Here we go again. I would like to try to interject a little fun into our memo today.


I have recently read a book that impressed me with its broad and practical applicability. I am not a highly political person and this book is not a political book. It is about economic incentives, which shape people’s behavior. It is fun and interesting because it describes every day situations for different groups of people; real estate brokers, game show contestants, school teachers, sumo wrestlers, the Ku Klux Klan, consumers of bagels in office coffee rooms, crack dealers and others.

The book explains, based on research, what motivates their behavior. To quote from the book jacket, “What unites all of these stories is a belief that the modern world, despite a surfeit of obfuscation, complication, and downright deceit, is not impenetrable, is not unknowable, and—if the right questions are asked—is even more intriguing than we think.”

To me, the upshot of the book is that everyone responds to incentives, and that to understand the behavior of a person, business or institution, you must examine the incentives that motivate that behavior. Once you understand how to identify the incentives that may be driving the behavior of others, you can protect yourself from being manipulated by those individuals or groups. You have information about their current and expected behavior, and this may help you benefit from that behavior.

One of the authors is Steven Levitt, the economist from the University of Chicago. Leavitt is famous for proving that crack dealers really do not make much money at all (and most of them live with their mothers), that sumo wrestlers engage in collusion to maintain their rankings in the world sumo hierarchy, and that many other behaviors, by many other groups, are driven by incentives not obvious to the logical observer. These subtle, and usually unobserved (by outsiders or non-experts) insights come from access to specific information that the insider or expert enjoys.

The book title is Freakonomics. Don’t let the title put you off. It was obviously concocted to sell more books. The subtitle is “A Rogue Economist Explores the Hidden Side of Everything”. To me, Leavitt seems to be far from a rogue. Rather, he seems to be a very wise seer, who has brought to the surface many very interesting sets of information and backed them up with solid economic research.

While the internet is providing a great deal of information to the public at large, and thus is leveling the playing field in some areas, almost all industries, professionals, government agencies and other institutions continue to operate on the basis of their superior knowledge. They have more information, and thus are well positioned to make money, or consolidate power. Experts of all types have insights and information that they can use to benefit people, or to take advantage of them.

This book contains no philosophy. It is essentially, an analysis of the subtle information that others use to shape our view of the world. It thrills me because it may make us more aware of some of the layers of information and wisdom that are available, but have not been obtained by the majority of us. At Guild Investment Management, our job is to monitor events that shape global economic, social and political activity and identify trends, which will create investment opportunities. The book has given us insights into unseen incentives and motivations of many groups, including the companies that we invest in.

Other books I have enjoyed:

Blink, by Malcolm Gladwell, is about how we think without thinking. It is also about how our intuitions and biases impact our decisions.

The Tipping Point, by Malcolm Gladwell, is about fads, how they are created and why they grip the public.

American Mania- When More is Not Enough, by Peter Whybrow. A psychiatrist looks at the human brain, and why it may not be well equipped to deal with modern affluence and may leave people vulnerable to manic behaviors.


In a recent press conference, Ali Al-Naimi, the Saudi Arabian oil minister explained that the visibility of oil supply and demand had lessened in the last few years. He pointed out what we have been saying for years, that it is hard to determine the amount of the increase in demand from India and China, as well as the expected increase in supply and demand from Russia. Without accurate information, it is hard for OPEC to produce the appropriate amounts in order to keep world prices steady.

OPEC has dealt with this problem by producing at capacity and trying to increase capacity. In our opinion, thus far they have had no success at keeping prices down. If demand continues to rise from China and India as we anticipate, prices will move much higher in years to come.


One of the biggest corporate announcements in a long time has been the recent pronouncement by GE that they would move aggressively into green technologies. One of their earliest ventures will be clean coal technology. This has caused the coal stocks to take off in the last few days and we believe that coal stocks can be bought during periods of market weakness for the next few months. It is fairly certain that with the huge supply of coal available in the U.S. and much of the industrialized world, clean coal technologies could quickly replace some of our consumption of oil and natural gas.

