These wholesale prices, which are supposed to track the underlying costs of certain raw materials and producer costs showed an increase of only 0.6 percent for the twelve months ending April 30, 2013.

There is a lot of talk about the ‘tapering off’ the Federal Reserve’s continued asset purchases, or the end of QE – a lot of it due to the strong performance of financial markets.  However, in our opinion the cessation of their QE seems unlikely as long as the inflation data remains so muted.  We believe it will take more than rising stock prices to get the Fed to stop.

The Fed has indicated that it wants to see much stronger employment and higher inflation.  When will the Fed see inflation numbers pick up? It doesn’t look like a 2013 issue.  Nonetheless we are vigilant; and we will use our Guild Basic Needs IndexTM (GBNI) to track the costs of basic, essential needs that Americans must buy every day.  We expect the prices of food, clothing, shelter, and energy contained in the index will be a harbinger for rising inflation.  Having an advance warning about rising inflation expectations is crucial for all investors… in equities, bonds, commodities, and real estate.  We will track it for you and publish in these letters and share it with you on www.gbni.info.

Guild Basic Needs Index^TM

Track your basic needs at www.gbni.info

The April 2013 GBNI data should be available soon.  If it looks anything like the wholesale prices or PPI data we discuss above, expect a slight drop in our data as well.

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

• Post- Recssion Labor Shifts: Supply or Demand?

  The persistence and character of unemployment in the aftermath of the 2007 to 2009 recession has become a matter of prime concern to politicians, policy makers, central bankers, and citizens…

• 3D Cameras, Terrorism, and Surveillance

  Bloomberg this week reported on new software created by Israeli entrepreneur Dor Givon and his tech startup, Extreme Reality.  The software allows existing 2D cameras in laptops, tablets, and smartphones to track and interpret complex 3D movements — for example, body movements and hand-gestures.  Hardware manufacturers and video game designers are already bundling and using the new software; they note the cost benefits, since the software allows for 3D imaging without the need for more expensive hardware modifications or upgrades.

• A Summer Reading Suggestion

• This Week We Made A New Investment Recommendation

• Newly Implemented Executive Summary
• Guild’s Premium Global Market Summary

  Sell in May and go away?  We recommend the markets we think are attractive.

Like what you see and want more?  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.

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And that May Be Good News for China and Her Neighbors

“The rapidly growing economy produced a high demand for labor, especially among young workers such as the rural migrants.  The possibilities for sales outstripped the ability to produce (given the relatively labor-intensive techniques of the time), bringing about a labor shortage.  This produced relatively high wages, even for those without a high school education.”

That quotation sounds like a perfect description of the contemporary situation in China.  But it’s not; it’s a comment by Ikuo Kabashima, political economist and governor of . . .
Continue Reading: May 09, 2013]]> Chinese Development Follows a Well-Worn Path

And that May Be Good News for China and Her Neighbors

“The rapidly growing economy produced a high demand for labor, especially among young workers such as the rural migrants.  The possibilities for sales outstripped the ability to produce (given the relatively labor-intensive techniques of the time), bringing about a labor shortage.  This produced relatively high wages, even for those without a high school education.”

That quotation sounds like a perfect description of the contemporary situation in China.  But it’s not; it’s a comment by Ikuo Kabashima, political economist and governor of Japan’s Kumamoto Prefecture — discussing Japan’s post-war rise as the “world’s workshop.”

China’s economic success is driving higher wages and a shift from an export-driven manufacturing economy to one more balanced by the consumer and service sectors, and by innovation and high value-added production.  We shouldn’t be surprised by this process; it’s the same one that Japan and South Korea followed before China.  Just as the mantle of the “world’s workshop” passed to China after Deng’s reforms, China’s economic success is already pushing manufacturing to other developing nations in Asia and beyond.  Those countries may not yet have the synergy of infrastructure and production ecosystems that China has — but eventually they will, and the current migration of low-cost manufacturing will help them build it.

The Service Sector Climbs in the Chinese Economy

Rising Labor Costs Put Pressure on Manufacturers

Manufacturers are paying higher costs in China, for many reasons: land prices are rising; environmental legislation is becoming more stringent; the Yuan has appreciated in value, etc…

Looking For the Next Workshop

What are the economies to which manufacturing is migrating?…

Who is Reaping the Rewards?

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Ethanol Tanks on Fuel Consumption Decline

The high-point of U.S. gasoline consumption was in 2007.  Since then, high global oil prices, sluggish growth during the aftermath of the Great Recession, and increasing fuel efficiency have all worked together to keep consumption down.  This summer, we’ll be about where we were 12 years ago:

Source: Energy Information Agency

In that peak year, the Bush administration mandated the blending of ethanol into the nation’s gasoline supply.  The mandate failed to envision a future in which consumption might be falling, and is set to grow each year in absolute terms — potentially exceeding the 10 percent national threshold of ethanol in a gallon of gasoline.  Although refinery output of gasoline will increase just 20,000 barrels a day from 2012, ethanol blending will mechanically tick up by 5,000 barrels a day…

To read the full analysis on energy, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Another Swing at “Too Big To Fail”

In the U.S., anti-big-bank sentiment is heating up.  Legislators and Fed officials alike are mooting plans that go beyond U.S. regulations and international financial standards in their pre-emptive response to the risk of future financial crises.

The potential effects of such stringent requirements are unclear.  The requirements may address some of the risks that Dodd-Frank and Basel III have both failed to tackle — but they may also turn out to hamstring banks in crucial ways.

A bipartisan bill in the U.S. Senate, sponsored by David Vitter and Sherrod Brown, proposes that banks with more than $500 billion in assets would need to up their capital reserves to 15 percent.  Goldman Sachs analysts calculate that this requirement would mean an additional $1.2 trillion for the banks affected, implying years of foregone dividends for shareholders and a permanently lower return on their equity.

If the largest banks didn’t like that, they could always break themselves up — which is perhaps the motivation behind the proposed law.  The Senators sponsoring it believe that Dodd-Frank doesn’t contain the risk — and they say they have 40 votes in the Senate already.

Further, they want to go beyond the capital requirements of Basel III — the new voluntary international standards being adopted globally in the wake of 2008’s crisis.  While Basel III’s capital requirements differentiate in their weighting between more solid assets (such as U.S. Treasuries) and less solid assets (such as asset-backed securities and corporate paper), U.S. regulators are proposing scrapping such distinctions and treating capital requirements very simply…

Personally, we disagree that more capital is bad, and that interconnectedness is the main issue.  Yes, banks are interconnected.  So what?  They have always been interconnected.  More capital, and less risk-taking is good; it is good for the U.S. and good for the world economy.

