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Yet the fear created by such news is diminishing—not because of a shortage of negative news headlines—but because European banks are more protected by the many lifelines that central banks keep throwing them.

. . .
Continue Reading: Who’s Afraid of the Big Bad Sovereign Debt Wolf?]]> Last Friday, the sovereign debt of nine European nations—including France and Italy—was downgraded by S&P.  Now, there are only four European nations whose sovereign bonds carry the highest AAA rating: Finland, Germany, Luxemburg and the Netherlands.  Since the sovereign debt refinancing and potential default problem still goes unsolved, we foresee the markets having to keep digesting more waves of bad news.

Yet the fear created by such news is diminishing—not because of a shortage of negative news headlines—but because European banks are more protected by the many lifelines that central banks keep throwing them.

Many Lifelines Bolster the European Banking System

We see the protection of the banking system as more important than certain governments’ ability to borrow.  Stock markets seem to agree.  They appear to have discounted much of this week’s sovereign debt news.  A few months ago, headlines highlighting rating agency downgrades—like last Friday’s—would have caused violent drops in the U.S. and European markets.  Yet when Friday the 13^th’s news of the downgrades was announced, the same markets declined less than 1 percent…and in the following trading sessions, the markets rallied, some even rising more than 1 percent.

Good and bad news go hand in hand in this business, especially in a situation like this…and good and bad news can come simultaneously.  Sovereign debts get devalued, and new countries offer more liquidity or support for the European Central Bank (ECB).  It all boils down to the problem continuing, while resources to repair it are being accumulated.

Good for Gold

Why would gold rise if inflation is falling?  Because the Euro and the U.S. dollar are being debased as more liquidity injections, aka Quantitative Easing (QE) programs, are instituted.  As this additional liquidity is being offered to the banking system by many governments, it increases the supply of currencies and thus decreases their values.

Here’s what we think: the long-term trend of rising inflation will not end until the poorly managed nations begin to make rational fiscal decisions. They should move toward balanced budgets, and they should create an environment where new businesses can start and flourish. This is what is needed to increase employment and tax revenues. When poorly managed nations achieve these milestones, they will cease to be poorly managed.

Investors continue to wonder how to protect buying power when their national currency is being debased.  A solution chosen by many investors is to buy insurance in the form of gold as a hedge against the declining buying power of their money.  We agree—gold can be an excellent insurance policy against unwise behaviors by government officials.  Countries do this too; gold continues to be demanded by many nations.  Last year many countries, including South Korea, Thailand, Turkey, and Russia, all added to their national gold reserves.  Recently, some well-respected technical analysts have written that the correction in gold has ended and a new uptrend will begin soon.  We are not technical analysts—but our fundamental research continues to make us bullish on gold.

What does this mean for me?

There is an investment opportunity. To know which investments we recommend, click here to become a Gold Subscriber and receive our recommendations.

A Note About Hoarding

Governments over the last few years have raised interest rates, in part to stop speculation in commodities which were being hoarded.  The price rises and subsequent hoarding contributed to the inflation problem that gripped many countries in late 2010 and early 2011.  Now, lower prices are a sign of little hoarding and thus a more effective system of resource allocation.

Inflation Rates – Shorter Term: Lower…Longer Term: Higher

Grocery baskets may have been fuller in 2011 than in 2010, but how long will that last?  Food inflation is moderating slightly in China, India, and most other Asian nations, in part due to larger food crops in Asia—but this moderation is nothing huge, and we do not expect it is permanent.

It can be misleading to only look at year-over-year inflation statistics, since they don’t always capture the larger trends.  For an example, we will use a fictitious country.  Let’s call it Chindia. In Chindia, the inflation rates went up 10 percent in 2010 and 5 percent in 2011.  Government officials in Chindia will measure this as a moderating rate of inflation.  This decline in the inflation rate will allow for a decline in interest rates.  However, the reality is that despite the fall in the rate of inflation, the goods being sold on January 1, 2012 are still 15.5 percent higher than they were on January 1, 2010.  Chindians may feel a little relief, but they will know that prices are still rising.

Reasons for the Slowdown

The slowing growth in the developed world and the tighter monetary policies in the emerging world were two reasons why 2011 saw a slowdown in inflation rates.  Another reason was general fear about Europe, which slowed bank lending and corporate expansion.

Brazil started cutting rates in late 201…reducing their SELIC rate

China also began loosening…reducing their high banking Required Reserve Ratio(RRR)…we expect more of this in coming weeks and months

Causes of the Inflation

If you have read our past commentaries, you’ll remember us saying previously that the food inflation was caused by the expansion of wealth among citizens in many countries—China, Brazil, Thailand, Indonesia, Philippines, Malaysia, Chile and India to name a few—over the last few decades.  As the poor of these countries have grown wealthier, they have desired food in larger quantity and variety.  The first wave of demand was for more grains, and secondly, more meat protein—which, in turn, increased demand for feed grain—because animal protein has higher grain and water requirements than other sources of protein.  The general rule states that every pound of chicken requires four pounds of grain; a pound of pork, six pounds of grain; and beef, eight pounds of grain.  Therefore, countries shifting from a vegetarian-based diet to an animal-protein-based diet must feed animals between four and eight pounds of feed grain to produce every pound of animal protein.  Clearly, as more animal protein is demanded, more consumption of grains is necessary.

Now that food inflation is moderating, has the food inflation problem been solved?  The answer: partially.  The problem has been addressed in part by: 1) Increasing the acreage of land under cultivation. Many countries are preparing for their citizens’ demand for a diet higher in animal protein. They are planning to grow more food and raise more animals.  2) When a country allows its currency to rise the higher currency acts to lower the cost of imported grains and meat.  For example, the Chinese currency, the Yuan, has risen by 8 percent against the U.S. dollar and 22 percent against the Euro since the January 1, 2010.  The rise in the value of the Yuan reduces the cost of imported food in Yuan terms.  3) Countries have started to address their water needs and are investing in and developing more water resources.

How Long Will Inflation Continue To Moderate?

That is a very good question, and we do not know the answer.  We will discover the answer by monitoring world political, social, and economic events.  We expect to identify signs as they appear…before the return of rising inflation.  Inflation in Asia is moderating now, and it is not vigorous as it was in other parts of the world.

History tells us that all of the ‘money printing’ that has been going on in many countries will cause the buying power of currencies to decline.  Decline in buying power of money is inflation. The shopping cart of food costs more dollars as the buying power of the dollar falls.  It is not hard to hide, but we will have our antenna out and we are monitoring inflation events carefully. You can count on us to report to you.

How Long Will Inflation Continue To Moderate?

That is a very good question, and we do not know the answer.  We will discover the answer by monitoring world political, social, and economic events.  We expect to identify signs as they appear…before the return of rising inflation.  Inflation in Asia is moderating now, and it is not vigorous as it was in other parts of the world.

History tells us that all of the ‘money printing’ that has been going on in many countries will cause the buying power of currencies to decline.  Decline in buying power of money is inflation. The shopping cart of food costs more dollars as the buying power of the dollar falls.  It is not hard to hide, but we will have our antenna out and we are monitoring inflation events carefully. You can count on us to report to you.