GE may be just the first of many corporate heavyweights to see the opportunity, and we view this as very positive for the major coal companies over the long term.



Those looking for a quick and violent rise in the Chinese Yuan should be careful what they wish for. It may be politically wise to press the Chinese to revalue, but economically it may be very unwise for most developed countries, especially the U.S.

1. In the long run, this revaluation will happen, but let us look at the side effects of this action. The U.S. is co-dependent with the Chinese and other nations, who export large quantities to the U.S., to recycle their profits into U.S. bonds. We need them as much as they need us. It is not in the best interest of the U.S. to force an economic slowdown on China, and thus dry up the demand for bonds without having alternative bond buyers.

2. Every sophisticated economist agrees that if China revalues their currency it will not improve the U.S. trade deficits. The U.S. will import more from Thailand, Malaysia, Philippines and Latin American nations instead. This is not a solution to the trade deficit issue in the U.S. Labor costs in China, Malaysia, Philippines etc., would have to rise by several hundred percent, to put them on an equal footing with U.S. wage rates. May I further note that the cost of living is much lower in these countries than it is in the U.S.

3. A revaluation of the Yuan could hurt economic growth in North America, Japan, Europe and Australia and elsewhere. China’s growth is already slowing gradually due to a series of efforts by the Chinese government to cut lending for consumer products like autos, and to slow speculation in residential real estate. These programs have worked, and China is slowing its growth rate. Further, a high currency has kept the inflation rate down in China, and they are happy with that. China is still growing at a rate much faster than any country in the world. Chinese domestic consumption is moderating. Some countries, which sell machines and raw material to China, including Japan, Europe, U.S., Canada and Australia, are reporting softening demand from China for these products. This does not mean that China is going to go into recession, but they may slow their growth rate to 8% today. A big rise in the Yuan would mean even slower growth.

4. I know the simplistic and inaccurate theory is that if you are worried about losing jobs, force your trading partner to revalue their currency upward. This is totally naïve and inaccurate from an economic viewpoint, but it is politically popular.

5. The fact is that the U.S. is taking the first steps to a trade war by attacking China for political reasons. A trade war would bring the world economic suffering of the kind that has not been seen since the great depression. If U.S. politicians are unwise enough to vote in substantial trade restrictions, the people they will be hurting most will be U.S. citizens. Trade restrictions, wherever they are found in the world, are unwise in the extreme, but popular with the uninformed. World trade is the operating system that has brought the world to its current level of prosperity. I pray that the politicians do nothing to upset the world’s economic growth.


Recently, France voted no on the E.U. constitution. French merchants and farmers are frustrated because their economy is doing poorly, and has been stuck in a malaise for several years. This is a Europe wide problem, and European leaders, with their strong social welfare focus, have ignored the growth engine of small entrepreneurs that has powered growth in the U.S., Canada and Asia.

In our opinion, the no vote was a signal of frustration with the stagnant economic situation in Europe. The no vote will delay European unification. It is hard to blame the French for being frustrated with the current economic situation. For Europe to be truly unified, we believe that a compromise between social welfare interests and economic expansion advocates must be reached. If such a compromise is not soon reached, protectionism could rear its ugly head. In our opinion, protectionism is a potentially devastating prospect for economic growth, and thus, negative for all parties.


In summary, our biggest concern is protectionism. Both the China currency brouhaha and the E.U. constitution rejection by France may be harbingers of protectionism. In our long considered opinion, free trade is good for world economic growth. In fact, it is very good for world economic growth. We know that free trade hurts people, sometimes badly, in the short run. However, without free trade, how would the world have grown into its current economic situation? Only 300 years ago, world economic activity, global standards of living and economic growth rates were all pitiful compared to today. A great deal remains to be done, but a good start has been made. The future of global economic growth is bright, if the world can avoid the pitfalls of protectionism.