To read the full analysis on banks, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Guild Basic Needs Index^TM

Track your basic needs at www.gbni.info

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

• Guild’s Premium Global Market Summary

  Sell in May and go away? Find out what we think about the coming months and what investments and global markets we favor.
  

Like what you see and want more?  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.

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During the last two weeks, a lot of time at Guild Investment Management has been spent analyzing the U.S. housing recovery.  In that period, we’ve listened to the conference calls of numerous home building firms who have reported stunningly good earnings.  We have spoken with four analysts who cover homebuilders and have done so for years, and we have spoken to or met with the managements of several homebuilding companies.  We have also listened to several mortgage insurance company managements discuss the improving conditions in the residential real estate market.

Homebuilding — . . .
Continue Reading: May 02, 2013]]> Home Builders Poised For Big Comebacks 

During the last two weeks, a lot of time at Guild Investment Management has been spent analyzing the U.S. housing recovery.  In that period, we’ve listened to the conference calls of numerous home building firms who have reported stunningly good earnings.  We have spoken with four analysts who cover homebuilders and have done so for years, and we have spoken to or met with the managements of several homebuilding companies.  We have also listened to several mortgage insurance company managements discuss the improving conditions in the residential real estate market.

Homebuilding — A Tale of Two Countries

Many parts of the U.S. have been slow to recover with respect to new housing starts, but the Sun Belt, the Pacific Northwest, and the Atlantic coast from the suburbs of Washington, D.C. to Florida are doing very nicely.  As we see it, California, Colorado, Arizona, Florida, and Texas are on fire with massive demand for homes.  The Carolinas, Georgia, Alabama, and Mississippi in the Southeast are doing well, and pricing and sales trends are also strong in Washington and Oregon in the Pacific Northwest.

What areas are not doing as well are the northern Midwest and the New England states.  Many investors and homeowners in these areas might be asking, “What home building resurgence?”…

To read the full analysis on home builders, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Investors Hunting Yield Go for European Periphery Debt — in Spite of Risks

Returns on Spanish and Italian debt have been healthy this year, as bond prices — even in troubled countries — have been driven up by investors’ relentless quest for yields higher than they can find in safer debt markets.  Since the market price of a bond varies inversely with its implied yield, this investor demand expresses a hunger for yield and a willingness to tolerate higher risk to achieve it.

Since the end of March, according to the Wall Street Journal, rising bond prices have given investors 3.55 percent and 2.74 percent total returns on Spanish and Italian debt, respectively.

Risky European Debt: Investors are Willing to Accept Less Interest Income

Source: tradingeconomics.com

Global Political and Macroeconomic Factors Support Demand for This Relatively Risky Debt

With the announcement of Japan’s new full-bore quantitative easing (QE) strategy, capital has been flowing into the sovereign debt of the relatively safer European economies.  Consequently, this has been driving bond prices up and yields down, causing a cascade into riskier economies by yield-hunters.  German 10-year Bunds now yield about 1.2 percent, French 10-year debt about 1.75 percent, and U.S. 10-year Treasuries yield about 1.63 percent.  The exception is Greece, where bond prices have been largely flat this year and yields are much higher…

To read the full analysis on European Periphery Debt, upgrade your subscription to a GoldSubscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Maybe All Your Retirement Accounts Belong to Us

One of the Federal watchdog agencies established by 2010’s Dodd-Frank financial legislation is mulling expanding its scope to cover not just credit products, but also retirement savings plans, according to Bloomberg.

The internal deliberations at the Consumer Financial Protection Bureau (CFPB) have not been made public.  Director Richard Cordray, whose January 2012 appointment during a congressional recess generated controversy for President Obama, said in an interview that the agency was “exploring… what authority [it has]” in retirement savings products such as 401(k) and IRA accounts.  Americans’ retirement assets total some $19.4 trillion.

On the face of it, Dodd-Frank does not explicitly give the CFPB regulatory jurisdiction over retirement savings plans.  Until now, that job has fallen predominantly to the Securities and Exchange Commission (SEC).  However, Dodd-Frank has helped created a maze of agencies and agency relationships that’s far from clear:

Is the U.S. government looking for revenue in the tangled mess of retirement asset regulations?

Cato Institute scholar Mark Calabria observed in an interview: “I could imagine the CFPB growing into a role on investment savings if it seems like the SEC is asleep at the wheel.”  The concept of a regulatory agency “growing into a role” rather than being assigned a role in a clearly delineated regulatory structure is alarming to some, and the CFPB has recently received critical scrutiny for its foray into large-scale data mining of consumers’ banking, saving, and spending habits.

Long-Term Questions and Problems…

Retirement Savings — the Argentine Solution…

Byzantine legislation and regulatory agencies with unclear mandates always lead us to ask uncomfortable questions about the future…

To read the full analysis on Retirement Accounts, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

“Twitter Crash” and Gaming of the Futures Market Show How High Frequency Trading Opens Doors for Fraud

Last week, the Twitter account of the Associated Press was hacked, and a fake tweet sent out to the effect that the White House had been bombed and the President injured.  The market’s subsequent drop was precipitous, and the recovery just as quick:

Source: The Market Ticker

The AP responded quickly.  Its account was shut down; and reports came both from the White House and the AP itself that the tweet was a fake.  The markets quickly recovered.  The whole episode was over in four minutes.

Nevertheless, it’s worrisome because of the role of high-frequency trading in the whole process — and we can’t help observing that hackers and algos (the writers of the automated trading algorithms used in HFT) have a similar knowledge base...

To read the full analysis on HFT, upgrade yoursubscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Guild Basic Needs Index^TM

Track your basic needs at www.gbni.info

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

• Guild’s Premium Global Market SummarySell in May and go away? Find out what we think about the coming months and whatinvestments we favor. 

  
  

Like what you see and want more?  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.

Please click the button below to learn about the benefits of Gold Subscription, or contact our office at (310) 826-8600.

There are More Tools in the Kit — We Expect to See them Used in the U.S. and Europe Before the Current Economic Malaise has Ended

So far, Japanese Prime Minister Shinzo Abe’s aggressive monetary easing is following pretty closely the prescription laid out in 1999 by a Princeton economics professor named Ben S. Bernanke.  Back then, before the dotcom decline of 2000 and the 2008 crisis, Mr. Bernanke wrote the following in his appraisal how to help Japan regain its economic footing after 10 years of stagnation:

“Despite the apparent liquidity trap, monetary . . .
Continue Reading: April 25, 2013]]> Central Bank Stock Purchases

There are More Tools in the Kit — We Expect to See them Used in the U.S. and Europe Before the Current Economic Malaise has Ended

So far, Japanese Prime Minister Shinzo Abe’s aggressive monetary easing is following pretty closely the prescription laid out in 1999 by a Princeton economics professor named Ben S. Bernanke.  Back then, before the dotcom decline of 2000 and the 2008 crisis, Mr. Bernanke wrote the following in his appraisal how to help Japan regain its economic footing after 10 years of stagnation:

“Despite the apparent liquidity trap, monetary policymakers retain the power to increase nominal aggregate demand and the price level… [and] increased nominal spending and rising prices will lead to increases in real economic activity.”