(Gold Subscribers can receive details here)

Declining Food Inflation Shows Up In The Guild Basic Needs Index^TM …But As We Said Above, It Is Not Permanent

Available only in the Guild Global Market Commentary, the Guild Basic Needs Index (GBNI) tracks the changes in price of the essential needs for living; food, clothing, shelter, and energy. 

2011 saw prices of certain basic needs pull back.  Correspondingly we saw a reduction in the rapid rate at which the GBNI had been outpacing the U.S. inflation measure, the Consumer Price Index (CPI).  Longer term inflationary pressures are building, especially in food and energy, and we expect a re-acceleration of inflation will resume in years ahead.  The GBNI gives our readers insight into the subsurface inflationary trends that cannot easily be gleaned from the data offered by government statisticians.

In the twelve years since the new millennium started, the prices of the ingredients for life measured in the GBNI are up almost 70 percent, versus about 35 percent for the CPI.  To measure a decline in the standard of living, you can take either inflation measure, and compare it to the fact that over the same twelve years, wages in the U.S. have gone nowhere.

Our goal is to help readers and investors preserve the purchasing power of savings, and thus their standard of living.

Seeking Higher Yields As Part of The Investment Strategy Is Our Tradition

There has been a lot of hype and press about how high dividend paying stocks have outperformed.  Equity income investing is the new marketing buzz among many money managers.  As our investment management clients know, seeking higher yielding stocks has been one of our major strategies for decades, and we continue to use high yielding stocks in our aggressive growth, growth, and our income strategies. All of our strategies enjoy the benefits of owning companies with good yields and strong cash flow growth.  We monitor these companies carefully.  Guild’s principals and analysts speak with the managements of these companies regularly to understand their growth prospects, the visibility of their yields, and their potential for continued growth or shrinkage of the dividends.  We have followed many of these companies for years and we continue to keep a close eye on them and their competitors. This vigilance allows us to find new vehicles for investment.

The U.S. Dollar Continues Its Slow Loss of Influence in Global Trade

New Alliances China and Japan - In recent weeks, China and Japan began to trade without using the dollar as an intermediate currency.  A similar announcement came from Russia and Iran.  In the first case, it is for economic reasons of trade and practicality. In the second case, it is as much for political reasons; primarily to show scorn for the U.S. and its world influence.

China and Japan expect to be each other’s major trading partners for the next 100 years. They are located near each other, are the 2nd and 3rd largest economies in the world, are natural trading partners, and direct trade between their two currencies is a rational and practical idea.  It will save money, allow simpler trade and cause the overvaluation of the Japanese Yen to moderate.  The two nations benefit from each other and need to encourage more trade between themselves.  A side effect is that because the Yen is overvalued against the Yuan, Japan will buy more Yuan bonds and diversify its investment portfolio away from U.S. dollars.

Russia and Iran have entered into a similar arrangement which provides for them to trade with one another using their home currencies rather than the U.S. dollar as an intermediary currency.  This agreement was devised as the two countries’ response to new sanctions against Iran’s central bank.  The purpose is to cause Iran to suffer a loss of oil revenues. Oil transactions with Iran by western countries have to be processed through the Iranian central bank.  Loss of oil revenue further worsens Iran’s dismal internal economic situation.

We wish everyone a happy upcoming Lunar New Year (Chinese New Year)
Gong Hey Fat Choy

Recommendation Tracker (Available to Gold Subscribers)

For many people, the word Brazil conjures contrasting images of endless Amazonian jungles, jumbo snakes, man-eating piranhas, the dazzling beaches of Rio, and of Carnival, the world’s biggest party.

Olympic and World Cup fans are looking forward to visiting Rio de Janeiro

Source: American Travel Club

Today, you have to add the word ‘boom” to the Brazilian national resume.  It’s ten years old and going strong, driven by rising production of everything from autos and computers to farm products and minerals. . . .
Continue Reading: Guild’s Premium Global Market Commentary]]> Beyond Beasts and Bossa Nova: The Brazilian Boom

For many people, the word Brazil conjures contrasting images of endless Amazonian jungles, jumbo snakes, man-eating piranhas, the dazzling beaches of Rio, and of Carnival, the world’s biggest party.

Olympic and World Cup fans are looking forward to visiting Rio de Janeiro

Source: American Travel Club

Today, you have to add the word ‘boom” to the Brazilian national resume.  It’s ten years old and going strong, driven by rising production of everything from autos and computers to farm products and minerals. The country’s growth has, in turn, been pushed by huge waves of exports to Asia, Europe, and North America, along with big-time domestic consumption of housing and consumer goods.

The boom has created a much larger middle class than existed ten years ago and transformed Brazil into more than just a fast-growth economic player on the global stage.  It has also turned many Brazilians into a jet set army of shoppers who flock to Fifth Avenue and Florida for big savings. Believe it or not, Brazilians, as a national group, are the leading foreign shoppers in New York City.  In 2010, they spent more money in the Big Apple than natives of any other country, ahead of Canada, the U.K., and Italy.  In the state of Florida, Brazilians are second only to snowbirding Canadians.

There are a couple of good reasons why Brazilians like to shop in the U.S.:  1) Avoid paying a high value-added consumption tax, and 2) the Brazilian currency has risen by 25 percent versus the U.S. dollar since 2009.  Together, these factors make Brazilian products very expensive at home and make shopping in the U.S. well worth the airline ticket and hotel bill. An Apple iPad, for instance, will cost half the price in New York as in Brazil. Some specialty products may be only a quarter the cost in the U.S. that they sell for back home.

The Guild Guide to Brazilian Investments

What does all this mean for those who wish to invest in Brazil? It means that when it is time to buy Brazil – and the time isn’t here yet – you will want to consider banks and credit card companies as a way to capture the wave of consumer cash since many consumers go abroad to buy personal and pricey consumer goods. To take advantage of rising internal Brazilian spending you will probably want to consider autos, housing, and big ticket durables that will not fit into the luggage of shoppers returning from spending trips abroad.

That’s the general picture.  However, investing in any market sector in Brazil, or for that matter in any country, requires a great deal more than just top-down thematic insight. We like the prospects of Brazilian banks and credit card issuers, homebuilders, auto and appliance manufacturers, and the makers of steel from which many of these products are constructed.  They are all beneficiaries of Brazil’s growing and spending middle class.  Sugar producers in Brazil may also be beneficiaries of another trend which we will discuss in next week’s Premium Global Market Commentary. However, a top-down approach can only point out potential countries and industries as investment targets. To go further, and fully analyze companies, there are many other variables to consider – and such consideration and study in Brazil and elsewhere is a primary preoccupation at Guild Investment Management.

As an example of what’s needed to make an informed investment in a particular sector, we chose homebuilding.  With homebuilding one needs to understand many factors. They include tax policy, interest rates (present and expected) as compared to the inflation rate (present and expected), the operating skill of management, the price points of homes to be built, financing availability, affordability, and a knowledge of the markets that builders are addressing. In addition, there is the issue of relative P/E ratios versus growth rates; the economic, political, and investment backdrop of emerging markets in general; and Brazil in particular.