That paper goes on to describe four central bank policies available to boost nominal prices.  Abe campaigned explicitly on two of them last year.

First, in Bernanke’s words, was a commitment to zero interest rates — with an inflation target.  Second was a depreciation of the Yen.  The recent G20 meeting, which we comment on below, put the world’s finance ministers’ stamp of approval on Japan’s monetary easing, and recognized that Japan’s action was first and foremost dedicated to overcoming deflation and not to devaluing its currency.  So much – at least temporarily — for the shades of “currency wars.”

Nevertheless, this “side effect” of Japan’s massive and unprecedented QE will be welcome and beneficial.  Mr. Bernanke was of the opinion in 1999 that “a policy of aggressive depreciation of the Yen would by itself probably be enough to get the Japanese economy moving again.”  The charitable public interpretation of Japan’s actions by the world’s financial movers and shakers is important because it shows that they understand the value of a dynamic Japan to the world economy — so much so that they are willing to overlook the devaluation of the Yen, and not scold or interfere…

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Singapore Faces a Double Squeeze to GDP: Demographics and Immigration Policy

Singapore, with two decades of strong growth under its belt, is facing an uncertain future — with European weakness undermining exports, a shifting landscape in electronics production that it has to navigate, unfavorable native demographics, and a deteriorating willingness to fuel its productivity by accepting foreign workers.  Analysts suggest an annual GDP growth rate of just 2.5 percent over the next four years, down from 6.7 percent in the decade from 1991 to 2000:

Components of Singapore’s Trend GDP Growth: Labor Force and Productivity

Source: Credit Suisse

The two components of the decline are a fall in labor productivity growth and a fall in labor force growth.  The former is driven largely by structural factors in the Singaporean economy and by macroeconomic processes in the global economy.  The latter has to do with Singaporean demographics and the state’s decision to shape immigration policy in a way that favors the interests of Singaporean natives.

The government’s recently published Population White Paper targets Singapore’s population to expand to 6.9 million by 2030 from 5.5 million today.  There are various components to this target — a desire to ensure affordable housing for Singaporeans, and perhaps a desire to maintain Singapore’s ethnic makeup.

To achieve the government’s population growth target would require halving the number of immigrants over the next generation.  With a fertility rate of 0.71, far below the replacement rate of 2.1, Singapore (like many developed nations) has relied on immigrants to bolster its labor force.  Singapore’s most urgent labor shortages are in relatively low-skilled service and manufacturing jobs, and those are exactly the immigrants whose entry will be made more difficult by new policies…

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Gold

In our opinion, gold has completed a decline — from over $1,900 to under $1,350 — which is about a 35 percent decline of the entire move up in price from the bottom in 2002 to the top in 2011.  After 11 years of price increases for gold, we are not surprised to see a sizeable decline.  During the historic gold bull market of the 1970s, there were several such declines; and the fact that we have now had one in this bull market is actually reassuring to us.  A normal pattern would be for gold to once again retest its bottom or stabilize above the former bottom over the next few weeks, and then proceed to build a base before beginning its next major move upward.

Over the last few years, the ownership of gold has shifted among central banks.  Potential central bank sellers in Europe — should they develop — will be more than met by buyers from India, China, Korea, Sri Lanka, Russia, and several other countries.  Among retail purchasers we are seeing substantial buying from Chinese and Indian consumers who hold gold for jewelry use and/or as a store of wealth.  In recent days, there has been a big increase in demand for gold coins among private investors in North America, Asia, and Europe.  Lower prices have attracted sustained buying by private holders of coins and bullion and by many central banks in Asia and Eastern Europe.

In 2012, Indian consumers purchased 37 percent of all gold sold, while Chinese consumers have also bought substantial amounts.  The central banks of Korea, China, India, Sri Lanka, Turkey and Russia, among others have been recent goldbuyers…meanwhile Portugal and Cyprus are the possible sellers.  We believe that demand from emerging countries and Russia will far outstrip sales by European central banks were they to be required to sell as part of the bailout process in Europe.

There are two types of individual holders of gold:

1)  Insurance holders who own 5-15 percent of their portfolios in gold and are holding this against a rainy day.

2)  The investment holder or bank account substitute holder.  These holders are found in emerging markets where historically banks have been difficult to use, or unavailable.  As a result, a traditional way to hold wealth has been in gold.  India, China, Vietnam, Thailand, and other South and Southeastern Asian nations are in this category.

Gold holdings are held as by many millions of Europeans, Asians, and North Americans as an insurance policy…

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Inflation — The Dog that Hasn’t Barked

This past week, Core CPI in the U.S. surprised many market watchers when it only showed a 1.5 percent year-over-year increase through March.  An International Monetary Fund (IMF) report this week likened inflation to the dog that didn’t bark, and asked “Has Inflation Been Muzzled Or Was It Just Sleeping?” They see economic slack (in employment and industrial capacity) as the key reason inflation has been kept in check.  It is true that there remains slack in the economy, and the deep 2007-2009 recession has lingering effects.  We also believe that one reason inflation has been kept in check is that the official inflation measure is only telling the story that officials want told.

We have believed that higher prices around the globe (especially for basic, essential needs that have limited supply) would be driven higher.  We have been tracking the prices of many of these components in our Guild Basic Needs Index^TM(GBNI) in an effort to prove our theory.

The belief that higher inflation is on the horizon is founded on several facts.  The first is that many hundreds of millions of people around the globe are increasing in their standard of living — eating more and better, owning more clothes, upgrading their housing, driving more, cooking more, etc.  Another fact is that in recent years, trillions of dollars in liquidity injections from governments around the globe have been created.  This liquidity is intended to fight financial crises and deflationary forces from deleveraging western and Japanese banking systems.

We believe that continued monetary debasement will eventually increase the supply of money chasing such necessities.  Since the year 2000, the prices of certain food, clothing, shelter, and energy (used for cooking, heating, and transportation) in the U.S. that are included in our GBNI have risen almost 89 percent.  Over the same 13.25 years, the CPI inflation index that tracks a basket representing Americans’ expenditures has only increased about 38.3 percent.  We do not keep detailed data on prices in China, India, Brazil, Russia, and other emerging nations — but reports published by their governments support the fact that prices are rising more rapidly in these countries than in the U.S.

Signs Point to Higher Prices… But Not Right Away

With a 1.5 percent year-over-year increase, the Federal Reserve still has a green light to keep the monetary spigots open, and to keep rates low.  So while the Federal Reserve sees inflation and inflation expectations firmly anchored below their 2.5 percent targets, more liquidity is coming.

We will continue to track the prices of items that people need every day in these letters and at www.gbni.info.  If the markets are going to hear the inflation dog start barking, we believe our GBNI index will pick up the frequency before the official data rings the inflation alarm bells.

Guild Basic Needs Index^TM

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

• Abenomics Gets the G-20′s Buy-In…and Japan Gets the Green Light to Join Nascent Pacific Free-Trade Coalition

• When All Else Fails, You Can Always Use Statistics

• Guild’s Premium Global Market Summary

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Guild Recommendation Tracker

]]> http://www.howtoinvestglobally.com/2013/04/25/april-25-2013/feed/ 0 http://www.howtoinvestglobally.com/2013/04/18/april-18-2013/ http://www.howtoinvestglobally.com/2013/04/18/april-18-2013/#comments Thu, 18 Apr 2013 20:04:57 +0000 Monty Guild and Tony Danaher http://www.howtoinvestglobally.com/?p=3019

The old news is: 1)  The world’s banks remain in difficulty,

2)  The potential for worldwide deflation remains great,

3)  The fight against deflation via the mechanism of a huge quantitative easing continues in many countries.

4)  The potential for a global currency war and “beggar-thy-neighbor” policies exists.

All of these negatives are true and will someday lead to a very big decrease in the wealth of those who have not prepared.  But in our opinion, the . . .
Continue Reading: April 18, 2013]]> It’s Old News that Problems abound — but It’s Current News that Money is Being Made in Real Estate and Stocks

The old news is:
1)  The world’s banks remain in difficulty,

2)  The potential for worldwide deflation remains
great,

3)  The fight against deflation via the mechanism of a huge quantitative easing continues in many countries.

4)  The potential for a global currency war and “beggar-thy-neighbor” policies exists.

All of these negatives are true and will someday lead to a very big decrease in the wealth of those who have not prepared.  But in our opinion, the timing for that is not now.  For many years, we have discussed the potential for major world economic problems, and how they may occur.  The key point is not if — but when — the above will occur.

In our opinion, the answer is not this week, or soon.  We believe that today there is opportunity for profits in stocks.  Many tailwinds exist to create that alternative. The message is to expand your asset base by making money. Let’s enjoy and make money when it’s easier to make than it has been for years.

Where is money being made?

The movement of cash flowing into investment dominates world attention.  Opportunity is to be found there...

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Immigration Reform: More H1B Visas, Please

Immigration reform appears to be on the horizon in the U.S.  The proposal will allow many millions of illegal immigrants to find a path toward citizenship.  Many of these people will add to U.S. economic growth by working in fields, and other jobs that do not require strong academic preparation.  The problem is that today the business world — especially technology industries where much of the U.S. growth and comparative advantage operates — requires knowledge of STEM fields (science, technology, engineering and mathematics).  What the U.S. desperately needs is an expansion of the H1B visa program, which would allow more highly educated foreign workers in STEM fields to work.

With half of Silicon Valley startups founded by Chinese or Indian-born entrepreneurs, according to the Financial Times¸ a crucial immigration reform would be to expand and rationalize the system that grants visas to this demographic.  Only 65,000 such visas are given out annually with a small additional supplement for those with advanced degrees.  This year the quota was filled in 5 days.  65,000 is a mere drop in the bucket for the U.S. workforce.

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Mis-Underestimated: China’s Official Stats May Downplay Consumer Spending

We’re used to thinking about China’s developmental imbalance between capital-intensive heavy infrastructure on one hand and consumer spending on the other.  China, we’re told, can’t continue its growth without rebalancing its investment towards the meeting of consumers’ needs.  Some recent analysis, however, suggests that for once, China’s unreliable official statistics may be telling a story that’s more unfavorable than it should be — in fact, consumer spending may be a lot higher than the official stats show.

At the end of February, Morgan Stanley published a report by two analysts, Jonathan Garner and Helen Qiao, which makes the case that private consumption accounts for 46 percent of Chinese GDP, rather than the 35 percent suggested by the government’s figures.  They arrived at this conclusion by working up from data down in the weeds — company reports, data on internal tourism, e-commerce, e-gambling, and other sectors they believe the official stats have neglected or underestimated.

China’s Rebalancing Act May Already be Underway

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Cyprus the Template: Will There Be a Push for Bail-Ins?  

After the confiscation of depositor assets in Cyprus, we see trends that suggest this may occur in countries that are not tax havens and that perhaps are located much closer to home for large developed countries.  Some countries are saying that instead of deposit insurance, there should be other forms of “resolution.”  New Zealand believes that deposit insurance increases moral hazard, by reducing risk management incentives.  Toby Fiennes, an official at the Reserve Bank of New Zealand, says, “We believe it is better to keep the risk of failure very low through a strong regulatory framework rather than to build structures that can distort incentives and behavior.”  According to Bloomberg:

“The central bank is proposing a system of open bank resolution as a better tool to manage a bank in the event that it fails.  That system uses a form of statutory management to freeze a bank’s accounts, then release a proportion of those accounts the next day with a government guarantee to prevent further runs on the bank.” (emphasis ours)

That sounds a little too much like a complete bail-in regime for our taste.

Canada is likewise mooting “bail-in” programs…

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Guild Basic Needs Index^TM

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• More on Cyprus, Greece, Europe, Russia

• The Fragility of Power — Are Big Powers losing their Mojo?

  Thinking about global political, economic, and social trends

• Guild’s Premium Global Market Summary

  We discuss our investment strategy and also have an update to our recommendation tracker.

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]]> http://www.howtoinvestglobally.com/2013/04/18/april-18-2013/feed/ 0 http://www.howtoinvestglobally.com/2013/04/16/april-11-2013/ http://www.howtoinvestglobally.com/2013/04/16/april-11-2013/#comments Tue, 16 Apr 2013 14:59:13 +0000 Monty Guild and Tony Danaher http://www.howtoinvestglobally.com/?p=3015 For 19 Straight weeks, Big Money Has Been Flowing into U.S. Equities

In 2013, U.S. stocks have seen big inflows of money.  $100 billion has been added to U.S. stocks so far this year.  Contrary to some pundits’ assertions, money is also coming into bonds, but to a lesser extent.  $50 billion has been added to U.S. bond funds this year.