Brazil’s Bovespa Index- Last 10 years

Source: Bloomberg

The following lineup represents sectors we are keeping our eyes on for the time when Brazil does become attractive.

Homebuilding – Brazilian homebuilder stocks experienced a rough 2011 due to rising interest rates in the first half of the year. They sell at trough valuations. The largest publicly- traded residential constructions companies are MRV Engenharia (Bovespa: MRVE3); Gafisa (NYSE: GFA, Bovespa: GFSA3); PDG (Bovespa: PDGR3); and Cyrela Brazil Realty (Bovespa: CYRE3).

Banking – The six largest Brazilian banks account for more than 75 percent of bank lending and credit issuance in Brazil. Only four are publicly traded. They are Banco Bradesco (NYSE: BBD, Sao Paolo: BBDC4); Itau Unibanco (NYSE: ITUB, Sao Paolo: ITUB4), Banco Santander (NYSE: BSBR); and Banco do Brasil (Sao Paolo: BBAS3). The country’s smaller banks have much higher funding costs because they do not have access to international markets.  They require government assistance to compete. They are less attractive in our opinion.

Automobiles and Motorcycles – Brazil ranks fifth in automobile production worldwide (about 3.5 million units made in 2010). The country cranks out cars – and motorcycles as well – for large global multinationals like Ford, General Motors, Toyota, Fiat, Honda, and Yamaha.  Although auto sales are robust, there are few pure plays in this sector.  We are investigating ways to take advantage of this opportunity when the Brazilian market gets attractive.

Steel – Autos are made partly of steel and are just one factor in the growing attraction of Brazilian steelmakers. We will discuss this sector in detail in a coming issue and make a specific recommendation as soon as the opportunity ripens.

Brazil – In Summary

Many Brazilian stocks suffered major declines in 2011 and the time for investing has not arrived yet.  Our review is a heads-up.  From our standpoint, even when markets are not attractive, working on a potential buy list can be a valuable exercise.  As we recognize openings ahead, we will recommend specific groups to you and give more in-depth reasons why we like them. We continue to monitor the scene and do our homework so that we will have a good selection of recommendations to make at the right time. For now, you may want to add these ideas to your watch list for the buying opportunity to come.

China 2012: Looking Good

China, according to a December 14 report from Reuters news agency, has pledged a growth guarantee for 2012 despite a poor outlook for global economics. Here are the key snippets from the report:

• China is “laying out a blueprint for the world’s second largest economy in the year ahead.”
• Beijing promised to keep monetary policy “prudent,” fiscal policy “proactive,” and consumer prices “stable.”

The language is broadly in line with previous commitments. To us, this means that China’s GDP will grow at a rate below 9 percent for three to six months in early 2012 and then accelerate.  The speed-up will occur because of the continued cuts in the reserve requirements by banks that will allow capital to flow more freely into the economy.

The Chinese Copper Caper: A Lesson in Market Manipulation

You probably haven’t noticed but Chinese refined copper imports have hit a 2 1/3-year high as copper prices have fallen to lower levels. Give credit where credit is due.  The Chinese have artfully played the system. They made huge purchases without driving prices up.  Just the opposite, in fact! China clearly plans to use plenty of copper over the next year or two and will have a large stockpile, smartly bought, with which to do so.

A closer look at this development further reveals China as a master market manipulator. You may remember that we have pointed out many times in past years that the Chinese may often say, “oh, we will not need any nickel (or any industrial metal) this next year, and we will be selling to diminish our stockpiles.”

Due to non-Chinese speculators, excessive leverage of their portfolios and the fear factor, world prices then subsequently drop. The Chinese then move from small seller to big buyer; going into the market to scoop up future supplies at low prices. In the instability that ensues, the wily Chinese may then sell off a tad to keep the markets guessing.  They will also go out and buy discreetly through intermediaries, buying more than they are selling publicly, thus locking in their stockpiles at lower prices.

The Chinese are smart. They view things with a long-term perspective.

The lesson for you is to be cautious when the Chinese say they are selling an industrial metal or energy material.  They may just be taking advantage of the system.

China’s Baubles

A final Chinese observation to share – Retail sales have boomed in 2011 because many more Chinese are rushing to purchase consumer goods. Now that home prices have begun to fall or stabilize, the public is spending more instead of saving for an immediate down payment on a home. The strongest retail segment has been gold, silver, and jewelry, a result of expanding retail store infrastructure throughout the country, especially in the smaller cities where wealth is growing rapidly and, secondly, where an attitude of consumerism is eclipsing saving. Consumers who want to show off are doing so with gold, silver, and jewelry.

The Canadian Wheat Scramble

On December 16, the Canadian government ended its 70-year monopoly of the domestic wheat trade. Previously, farmers could only sell to the Canadian Wheat Board. Now, they can sell on the market as do U.S. farmers. Many farmers have already hailed the action. It gives them a better chance to profit from the rising price of wheat that will occur as the U.S. dollar declines. As readers know, wheat is priced in U.S. dollars on a global scale.

Here are some background wheat facts that you should know:

• Wheat contains more protein per bushel than corn (maize).
• Wheat is the number one source of vegetable protein for humans.
• Corn is the most widely-grown grain and much of it goes for animal feed.

Harvesting profit on the prairie

Wheat has fallen in price versus corn to the point where wheat now provides a better value for animal feed. We expect this to create new markets for wheat. Wheat growers and grain handlers will want to hedge their crops and more farmers will want to grow the grain. We foresee more profits for grain handlers, less government bureaucracy involved, and more demand for futures exchanges to hedge crops. We think that many farmers in Canada who had given up wheat (not liking the politicized government system) will now return to the fold. Over the long run we expect a greater Canadian supply, a bigger demand, and bigger profits for wheat farmers. We also expect a much bigger hedging program by Canadian wheat producers. Commodity exchanges are already competing for this business.

In the U.S., we expect some substitution of wheat for corn because of the politicized and inefficient system where the latter is used for ethanol, artificially increasing its price and decreasing the supply available for feed. The artificial corn shortage created by ethanol demand will create demand for the higher-protein wheat.  Combine this situation with the recent news from Canada and you have further reason for liking wheat.

Wheat Price (CBOT) since 1990

Souce: Bloomberg

Here’s yet another reason: current poor growing conditions in South America have damaged the corn crop.  Rains have been less than expected and forecasts for dry weather ahead have caused grain futures in the U.S. and Europe to rise. The magnitude of wheat price rises in the near term will be affected also by South American corn production shortfalls as corn users may substitute wheat.

How To Play Wheat?

Investors can buy wheat futures in the U.S. and several other countries or wheat exchange traded funds that trade in the U.S. and the U.K.