It wouldn’t be irrational to ask, “Where has this money pouring into U.S. stocks and bonds come from?”…

To read the full analysis on U.S. Equity markets, upgrade your subscription to a Gold Subscription. To learn more . . .
Continue Reading: April 11, 2013]]> For 19 Straight weeks, Big Money Has Been Flowing into U.S. Equities

In 2013, U.S. stocks have seen big inflows of money.  $100 billion has been added to U.S. stocks so far this year.  Contrary to some pundits’ assertions, money is also coming into bonds, but to a lesser extent.  $50 billion has been added to U.S. bond funds this year.

It wouldn’t be irrational to ask, “Where has this money pouring into U.S. stocks and bonds come from?”…

To read the full analysis on U.S. Equity markets, upgrade your subscription to a Gold Subscription. To learn more about Gold Subscription, please click the following link: Gold Subscription

Advantage U.S. — Shale Energy Transforms American Prospects for Jobs and Manufacturing

The cost of labor has been a central factor in the comparative advantage enjoyed by the export economies of the developing world — especially China.  In its post-Mao reforms and the unparalleled growth of the past generation, China has parlayed this advantage into development.  Urban and coastal Chinese cities and regions now boast levels of development comparable to those of the European nations we typically think of as highly developed.  According to the U.N.’s Human Development Index, Shanghai now slightly outranks Iceland; Beijing sits at the level of Finland; and Tianjin, China is on a par with the U.K.

As China became an export powerhouse and the world’s workshop, these gains were driven in large part by China’s lower labor costs.  But labor is not the only cost component in manufacturing.  With the recent development of fracking technologies and the ability to meaningfully exploit shale oil and gas reserves, the U.S. stands to benefit mightily from a comparative advantage in energy costs even more significant than the labor cost advantage China has enjoyed.

Cheap shale oil and gas will reshape energy costs and manufacturing worldwide over the next decade, leading to a renaissance for American manufacturers and exporters.  That will translate into jobs — a siren song that American politicians of all persuasions will not be able to resist.  We believe that the pressure for growth and job creation will drive politicians, including President Obama, to be pragmatic in their embrace of fracking and shale energy.

• Another Drawing in the Global Lottery
• U.S. vs. China for Manufacturing
• Pragmatists Will Go Along

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The Health-Care Cartel: How Lack of Transparency Drives Stratospheric Prices

Several recent articles — an award-winning series in Charlotte’s News & Observer, a long expose published in Time — have addressed an underlying question often lost in the U.S. health care debate.  A rush to answer the question of who will pay for care bypasses the logically prior question of why the price of care is so high.  Time’s Steven Brill asks, “Why does simple lab work done during a few days in a hospital cost more than a car?”

Ordinarily, a market functions as a network of exchange in which consumers benefit from competition among producers.  Markets can fail when there are significant “externalities” — that is, when there are costs of production that don’t get included in the direct price of a good, but are distributed publicly (think of pollution).  But in broad strokes, markets do function as they should, reducing prices and increasing the quality and abundance of goods — which is why they’re embraced with various levels of enthusiasm by politicians of all stripes.

The recent attention to health-care prices shows a critical weakness in the health-care market.  One critical element of market exchange is transparency.  Consumers need to know what they’re buying, and how much various providers are charging for it.  There needs to be information symmetry — consumers need access to the same information that producers have about cost and price.  Armed with this knowledge — the knowledge of how the price a seller is offering stacks up compared to other, competing offers — consumers can make the choice that will give them the most bang for their buck.  And with sellers competing with one another for business from educated consumers, they won’t be able to pull the wool over anyone’s eyes.

The recent attention to the health-care market — and especially to non-profit hospitals — shows how much of the U.S.’ spiraling health-care costs are attributable to the distortion of this market by a lack of transparency.

Lack of Transparency Creates a Seller’s Market for Health-Care

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Guild Basic Needs Index^TM

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  We discuss the markets we think are bullish.
  

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Japan has seen “false dawns” during its decades-long deflation — moments when it seemed that some policy shift would be able to lift it back to the growth and dynamism of “Japan, Inc.”  Those hopes have until now always been dashed, often by the impatience of the Bank of Japan — tightening monetary policy before the economy had time to build a head of steam.

What makes us think that the current optimistic mood will be different?

Fundamentally, the fact that there is finally a resonance among the major sectors of state and . . .
Continue Reading: April 04, 2013]]> Japan’s Recovery Continues to Strengthen

Japan has seen “false dawns” during its decades-long deflation — moments when it seemed that some policy shift would be able to lift it back to the growth and dynamism of “Japan, Inc.”  Those hopes have until now always been dashed, often by the impatience of the Bank of Japan — tightening monetary policy before the economy had time to build a head of steam.

What makes us think that the current optimistic mood will be different?

Fundamentally, the fact that there is finally a resonance among the major sectors of state and civil society — in political leadership, through the Abe administration, and the cooperation it has received from the opposition; in the Bank of Japan, through actions and signals from its unprecedentedly dovish new directorate; and in the deflation-weary public, through their positive sentiment and support for the bold actions of their leaders.  It seems that this time, Japan’s will is aligned and focused on the goal.

Abe’s “Three Arrows”

Prime Minister Abe said when he was elected that he had “three arrows” to shoot at the heart of Japan’s long economic malaise.  Two have been fired.  One is still coming.

Note: News flash today the Bank of Japan (BOJ) announced it will double the monetary base by the end of 2014.

First was a ¥10.3 trillion (about US $110 billion) stimulus package, passed on January 10.  The effectiveness of this stimulus is likely to be fundamentally marginal, but psychologically substantial; it’s not very large, and it’s entering an economy so saturated with public spending that the debt-to-GDP ratio is expected to reach 245 percent this year.  Bank of Japan governor Haruhiko Kuroda called this level “extremely high” and “abnormal” in comments last Thursday.  It is a psychologically important addition by a new pro-growth, pro-inflation, anti-deflation administration that we believe will cause global investors to sit up and take notice.  In the last six years the Japanese Yen has strengthened against the U.S. dollar by over 33 percent and this much higher yen made Japanese goods much more expensive.  The stimulus is meant to send a message that the Yen must fall in value.  It appears obvious that U.S. and Europe are both willing to let this happen so that Japanese economic strength can be reestablished, thus helping to strengthen global economic growth.

Second was the promise to ensure that monetary policy at Japan’s central bank was solidly and reliably accommodative, please see the link to the BOJ press release below.  The BOJ emphatically underlined their commitment.  Japanese financial history includes the successful navigation of the Great Depression through the then-unconventional monetary and fiscal policies of finance minister Takahashi Korekiyo.  Nevertheless, in the twenty plus years of Japan’s current doldrums, the Bank of Japan has maintained a hawkish stance — frequently reacting to tighten policy before it had been able to have the desired effects, and thwarting the kick start that easing could have given the real economy.  Abe campaigned on the promotion of accommodation from the BOJ leadership.  The installations of Haruhiko Kuroda as governor, and Kikuo Iwata as his deputy, have likely accomplished that goal.  Both are very dovish, and both are avowed supporters of Abe’s strategic vision for Japan.  Consistent support from the BOJ, and an end to its habit of premature tightening, will cheapen the yen, boost exports and corporate profits, promote the restructuring of venerable Japanese industrial corporations, and give them some cash for long-needed investment in research and development. (BOJ Press Release)

His first two arrows were simple — Abe could get those shots off fairly easily, with political and public support rallied behind him…

Upgrade your subscription today and learn what is Abe’s third arrow.

On the Ground: The Near-Term Outlook…

Abe’s Third Arrow: The Longer Term…

Sectors to Watch…

What Could Go Wrong?…

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More Americans Seek Assistance to Afford Food, Even as Employment Improves  

In our biweekly installment about the rising cost of basic, essential needs, we often discuss how the standard of living in America is eroding — hurt by stagnant incomes and the rising costs of necessities.  One effect of this is that more and more Americans are relying on Federal government assistance to help them feed their families.  An article in last Thursday’s (3/28) Wall Street Journal by Damian Paletta and Caroline Porter discusses that even though the economy has improved after the 2008 to 2010 recession, enrollment in the Supplemental Nutrition Assistance Program (SNAP), which is the modern-day food-stamp program, has stayed high.  In 2008 food-stamp recipients numbered about 28.2 million.  While unemployment has fallen from a peak of 10 percent in October 2009 to 7.7 percent today, SNAP participants grow.  Today, enrollment stands at about 47.8 million Americans, costing the government about 74.6 billion dollars in 2012.

Click to Enlarge

Another Cause — Government’s Generosity Expanded

Since 1996, when the Clinton Administration and Congress set in motion the overhaul of the welfare system — a process that continues under the current Administration — more Americans have become eligible.  At Washington’s behest, many states are opting to relax the requirements.  Now, people with good income and savings can qualify… and so more are using it.

Typically as economy improves, government programs don’t have to help as many people… Yet the graphs below show that some programs keep growing

Click to enlarge

As Food Prices Climb, the Numbers of People Using Government Assistance to Eat Will Stay High

The Guild Basic Needs Index^TM(GBNI) tracks the rising costs of certain food, clothing, shelter, and energy components that people must consume every day.  Food components represent 30 percent of the Guild Basic Needs Index(the other components and weights are Clothing 10 percent, Shelter 30 percent, and Energy used for heating, cooking, and transportation 30 percent).  In developed countries, the average person spends 10 to 15 percent of their income on food items.  In the U.S. the percentage is at the low end of that range, but we believe the percentage is going to grow.  The food components that we measure in our GBNI have risen an average of about 108 percent since January 1, 2000.

Unless wages start keeping pace, or unless unemployment falls a lot more, the government’s SNAP is looking like a permanently growing budget item.  In the grand scheme of things, SNAP $75 billion may not be a huge budget item, but the trend is in place for it to get out of hand.  A lethargic economy, rising food prices, and the government’s increased generosity are all driving its growth.

To track the effects of rising prices of basic, essential needs, and our discussion of how it affects American policy and society, visit www.gbni.info.

Guild Basic Needs Index^TM

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

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  We discuss the markets we think are bullish and the markets that are correcting.  We also discuss gold longer term and foreign currencies.
  

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Guild Recommendation Tracker

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New Swap Rules Aim to Control Derivatives Risks

The huge, opaque, and risky over-the-counter (OTC) derivatives market that sparked the financial collapse in 2008 has not gone away – it has grown in the years . . .
Continue Reading: March 28, 2013]]> There Are Three Investment Opportunities That Investors Can Benefit From Today
Upgrade your complimentary subscription to a Gold Subscription today and find out what three industries we see as attractive.

Become a gold subscriber today and read the full analysis and find out what investments we are bullish on.  To learn more about Gold Subscription, please click the following link: Gold Subscription.

New Swap Rules Aim to Control Derivatives Risks

The huge, opaque, and risky over-the-counter (OTC) derivatives market that sparked the financial collapse in 2008 has not gone away – it has grown in the years since.  It’s also been in the forefront of many regulators’ minds.

New rules rolling out in Europe and the U.S. will begin to move parts of the OTC derivatives market onto exchanges.  However, of course there are parties with vested interests resisting the change, regulators and industry analysts alike believe that exchange trading will have substantial benefits — providing market participants and regulators with more information and greater transparency, and reducing the systemic risk posed by the potential catastrophic failures of counter-parties to OTC trades.  Think of Lehman Brothers and AIG.

Since 2008, the OTC Derivatives Market Has Grown, Not Shrunk

Source: Financial Times

Derivatives (financial instruments whose value depends on, or is “derived” from, some underlying asset) are invaluable tools for businesses operating in a global environment who must hedge risks associated with market movements and volatility in interest rates and foreign exchange rates, for example.  Although certain types of derivatives are as old as risk itself, and have been around for centuries, financial derivatives have become more and more important over the past several decades as globalization has taken hold.  As the global economy has moved into a post-BrettonWoods environment, volatility has begun to pose even more severe risks to the profitability of businesses competing in global markets and using global supply chains.  The growth in derivatives is a natural response to these risks…

What are the problems with derivatives and how devastating they can be.

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Wash Trades Draw Scrutiny of Stock and Commodity Regulators — Fast
(High Frequency) Traders at work?

Officials at the Commodity Futures Trading Commission (CTFC) and at the Financial Industries Regulatory Authority (FINRA) are independently investigating the potential broad use of “wash trades” by high-frequency trading firms in commodities and stocks, according to an article published last week in the Wall Street Journal, and according to public comments by commissioner Bart Chilton of the CTFC.

A wash trade is one in which the same entity acts as buyer and seller in a transaction.  Such trades are illegal in the U.S., because they can be used to game markets by creating phantom liquidity and goading other market participants into behaviors detrimental to themselves, but beneficial to the fraudulent traders.  The risk of these and other similar system-gaming activities has been in the forefront of proposed regulation of high-frequency trading.

CFTC and FINRA Say, “No Washing”

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American Workers’ Retirement: Squeezed Between Economics and Demographics

Long-term financial and demographic trends are catching up with American workers.  The Employment Benefit Research Institute (EBRI) surveyed American workers, and reports that 57% have less than $25,000 in total household savings and investments.  That’s up from 49% in 2008.

We’ve commented in this letter before on the trend of rising retirement insecurity among Americans.