In our Global Market Commentary, Guild Investment Management, Inc. currently has a long-term buy recommendation on wheat which was placed on October 24^th, and it has risen by 3 percent since our recommendation.  We first recommended buying wheat on December 31, 2008, and then recommended taking profits in March of this year after it had risen about 35 percent.  We track our recommendation based on the price of cash wheat as designated by the Chicago Board of Trade’s rolling futures contract.

Meanwhile, Europe is Still Sick and Not Out of the Woods Yet

The vital signs of Europe’s chronically ill financial house are better, but is the big bad wolf still lurking in the bushes?

Last week, some 500 banks borrowed about 490 billion Euros (some $637 billion U.S. dollars) in the form of three-year loans from the European Central Bank (ECB).  The stronger-than-expected demand for ECB cash came shortly before several months of very large refunding activity will take place in many Eurozone countries.

The question at hand is whether banks will use their money to continue buying the toxic debt at high yields of the weak European peripheral countries, like Spain and Greece, or have they learned their lesson?  In June 2009, European banks received over a half-trillion dollars in government loans. About half of the money was spent on peripheral nation sovereign debt, which has been the source of much of Europe’s ongoing financial woes. Hopefully, they use the cash this time to shore up their balance sheets and avoid buying bad bonds.

The Next Big QE  or other bailout for Europe = Opportunity

Currently, we are working on a buy list and preparing to take advantage of global market opportunities. We expect multiple opportunities ahead when a concerted quantitative easing “jamboree” or a more subtle type of bailout of European banks occurs with the U.S., Europe, Britain, Switzerland, Canada, and Japan taking part.  Quantitative easing, or QE for short, means extraordinary money creation. We may see QE or we may see a more creative type of bailout using other tools from the central banker’s tool box.  For example, today we are aware of swap lines from the U.S. to Europe and Japan which are being used to provide liquidity to financial institutions in Europe and possibly Japan. The purpose of these swap lines is provide liquidity when normal liquidity sources dry up.  Until recently European banks were funding their activities using money from U.S. money market funds and through bank loans from US banks. When the funds and banks became afraid of the risk in European banks they withdrew their loans and now the U.S. Fed has stepped into provide the liquidity that has been removed.  The use of swap lines to accomplish this is not a typical approach and as such has escaped notice until now. Hints of this type of program have begun with the U.S. Federal Reserve surreptitiously engaging in swap transactions with the European Central Bank (ECB).  Stay tuned.  We will write much more on this next week.

Here’s a preliminary look at how we see the opportunities shaping up.  We will recommend taking action when the major QE program or another type of bailout is implemented. In the meantime, here are some general parameters.

• Continue avoiding European banks and most European stocks that are not more than 50 percent export-oriented to non-European destinations. Asia would be the preferred export customer.
• Own gold as an insurance policy. We are not concerned if it rises in the short term. Gold can help hedge European meltdown risk and benefits from continued currency debasement.
• Be prepared to buy growth stocks in Europe, the U.S., and in Asia only when the investing public becomes aware that QE or other bailout program has been activated. It has already been activated in our opinion, but investors who are mostly traders and not economists have not yet realized what is going on. When they do come to that realization we expect a big rally that will be must like the rally that occurred in 2009 and early 2010 after the bailout of U.S. banks and insurance companies.  Stay tuned…
• Consider becoming a Gold Subscriber to receive the Guild Global Market Commentary Premium so that you will be able to track our new recommendations.  Current subscribers to the free Guild Global Market Commentary will be notified if any changes take place in the 4 outstanding recommendations that we have on gold, wheat, and the Singapore and Canadian dollars.
• You will be receiving an email at the beginning of the New Year with instructions on how to become a Gold Subscriber to the Guild Global Market Commentary Premium Edition.

We would not buy Europe yet; we own gold, and recommended taking profits on U.S. stocks this week.

Why are we not currently in the buying mood? Unfolding events could drive stocks further down before they go much higher after the big quantitative easing ahead.  We will continue to hold gold while we wait.

Recommendations Summary

Beginning in 2012 our new recommendations will be included in the Premium edition of the Guild Global Market Commentary, which will be made available to our investment management clients for no charge and to our paying Gold Subscribers.

Please click here to view our recommendations.

The plans were announced by Chancellor of the Exchequer George Osborne earlier this week and, when put into law, has the potential to significantly strengthen banking in . . .
Continue Reading: Banking Reform: Hopefully Britannia Creates A Wave]]> The British government has set in motion this week a future overhaul in the way that individual banks do business.  British banks will be required to separate their basic lending and deposit operations from investment activities involving trading and speculation on behalf of clients and the banks themselves.  This should mean that the deposits of retail customers will be shielded and protected from bank investment and trading ventures.

The plans were announced by Chancellor of the Exchequer George Osborne earlier this week and, when put into law, has the potential to significantly strengthen banking in England.

We support this British step forward and hope for similar action globally, including in the United States, to cleanse and detoxify what has become a destabilizing and dangerous banking practice.

It is just the kind of sorely-needed reform that has been long championed by former U.S. Federal Reserve Chairman Paul Volcker and which is being challenged in the U.S. by the banking industry.

China Watch: Diversifying Reserves From Bonds Into Hard Assets

Over the years, China has invested about $3.2 trillion of its excess reserves into U.S. and European government bonds.  The returns, however, have been paltry and painful.  Initially, the Chinese bought many U.S. bonds only to see the dollar fall into a prolonged slide versus the Chinese Yuan.  In a decade, it has dropped by about a third.  In an attempt to diversify, the Chinese then started moving some reserves into European bonds.  Now, low and behold, Euro bonds make up about

$800 billion of their foreign exchange reserves fund.  But, like the U.S. dollar, the Euro has fallen versus the Yuan – by nearly 14 percent in the last three years.

Recent investment activity indicates that Beijing has decided that real assets make better investment sense than the bonds of their trading partners.  The central government has clearly taken notice of how major state-owned enterprises have successfully bought into energy and mineral properties throughout the world and how the value of oil and minerals has risen sharply during this time. The government is now following the lead of these companies, adding gold, copper, energy, and other important commodity holdings to its reserve portfolio.  To accomplish this, it is creating a sovereign wealth fund with initial capital of $300 billion.  This latest shift is a blow to a Europe that desperately needs buyers for its ailing bonds.  For the Chinese, however, this is smart business that best serves the national interest.

China’s shift should serve as a warning to Washington, which has not gotten its financial house in order.  The U.S. has not cut spending or raised taxes. The deficit continues to grow and remains a huge problem.  Currently, the attention is on Europe, but crisis time is coming next to the U.S. It has become obvious that Congress will not do anything to anger its favorite special interest groups. So, we expect nothing more than meaningless baby cuts and lots of rhetoric, campaigning, other-party blaming, and prolonged foot-dragging.  It’s very sad to see such dysfunction and self-destructive behavior.  For America, this is dumb business that does not serve the national interest at all.

China Report

As we have been reporting lately, China continues to import and consume more.  At the same time, speculation-driven real estate prices have stalled and food inflation has eased.

In effect, the economic news from China is good.  China is continuing to steadily diversify its industrial base.  The economy is no longer so export driven and is more driven by domestic consumption.