The EBRI cites several possible explanations of their new data:

Retirement savings may be taking a back seat to more immediate financial concerns: Just 2 percent of workers and 4 percent of retirees identify saving or planning for retirement as the most pressing financial issue facing most Americans today.  Both workers and retirees are most likely to identify job uncertainty (30 percent of workers and 27 percent of retirees) and making ends meet (12 percent each).

In other words, the pressure of continued high unemployment is causing workers to delay building their savings.

Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer’s plan, with 41 percent of eligible workers citing this factor… Worker confidence in the affordability of various aspects of retirement continues to decline.  In particular, increases are seen in the percentage of workers not at all confident about their ability to pay for basic expenses (16 percent, up from 12 percent in 2011), medical expenses (29 percent, up from 24 percent in 2012), and long-term care expenses (39 percent, up from 34 percent in 2012).

We highlight every two weeks the way in which stealth inflation, obscured by changes in CPI calculations, are eroding purchasing power.  Clearly this is also having an effect on the way in which workers are looking forward to retirement…

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Guild Basic Needs Index^TM

Stay tuned to these letters, and visit www.gbni.info periodically to track the cost of basic, essential needs in America.

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

• China Pursues the Internationalization
  of Its Currency

  A recent article in China Business News notes that since the financial crisis broke in 2008, China has greatly expanded the roster of nations with whom it has entered into currency swap agreements.  The strategic significance of these arrangements is China’s progressive long term plan to internationalize the Yuan — by making agreements first with close neighbors, then with certain developing countries, and finally with countries in the developed world.  New Zealand and Australia have signed agreements, and discussions are in progress with the Bank of England… 

• Guild’s Premium Global Market Summary

• We Make One New Equity Recommendation
  

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Guild Recommendation Tracker

If your firm uses soft dollar arrangements to pay for research, please contact us to discuss how to soft dollar your Gold Subscription. ]]> http://www.howtoinvestglobally.com/2013/03/28/march-28-2013/feed/ 0 http://www.howtoinvestglobally.com/2013/03/21/march-21-2013/ http://www.howtoinvestglobally.com/2013/03/21/march-21-2013/#comments Thu, 21 Mar 2013 20:00:32 +0000 Monty Guild and Tony Danaher http://www.howtoinvestglobally.com/?p=2997 Today’s Biggest Investment Theme: Investors’ Worldwide Search for Yield

For years now, the Fed and other central banks have had short-term rates pegged very close to zero.  At the same time, the Fed, Japan, the U.K., Switzerland, Europe, and many other countries are printing money via quantitative easing.

Cyprus and Gold

Early this week, Europe panicked because of Cyprus.  We see gold as the biggest beneficiary of the crisis in Cyprus, but we do not see the Cypriot banking system upending and crashing the world banking system…

Bullish on U.S. Stocks, Japan Stocks, and Gold

It . . .
Continue Reading: March 21, 2013]]> Today’s Biggest Investment Theme: Investors’ Worldwide Search for Yield

For years now, the Fed and other central banks have had short-term rates pegged very close to zero.  At the same time, the Fed, Japan, the U.K., Switzerland, Europe, and many other countries are printing money via quantitative easing.

Cyprus and Gold

Early this week, Europe panicked because of Cyprus.  We see gold as the biggest beneficiary of the crisis in Cyprus, but we do not see the Cypriot banking system upending and crashing the world banking system…

Bullish on U.S. Stocks, Japan Stocks, and Gold

It appears that in the last two months, the investing public is finally feeling comfortable enough to buy stocks.  This is why we are encouraged to see that finally the investors, after buying long bonds, corporate bonds, and junk bonds in search for yield, are shifting some of their money from money market funds into stocks.  That is correct: they are not selling their bonds.  Rather, they are now abandoning their money market funds in search of stocks that can yield (say) 2+ percent, which is more than 10 times the amount they annually earn in the money market funds. 

Why are Investors Finally Awakening Now?…

Where is it coming from?…

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Japan Eyes Potential Energy Windfall from Commercial Methane Ice Extraction

A Japanese research team under the auspices of a state-run company has made a significant breakthrough in the exploitation of a new source of natural gas — one with game-changing potential for the Japanese energy sector.

Energy security weighs heavily on the minds of Japan’s leaders.  The EIA (Energy Information Administration) estimates that Japan is only 16 percent energy self-sufficient.  Although Japan has coal, it has little in the way of other conventional hydrocarbon reserves, and is now the world’s largest importer of liquefied natural gas (LNG).

Until 2011, nuclear power had been a significant part of Japan’s energy strategy.  30 percent of its electricity was generated by 54 operational reactors until the disaster at the Fukushima Daiichi plant led to a virtual shutdown of Japan’s entire nuclear industry.  Only two reactors are operational again, and public sentiment has turned decisively against nuclear energy.  Despite this catastrophic drop in electric production capacity, Japan has only experienced shortages, and not the full-scale blackouts that some grim pundits had predicted…

The Promise of Methane Hydrates…

Methane Hydrate Deposits — A Potential Game-Changer for Energy-Hungry Nations

Source: Deutsche Bank

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Chinese Officials Fight Corruption: The “Rot That Has Reached the Roots”

When Xi Jinping became the heir apparent to China’s top post in December, we commented on the apparent seriousness of his intention to make anti-corruption efforts an early and critical part of his rule.  We also pointed out that his father, Xi Zhongxun, had been a liberal and reformer persecuted by hardliners during the Cultural Revolution and rehabilitated after Mao’s death — in short, that the younger Xi has a family history that lends credibility to his anti-corruption stance.  We also commented in January that the state seems to be making selective use of new media to let the Chinese people take the exposure of corrupt officials into their own hands — at least when the officials in question aren’t too high up in the echelons of Party power.

Underlying all talk of corruption in China is the memory of Tiananmen Square.  Although western media portrayed the 1989 protests as being “pro-democracy,” the Chinese overwhelmingly perceive them as having been motivated by disgust and frustration with official corruption.  In his first speech as Politburo head, Xi acknowledged that if corruption were left unchecked, it would threaten the stability of the Chinese state.  This is the existential dilemma that lies unspoken behind the urgency of current anti-corruption drives, and the selective “pressure release” the state is cautiously permitting through citizen muckraking on Sina Weibo (China’s Twitter analogue).

“The Chinese Way”…

Little Red Envelopes: Endemic Bribery in China Goes Beyond Officialdom

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New Cases Showcase Instances of U.S. State and Municipal Corruption

Illinois got a slap on the wrist last Monday as the Securities and Exchange Commission announced a settlement to deal with the state’s fraudulent pension finances, and their impact on bondholders.