How can we monitor this?  One way to monitor import and export trends is to monitor the shipping rates from various locations to and from China. Many of China’s imports come from Canada and South America. Now more are coming

from the U.S..  In the last year, shipping rates from Shanghai to the Los Angeles/Long Beach ports are down 26.8 percent—meanwhile shipping rates from Los Angeles/ Long Beach to Shanghai have risen by about 30 percent.  Container shipping rates are now higher going from the U.S. to China than going in the reverse direction.  These revealing shipping numbers reflect the rising value of the Yuan as well as a rising standard of living in China, two developments that create a high demand for many raw materials including among other things hardwood, minerals, and food.

Guild Investment Management’s contacts and correspondents in China represent a wide range of observers, including business people, company employees, independent consultants, employees of real estate developers, professionals, professors, doctors, lawyers, and investment managers.  From them, we hear that the demand for housing continues strong, particularly from the middle class, and from families that want to own a home.  This point may seem obvious to you, but it represents an important victory for Chinese housing policy. The fact is that in recent years, speculation by small and mid-sized companies stoked a housing bubble.  Many of these Chinese companies were motivated by the prospect of greater profits from housing speculation than from their regular business activities. Thus, many of these companies cut back on their business and pursued real estate speculation. Even local governments got into the act; some local governments built vanity projects, or big, showy real estate projects to make themselves look more important.  In order to combat the speculation, the central government raised interest rates and down payment requirements. The strategy has worked and the market has returned to the legitimate buyers, people who want homes for the long term. The prevalence of speculation is abating.

Very recently, Chinese interest rates have begun to decline. We believe the lower rates will generate increased domestic economic activity by mid-2012.  Domestic consumption is already expanding rapidly. The middle class is scooping up technology products and brand names familiar to Westerners.  Look around and you see iPhones and iPads all over, and these aren’t cheap in China.  Men and women alike are buying consumer electronics, sporting goods, clothes, jewelry, fancy food, and eating expensive meals away from home.  Hotels and high-end restaurants are bustling with business.

Elsewhere In Asia: The Declining Interest Rate Trend Continues

In the last two years, India, like many fast-growing Asian nations, has been frightened by rising food inflation.  To combat inflationary pressures, the Indian government has raised interest rates many times. However, concern has emerged recently that GDP growth would suffer because of the higher rates. Fortunately, food inflation has begun to ease, allowing the government to put its foot on the brakes and halt the interest hikes.

In India and other developing Asian nations, inflation levels are dropping as exports drop. Expect to see interest rates soon come down, a long-term positive influence for Asian stocks.  Historically, falling interest rates have heralded stock market surges.

Asian stocks have been held down by fear of declining exports.  Such a fear is somewhat well-placed and we expect a slowdown in emerging world exports to the developed world.  When the positive influence of lower interest rates overcomes the negative influence of lower exports in these markets, look for a big rally in the Asian growth market.

The U.S. Bailout Saga – How Much Did It Cost?

Washington has declared that U.S. taxpayers have not lost a penny.  This is technically true.  The Treasury got most of its money back from the banks; that which has not been repaid may be repaid, and the trillions in deposit guarantees for money market funds were not triggered. However, the operation cost plenty when you consider that the dollar has depreciated in value because of the bailout and the Quantitative Easing that was implemented to create demand for bonds.

Yes, the symptom was relieved, but the disease is still there, and it is a Made-in-the-USA disease.  The cause is the spendthrift ways of current and previous U.S. Administrations and Congress – and that means both political parties.  Since the bailouts began in 2008, it seems that trillion dollar-plus-sized deficits have now become “acceptable.”

Gold Watch: What’s Ahead

Gold has been snared in a corrective phase since peaking last September.  Recently, a major long-term historian of gold predicted a correction through January 2012 to be followed by a rally, from a much lower level, beginning in February.  Some technical analysts, meanwhile, look for support at $1,560 and $1,450 per ounce.

We aren’t sure what scenario will play out, but we are sure that gold will go much higher over the long term.  What will be the catalysts for the coming advance?

Here are two of them:

• Money printing on a grand scale as the most probable solution to the European banking crisis

• Continued head-in-the-sand reluctance of many countries, the U.S. at the top of the list, to cut operating deficits

In our opinion, the continuing instability in Europe, combined with banking problems in Japan and the U.S., will keep the pressure on world central banks to create liquidity and this will be accomplished by quantitative easing (QE, aka money printing).  QE leads to inflationary pressures. Such pressures may occur within an economic expansion, and create inflation, or they may occur within an economic contraction, creating an inflationary recession. In either case, gold benefits.

If you review history, you find many examples where nations opted to solve similar problems we face today in the world via the creation of liquidity by the means of QE.  During the great bull market of the 1970s, for instance, gold went from $35 to over $850 per ounce. In that spectacular rise there were several 50 percent corrections in gold’s price.  We don’t see anything of such magnitude on the horizon, but we do think that using periods of pessimism and panic as a buying opportunity has been, and will continue to be, a good yardstick for action.  If you are frightened, you may want to scale your purchases; perhaps adding to your holdings with every $50 decline, or some other equally mechanical approach.

The Guild Basic Needs Index^TM And CPI Decline In November

Inflation is percolating on the back burner.  While it may not be boiling over or whistling in alarm, the temperature builds nonetheless.  Many prices of commodities and assets have been in decline recently, but in our opinion, the basic necessities of life will soon resume their long trend upward, at a rate exceeding the traditional inflation measures.

In the U.S., the population spends a large portion of its income on many superfluous, non-essential goods and services.  Because of this, the rising costs of basic needs like food, clothing, shelter, and energy can be masked by the falling prices of technology goods and consumer services.  At some point however, these basic needs impact of the ‘cost of living’ will be felt, especially in an environment with falling wages…as the U.S. has been experiencing for almost a decade.

When the realization hits that monetary debasement will be employed over and over in the coming years to spur growth and paper over debt crises, we expect countries, companies, and people will rush to hoard real assets, especially those that are basic to survival.  That behavior will have a profound upward effect on the Guild Basic Needs Index^TM.

An Exciting And Important Offer To Our Readers

For some time you have received our weekly analysis of the global events and markets that can impact your investment portfolio. As a reader of this commentary, you will have noticed that over the past year we have expanded the content of the letter. It now includes periodic buy and sell recommendations on countries, commodities, and currencies as well as new discussion topics like the Guild Basic Needs Index and how traditional inflation data should not be taken at face value.

We continue to get a lot of feedback and requests from our readers as to how we may constantly improve the quality of the letter.  Beginning in 2012, we plan to offer more of what our readers have been asking for.  We plan to include more in depth research on countries, industries, and companies, and offer more specific timely investment ideas.  Providing these expanded features involves a good deal of more work on our part, so as we revamp the Guild Global Market Commentary in January 2012, the additional content will now be available as part of a new paid Premium Guild Global Market Commentary Subscription Service.

At the same time, we will still offer the current free weekly letter which will continue to discuss many global macro events and global market developments and trends; but the more in-depth research, analysis, and investment recommendations will only be available to our paid subscribers and investment management clients.

This expanded Premium newsletter, with its in-depth research, analysis, and investment opportunities, will be available for only $295.00 per year. This works out to less than $6.00 per weekly issue; and for that, you will get greater access to the information and research tools used to make sound investments. You will get to look deeper into the thinking process that generates investment opportunities — and you will also receive specific investment ideas and action items that you can turn into gains for your own portfolio.

We are excited when we get feedback from our readers, such as what led to this Premium Service, and we look forward to seeing you become a subscriber of the new Premium Guild Global Market Commentary.

You will receive an email notifying you when the “Premium” commentary is available and how to subscribe to this service.  Please email us at guild@guildinvestment.com, with any questions and comments, and we look forward serving you in 2012.

Summary

We remain bullish on gold, U.S. stocks, wheat, and Canadian, and Singapore dollars. The logic behind these picks is simple.

Wheat and other grains will rise in price long term due to 1) wealth creation in the emerging world increasing the demand for more protein and a more substantial diet, and 2) historically low carried forward storage [inventories] of grains worldwide.

The Singapore and Canadian economies are more rationally managed than the U.S. dollar.  Their currency values should reflect their better management by appreciating against the U.S. dollar.  The U.S. dollar temporarily rises during coming periods of fear as some see it as a relative safe haven.  Eventually, investors will realize that the U.S. Government is doing nothing to address the deficit spending and taxation issues plaguing the country.  As attention increasingly focuses on this fundamental failure, we believe that the US dollar will decline against these two currencies.

Gold should rise as investors come to the realization that gold is a valuable asset to store and protect wealth during periods of inflation or recession.  Whichever economic environment persists, the value of gold will be driven by the efforts of central banks to create liquidity and debase fiat currencies.

Presently, the developed world has a deleveraging banking system. The deleveraging is very painful. So, in order to impress voters and stimulate economic activity, politicians and central bankers are under heavy pressure to create liquidity via various mechanisms.  Most of these mechanisms create money and thus create excess currency. Excess currency creation drives gold higher.  As we learn in basic economics, an increase in supply while demand stays constant will lead to a lower value for whatever has increased in supply.  To say it another way is that as the supply of world currencies increases, their values fall…and gold rises.

Today, some investors believe that the U.S. dollar is rising in price.  This is not correct; the U.S. dollar is rising in price only versus even weaker currencies.  The dollar’s buying power is falling, and has been falling for decades.  In this situation, demand for gold is buoyed as gold is used as a mechanism to maintain the buying power of one’s assets.

Please click here to see our recommendations.

We want to take this opportunity to thank all of you, our readers for your attention and valuable input in 2011.  We wish each of you a wonderful holiday season and a happy, prosperous new year, and we look forward hearing from you in 2012.

Making Sense Of The European Chaos

We have long believed that the European currency union will not survive in its current form and that some governments will never pay off their huge bond debts. Recent news about the European sovereign debt crisis has been negative and supports our bleak evaluation of the situation. However, . . .
Continue Reading: Making Sense Of It All]]> Developments in Europe have dominated the world’s economic headlines in recent days and have obscured some good news from China. In this week’s newsletter, we will cover the background of these important events and their meaning to global investors.

Making Sense Of The European Chaos

We have long believed that the European currency union will not survive in its current form and that some governments will never pay off their huge bond debts. Recent news about the European sovereign debt crisis has been negative and supports our bleak evaluation of the situation. However, reporters and commentators alike tend to miss the one critical point that is essential for the investing community: the banking system will be bailed out.

The fear dominating the world markets today is “Made in Europe”. It exists because European nations are trying to reach a political compromise to solve crushing fiscal problems created by free spending, social service-oriented governments.  For years, political leaders have nonchalantly exercised their power to tax, spend, and borrow without considering more than how their actions will impact their own chances in the next election. Such warped focus places a low priority on long-term responsibility to bond holders and now the bond holders are revolting.

In this skewed scenario, the very same bond holders who provided the politicians much of the capital with which to fund social service largess, are now seen as the enemy because they have lost faith in the politicians’ willingness to repay them. Bond holders have now voted with their feet – “fleeing from bondage”, so to speak – by cashing out and thus raising the cost to borrow.  Spending-oriented politicians, of course, are angry. In turn, they do not trust the bond holders.  There is now little mutual trust between traditional bedfellows.

As we look at Europe today, we see a stand-off situation. Many investors globally fear that the enmity towards bond holders on the part of European governments is so great that they may let the banks fail in order to teach the bond holders a lesson.  Keep in mind that banks are among the biggest bond holders, and if bonds are not repaid, then banks will fail unless some entity steps in with large infusions of rescue capital. It is clear that European Sovereign debt will continue to be downgraded by the credit agencies.  We expect not one but several European debt downgrades over the next few years.

Heard Only Here!

This is not the view you will see on TV, but this is what will probably occur. Some small banks may fail. It may be that one big bank will be allowed to fail, but the global banking system will be protected at all costs.

Why The European And Global Banking System Will Not Be Allowed To Fail

Banks provide many services that people either do not know exist or fail to fully appreciate.  Here are a few of them:

• Loans to companies to facilitate expansion and hiring.

• Underwriting of stocks so companies can sell shares and further expand operations.

• Handling the receipt and delivery of investments.

• Clearing of transactions in bond, stock, and commodity markets as well as mutual funds and ETF industries, thus serving governments, companies and investors everywhere.

• Holding assets in private banks that allow you to own gold, stocks, bonds and other commodities. This service allows you to buy gold without traveling to a mine in, say, Peru and then transporting the precious metal to your home.  It allows you to buy and hold stocks without traveling to various company headquarters.

• In addition, banks provide vital behind-the-scenes functions supporting credit cards, money transfers, dividend payments, interest payments of stocks and bonds, and numerous other functions.

Having accentuated the banking positives, there is no denying the negatives, namely the mortgage bond underwriting, sales, and in-house trading departments of some banks that violated the spirit and letter of fundamental banking principles. Their actions have resulted in terrible losses over the last few years for investors, taxpayers, other banks and overall global economic equilibrium.  We strongly believe that banks that broke the law should be punished and their ability to repeat those wrongs should be removed.  However, banks must continue to operate and perform their vital functions unless we want to return to a barter economy in the developed world.

Politicians want banks to survive. Without banks there is no mechanism of easily raising money through bond sales. They need agents to sell bonds. A strong banking sector is imperative for any country to prosper. This fact of life is understood clearly by the business, political, and investment community alike.  For all these reasons, the ruling class will not allow the banking sector to sink. The big banks reeling with sovereign bond debt will be bailed out. We have no doubts about that.

Assessing Europe From An Investor’s Perspective

Our long held opinion is that the Euro currency union will not continue in its current form. The sovereign debts of many nations are in such a pickle that there cannot be a happy ending for some of them.