It wasn’t the only time last week that corruption in state and local government was in the news: a jury in Detroit delivered guilty verdicts on 24 of 30 counts in the corruption trial of former mayor Kwame Kilpatrick — the two most serious of which carry maximum sentences of 20 years apiece.  (The Detroit proceeding, unlike the SEC’s, involves actual charges and actual enforcement against actually responsible individuals.)

Rod Blagojevich’s Corrupt Administration Helped Build Illinois’ Pension Insolvency

Source: Wikimedia

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The Inflation Targeting Balancing Act

According to the U.S. Federal Reserve Bank’s web site, the objectives of its monetary policies are to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The Chairman of the Fed has suggested in recent months that the Bank intends to maintain its stimulative quantitative easing (QE) asset purchasing programs in place until the economy demonstrates sufficient strength to generate enough job growth to get unemployment down to 6.5 percent, and can generate inflation of about 2.5 percent.

As we discussed last week, the U.S. economy has made some progress on the employment front as the official unemployment rate has been declining; it now stands at 7.7 percent — even if the official numbers leave a lot to be desired.  Recent progress aside, “maximum” employment does not look likely any time soon.

With respect to stable prices — another area where the official numbers leave a lot to be desired — the numbers are also showing a pickup.  The February 2013 data released last week said that consumer prices rose 2.0 percent over the previous 12 months, which is up from January’s 1.7 percent figure.

Inflation of 2 percent is still well below the Fed’s desired 2.5 percent target, and is also well below the 100-year average of about 3.2 percent.  We believe this gives the Fed a lot more room to keep their foot on the QE gas pedal.

The St. Louis branch of the Fed chart below shows the long-term swings in the U.S inflation (as measured by the Consumer Price Index, or CPI).  The average rate for the past 100 years is estimated at about 3.2 percent.

If the Fed is Successful in Driving the Official, Manipulated Data Higher, What Will it Do to the Prices of Basic Needs?

Keep in mind that the calculation of consumer prices in the CPI includes many periodic adjustments to weights, seasonal smoothing calculations, and many changes to what is in the basket of goods used to calculate CPI.  In most cases, the effect of these manipulations tends to lower the official rate of inflation.  Many of these manipulations of how the statistics are calculated have taken place since the 1980s… and you can see in the St. Louis Fed’s chart above that the official inflation number has gotten less volatile in the past few decades.

While the government’s latest inflation data said prices were up 2.0 percent in the past 12 months, the prices of a fixed basket of certain basic, essential needs (representing food, clothing, shelter, and energy) as measured by our Guild Basic Needs IndexTM were up 6.9 percent over the same 12 month period.

One Year isn’t a Trend, So Let’s Take a Look at a Longer Period

If the economy reverts back to the 100-year average inflation rate of about 3.2 percent, what does that mean?  At 3.2 percent inflation, prices double about every 20 years.  We have not gathered 100 years of data for the cost of basic, essential needs, but since the start of 2000, the prices of certain basic, essential needs show an average annual increase in price of about 4.8 percent.  At that pace, the cost of things people need and consume every day are on pace to double every 15 years.

Guild Basic Needs Index^TM

The Fed had Better Be Careful What it Wishes For

Another thing a higher inflation rate means is more stress on the U.S. Treasury.  While the Fed wants to engineer higher prices in the economy, there is definitely a point that is too high.  Can they engineer that too?  The Treasury doesn’t want them to be too high, as the government has a lot of debt outstanding and a lot of future bills that are calculated based on CPI as the cost-of-living adjustment mechanism.  It is a delicate balance, but nonetheless, we expect two things to continue:  1) We expect QE to continue, and 2) we expect the official inflation rate to continue to understate the reality of what Americans experience at the store.

Stay tuned to these letters, and visit www.gbni.info periodically to track the cost of basic, essential needs in America.

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Japan: The World’s Most Attractive Investment Market

As we have written here several times, Japan’s Abe Administration is in the process of revitalizing the country with an entirely new type of monetary policy — a policy which will lower the value of the Japanese yen and hurt Japanese savers.  Although the Administration is . . .
Continue Reading: March 14, 2013]]> The information and analysis you get in our commentaries is not obvious.  It’s the knowledge and research of seasoned investors.

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Japan: The World’s Most Attractive Investment Market

As we have written here several times, Japan’s Abe Administration is in the process of revitalizing the country with an entirely new type of monetary policy — a policy which will lower the value of the Japanese yen and hurt Japanese savers.  Although the Administration is fully cognizant of this, it has decided to stop deflation and stagnation by implementing an aggressive and immediate program to reverse deflation and to actively seek inflation.  The program will penalize savers and bond-holders and will benefit holders of Japanese stocks a great deal.

Shinzo Abe Wants YOU to Beat Japan’s Deflation

Source: Source: Blouin News

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U.S. Employment Trends 

U.S. private employment as announced last week is strong.  Government employment is flat, but nationally employment increased at the best rate in a long time and the overall official unemployment rate fell to 7.7 percent.

While we were happy to hear this news, it is not an entirely accurate picture of what is happening.  In our opinion, there have been too many people added to three categories that take them off the unemployment rolls.  1) those claiming disability, 2) those who have run out of unemployment benefits and thus go off the statistical rolls, and 2) those dropping out of the labor market.

Where the U.S. Jobs Are…

The Fed’s View…

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Migrating North: Crisis Pushes European Integration in Unexpected Ways?

Crisis brings unpredictable effects in its wake.  Often these effects go unremarked in the first throes of the crisis as it unfolds, and then make themselves felt as the acute stage of the crisis passes.  The Euro crisis has revealed a number of political and economic fault lines dividing the European Union and accentuating its character as a work in progress with a great deal of necessary integration yet to be achieved.

Migration Patterns Shifting…

Southern European Unemployment Drives “Crisis Migration” to the North

Source: APA

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At Long Last — Some Action on High Frequency Trading

The FBI and the SEC Collaborate to Target Algorithmic Trading

The Securities and Exchange Commission (SEC) is providing the FBI with analytical expertise from its Quantitative Analytics Unit, established in 2011, according to SEC sources quoted in the Financial Times.  Regulators have been slow to catch up with algorithmic traders, and slow to evaluate the potentially fraudulent and destabilizing strategies algorithmic traders can employ.

We’ve discussed many times in these pages the risks posed by high-frequency trading (HFT) and the manner in which it undermines the function of the markets as efficient allocators of capital, and threatens value investors with artificial fluctuations meant to game them out of their positions.  We do not believe that the claim of HFT advocates — that HFT improves market liquidity — is accurate in any meaningful sense, and we watch the global regulatory environment carefully for signs of effective mitigation of the risks HFT poses to investors…

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Guild Basic Needs Index^TM

Stay tuned for our periodic updates to the GBNI in these letters or in our www.gbni.info web site.

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