We expect a deep recession for distressed countries such as Italy, Spain, Greece, Ireland, and Portugal, and a lesser one for the rest of Europe. We anticipate a decline in European real GDP of 1-2 percent in 2012. That not good, but it’s not terrible.  The U.K. has wisely continued to remain outside the Euro currency and the financial monitoring mechanism currently being formed.

If implemented and fiercely enforced, this program has a chance to work.  The odds, however, favor politics trumping common sense and the program failing. Failure or success aside, we expect a bailout for the European banks.

What does all this mean to an investor not holding any European sovereign debt and who does not own stocks that will be hurt by a big recession in Europe?  Let’s say you are an investor living in Australia, Asia, North America, South America or a European not at all invested in the European arena.

Expect to see temporary bond, stock, and commodity market volatility and fear in the short run, but little else in the long run as long as the European banking system is bailed out. European debt problems will take years to work out, and they may never really work out. Countries may renege on their debt and fall into deep, enduring recession. However, the world banking system will be rescued.

China – The Positive News

We consider China the growth engine of the world.  As goes China, so goes the world. And we think things are going pretty good.  Here’s our current roundup:

•  Export data is better than expected.  Many had envisioned a steep drop in exports, yet the growth rate is humming at about 13.8 percent. We don’t expect this rate to continue.  Eventually it will fall into single digit growth, but the growth will stay solidly on the positive side.  Many argued that exports would collapse due to significant increases in wages (some coastal manufacturing hubs have seen wages rise 30 percent in the last couple years) and the continuing rise in the value of the Chinese currency, the renmimbi. This prediction has not materialized.

• Imports remain strong and growing in the 15-20 percent range. Thus, the Chinese trade surplus is falling. Consumers have more money to purchase goods and services. Real estate prices have fallen in the last six months, so the frantic rush to buy homes has abated. Chinese citizens are saving cash that would normally go towards a 30 to 50 percent down payment, and are instead spending more on all kinds of consumer goods, from apparel and household appliances to luxury items and meals away from home.

• Inflation for November was well below expectations. Food prices peaked a few months ago, but are now declining at both the wholesale and retail levels.

• Interest rates have begun to fall. That’s because the government no longer needs to keep rates high to discourage real estate speculation.  The decline in wholesale and retail inflation further permits cutting interest rates.  With a lower interest rate, and banks now permitted to reduce their reserve requirement (as we reported last week), businesses now have greater access to more attractively-priced lending from banks rather than having to borrow from other companies or loan sharks. The impact will be more available capital for business expansion at less cost.

• We do not fear a meltdown in property prices in China. As expected, nationally, home prices have stopped rising and are starting to retreat to more reasonable levels. This is positive and normal. The big run up in home prices was negative and has now been stopped. Homes are becoming more affordable especially for those entering the new middle class. Home prices remain stratospheric in Shanghai and Beijing, but most cities see home prices becoming more rational.

Russia – Not So Positive News

Vladimir Putin runs Russia like a modern day Czar, wielding tight control of the government through fear-based administration.  Groups rising up to confront him and his allies in power are quickly quashed.  The country is treated by him and his kleptocratic friends as their own personal property.  Outside of the big oligarchs, Russian citizens in general continue to suffer.

For several years, we have warned investors about Russia. We are aware that periodically trading opportunities arise, and money can be made, but we are afraid to commit because of the corrupt courts system and accounting profession, the lack of legal redress, the theft of the businesses of companies critical of government activity, and the heavy-handed bureaucracy.  It is too difficult to effectively evaluate reward and risk in Russia.

To those who do invest there, we wish you well. Your courage exceeds our own.

U.S. Federal Reserve 2008-2009 Crisis Actions Revealed

The U.S. Federal Reserve has made public its pattern of lending against bond collateral in the 2008-2009 period.  During that crisis time, the U.S. supported global banks through loans, capital injections, and deposit guarantees to the tune of $7.7 trillion (including rollovers).  On one day alone, $1.2 trillion was provided to banks in need, many of them European banks.

Based on such mega-money manipulations of the U.S. Fed by itself, imagine the massive potential of the European, Japanese, Canadian, U.K., and Swiss central banks. You will have plenty of buyers for the bad bonds of weak countries held by European banks.  The U.S. and others have shown that they will lend at face value and a low rate of interest on mortgage bonds in the U.S. in 2008. Why would the central banking fraternity not lend on bad European debt today in a similar crisis?  By the way the above list does not include China, the oil-producing nations, and hedge funds that would all love to buy cheap European assets once a bailout begins.  For example, hedge fund mogul George Soros has invested $2 billion of family money in European government debt bought (presumably at a bargain price) during the liquidation of MF Global. Additional MF Global bond holdings were purchased by JP Morgan and another major hedge fund.

On the Gold Front

Day-to-day fluctuations aside, we believe that declines in the gold price provide buying opportunities. We have counseled buying gold on many declines in the past 8 years. The current decline offers another such opportunity.

Courtesy of Bloomberg

Summary

We are recommending using the gold market decline to add to gold positions, we continue to hold other long term positions.

Recommendations

We see several developments supporting a continued equity market rally. They have to do with measures taken in China, Europe, and by central bankers around the globe.  We discussed these actions briefly last week and now we’d like to take a more detailed look at them.

Reason # 1: China Revving Up Its Growth Engine!

In the three-month quarter ending September 30, the Chinese national gross domestic product grew at . . .
Continue Reading: Markets Rolling – Look For More Of The Same]]> During the last two weeks, global markets have moved their way to higher ground and indications point to a healthier finish than expected to an otherwise sickly 2011.

We see several developments supporting a continued equity market rally. They have to do with measures taken in China, Europe, and by central bankers around the globe.  We discussed these actions briefly last week and now we’d like to take a more detailed look at them.

Reason # 1: China Revving Up Its Growth Engine!

In the three-month quarter ending September 30, the Chinese national gross domestic product grew at a rate of 9.1 percent. By any “normal” global standard, that’s quite an enviable growth rate but not in China where such a level actually reflects a slowdown compared to previous months.  Moreover, we believe that growth for this quarter will come in at around 8.5 percent and even drop to 8 percent in the first three months of 2012, during which time we expect it may hit a “low point” of 7.5 percent – probably in March.

China has now begun taking steps to reverse the slowdown and incentivize consumer demand.  As a result, we envision a dynamic expansion of lending activity and a sea change in growth by April-June 2012.

Here’s what going on: The Chinese housing boom of the last few years has been largely stoked and financed from savings. Housing purchases require a minimum of a 30 percent down payment. That means people spend less on consumer goods and save to buy a house. This behavior has been exacerbated by the fact that real estate prices were rising and potential home buyers believed that they had to buy now to avoid higher prices later.  This scenario has changed. Housing prices are falling, making buyers less likely to defer other purchases in order to save for a home.  That’s one part of the growth picture.

On the banking front, the government has cut bank reserve requirements for the first time in three years. We expect this recent cut to be followed by perhaps two more similar moves over the next couple of months. Banks will now be able to keep less cash in the kitty and lend more. The implications are clear: More available capital means more economic activity and more growth. Lending allows businesses to expand by enlarging facilities, building new ones, acquiring new equipment and inventory and hiring employees.

We expect signs of economic stimulation to become apparent in about four to seven months. In our opinion, GDP will bottom out in March and then rise from there. Some pundits have expressed fear that Chinese exports will be hurt by the recession in Europe. They may fall but will not collapse. However, we do believe that financial turmoil in Europe has influenced Beijing’s decision to cut reserve requirements and stimulate bank lending.

China’s long-term goal is to bring hundreds of millions of Chinese into the middle class. That requires job creation, migration from the countryside to cities, and construction of housing and transportation infrastructure – all on a massive scale for many years to come.

China is stimulating business and consumer lending and spending. It has taken action, and will continue to take more action, to revive the kind of GDP growth rate that we have long seen as a major driver for global economic growth. When China begins to grow more rapidly, much of the world will follow, especially those countries who export to them, such as Brazil, Canada, and Australia.

Reason # 2: Europe Moving In The Right Direction

Yet another European chief of state summit on the Euro zone financial predicament takes place this weekend. While many experts believe the continent’s leaders are not giving sufficient urgency to the ongoing banking system crisis, we think otherwise.  We are encouraged by consistent moves to cut costs, rein in spending, and raise taxes throughout Italy, Spain, and other debt-ridden countries. To be sure, news reports often feature confounding and unwise comments made by politicians for home country consumption, indicative of a political solution to the European unity dilemma that will be slow in the making, and will be replete with unwise statements by politicians.

Such political posturing was addressed last week by Mario Draghi, head of the European Central Bank.  According to a report in the New York Times, he was “suggesting the bank could increase its support for the European economy if political leaders took more radical steps to enforce spending discipline among members”. Please click here to view the article.

The European summit this weekend will attempt to address the political difficulties.  Resolution could take a long time and be quite contentious. We expect to see small market corrections during the process, but in our opinion the bottom of the market has occurred.

Reason # 3: Central Bank Solidarity

The most important point is that the central banks of the developed world have made it clear they will stand behind the banking system of Europe in order to avoid a repeat of the Lehman Brothers collapse of 2008.  Declarations from the U.S., Japanese, Canadian, Swiss, U.K., and other central banks indicate a unified resolve to keep major banks and clearing institutions of the world up and running.

A number of Asian countries have lowered their interest rates, and such declines are bullish for the markets.   Meanwhile, we also expect that the European Central Bank (ECB) reduced interest rates this week, continuing a trend which began last month when Mr. Draghi took over. In summary, world central bankers are watching closely and will not let European banks fail. They will intervene and do it very aggressively to avoid a banking collapse.

What Investors Need To Know

We see signs of more coherence in financial and monetary system management. Central bankers will take correct action to support banks in spite of the dawdling, continued failures, and lack of wisdom demonstrated by European politicians.

Investors need to understand that the European, U.S. and world banking systems is not destined to implode, even if the politicians are more or less clueless about the impact their gesturing and shenanigans have on world banking confidence.

In our opinion, world stock markets function by discounting future events. On today’s global stage, future events revolve rather intimately around the growth of China and the continued stability of the world banking system. Even if many countries have problems with sovereign debt, and even if many banks are horrendously burdened by ownership of such debt, the central bankers of the world will support them and keep them solvent.

The recent developments in China and unity among the central banks have been discounted in the markets.  Short sellers have been buying stocks, and long buyers bought increased their exposure to the markets…this spells rally.

U.S. S&P 500 – 1 Month Chart

Courtesy of Bloomberg

MSCI Emerging Market Index Fund – 1 Month

Courtesy of Bloomberg

Inflationary Pressures Are Building As Evidenced By The Guild Basic Needs Index^TM

Even though it has been a year where deflationary fears have had the upper hand, our analysis of the prices of basic elements suggest more inflation is around the corner.  The recent lowering of interest rates in the developing world and in Europe increases the attraction of accumulating raw materials and commodities.  Cheap money tends to feed asset prices, especially the prices of assets with restricted supply growth.  Even though the U.S. has high unemployment and excess slack in its economy, its population is not immune to rising global inflationary pressures.

Credit Rating Agencies Getting The Congressional Eye

During the last five years, some 132 employees of the major rating agencies have reportedly left their positions to work for firms that the agencies help to rate. The agencies are now coming under Congressional scrutiny for their close ties to the organizations they rate. We applaud meaningful investigations, and beyond that to the prospect of positive reform, needed to clean up alleged conflict of interest behavior.  But will the scrutiny only focus on lower level analysts and not on senior management who authorized the use of bad financial models?  Such inaccurate rating models led to companies being rated far more highly than they deserved and cost investors hundreds of billions.

India Watch: No Whoopee For The Rupee Yet

We have completed a thorough analysis of the Indian currency and found many persistent problems. The rupee has fared weakly during the last several months and is not poised yet to rise. However, we believe that the cyclical downturn in India that has led to a currency decline will end within a year and then the rupee should become a stunningly good buy due to high interest rates and a low valuation.

The Khan Academy: A Fun, Educational Resource For The Whole Family

We wanted to share this free resource with our readers. I have used it to review math studied in the past. The Khan Academy, created by Salman Khan in 2006, is a free educational resource designed to expand the knowledge of individuals at any age level in numerous subjects in a very simple way. The online academy provides 12 minute video tutorials that are fun and easily absorbed by the viewer. These short video lessons are intended for audiences of all skill and age levels.  Each tutorial starts with the basics of each subject and builds to the most complex; while providing fun tools to get each viewer to their desired level. The list of subjects covered by the Khan Academy is extensive, and the depth of each subject is good.

The Fields Covered in the Khan Academy Are:

Math (basic arithmetic through beginning differential equations), American Civics, Art History, Banking and Money, Biology, Chemistry, Computer Science, Cosmology and Astronomy, Credit Crisis, Currency, Current Economics, Finance, GMAT Preparation, Healthcare and Medicine, History, Organic Chemistry, Physics, Probability, SAT Preparation, Singapore Math, Statistics, Valuation and Investing, Venture Capital and Capital Markets, and more. See for yourself at www.khanacademy.org

Recommendations

Our current recommendations continue in force.

• As we explained last week, we are bullish on U.S stocks.
• Gold continues to be attractive. Sellers of gold sellers have primarily been hedge funds faced with redemptions. South Korea recently announced new gold purchases, joining a large group of central banks that have been steady gold buyers.
• Wheat represents an attractive buy. First of all, it provides more protein than corn and thus meets an increased global demand for a higher protein diet. Secondly, it is not subject to the price gyrations plaguing corn that is used in creating ethanol.
• The Canadian and Singapore dollars are well-managed currencies in countries with conservative banking systems. They are good candidates for continued long- term appreciation versus the Euro and U.S. dollar.

Thank You To Our Readers

For 40 years we have been managing investment portfolios for clients. We hope our newsletter serves to sharpen your investment perspectives and strategies.  Please feel free to forward our commentary to friends, family, colleagues.

To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email us at guild@guildinvestment.com