Russians have been doing variations of the same trick they are now pulling in Eastern Europe for almost a thousand years.  In order to “protect Russian citizens”, they will hand out Russian passports in regions that they want to control, or (as they did several centuries ago) they will make citizenship claims of the inhabitants of territories that they want.  Then, they invade the regions that they wish to control to “defend their Russian countrymen”.

After defending their countrymen, they conveniently forget to return the territory to its original owner.  Instead, either setting up a puppet state, or annexing and controlling the territory directly.

Below is a map showing significant concentrations of ethnic Russians in the independent states that were part of the Soviet Union.

On occasion, they first foment rebellion in the country to provoke the sitting leaders to respond.  When the country in which they are meddling responds, they protect the countrymen like they just did in South Ossetia and Abkhazia.

Statements this past weekend out of Moscow announcing their intention to protect “spheres of influence” on or near its borders, and other recent statements that they will defend “the life and dignity” of Russian citizens “no matter where they are located” are little more than diplomatic pronouncements of a foreign policy that has existed for nearly a thousand years.  Let there be no mistake, the old Russia is back.

Today, Russia has the need to recapture its former glory, and reverse the humiliation of the collapse of its empire.  The psychology that “might makes right”, and the experience in global politics to know that the west is currently divided and complacent emboldens them further.  It appears to us that the South Ossetia adventure is just the first that Russia will undertake.  In our opinion, we should not make excuses or delude ourselves about the goals and the point of focus of the leaders of Russia.  Russia has become a force of opposition to the interests of Europe, of the developed world, and many in the newly developing world.

Many have criticized the U.S. for its adventure in Iraq.  The war has become unpopular with a large majority of U.S. citizens.  Today, the U.S. public views the Iraq war as a hugely expensive and unnecessary expedition that is probably destined to end in failure.  The U.S. appears to have lost its taste for conflict, while Europe is vacillating.  These occurrences can not have been lost upon the Russian leadership.

Russia was humiliated by the events following the breakup of the Soviet Union.  Much like Germany during the Weimar Republic after World War I, Russia is going through a national crisis marked by corruption, decadence, and the theft of public resources by private interests.  Now, much like in the 1930’s in Germany, a strong man has entered the stage.  When the strong man entered the stage in Germany, many made excuses for him. That proved to be a mistake.


This time, the world may be better off than it was in the 1930’s.  This time, we are joined by an important new entrant into the leadership of the family of nations, a natural adversary of Russia…one who will be much more alert to Russia’s machinations than anyone was before WWII.

China will be an important influence to warn the world of how Russia really thinks. China is much less naïve than the west, much more experienced in global intrigue and much less given to wishful thinking.


What were Germany and Italy thinking when they agreed to rely largely on Russia to receive their natural gas for winter heating?  With parts of the former Georgia under Russian control, other pipelines delivering gas to Turkey and Europe are also in danger of being indirectly under Moscow’s control.  Russia will undoubtedly try to use energy as a weapon to turn Germany, Italy, Greece, and Bulgaria into apologists for Russian behavior.  I do not think that we have seen the last of the crisis in European energy.  Europeans had better keep buying the windmills and solar panels because they have big problems ahead with respect to their energy supplies.

For this reason, and for others, we are not attracted to Germany or Italy at this time. The Russian Bear has awakened, and these countries’ energy policies are poor.  Norway, on the other hand, has a wise economic and fiscal policy and substantial energy resources.


At this point, we expect inflation.  It does not yet look like the 1930’s.  The world is again flirting with deflation, but this time however the leaders of the central banks of the world are much more sophisticated than they were in the 1930’s.

Today, they have opted for a program of de leveraging and liquidation of a grossly overextended and mismanaged banking system based upon a model whereby governments lend against (read purchase) loans from failed institutions.  This will be followed by money printing to liquefy the system when the loans they make are not paid off.  We view it as a virtual certainty that most loans made to banks and investment banks in Europe and the U.S. that used mortgage loans or related derivatives as collateral will not be fully paid off…certainly not within the time frame of the loan.

Over time, governments will have to print money and inject it into the system to repay the loans which will not be repaid by the banks.  The effect of this lending and money printing is inflationary and every central banker currently understands that inflation could easily develop in their country.  They talk tough about inflation because they are afraid that an inflationary psychology could develop, and hoarding, etc. could take place.

Central bankers see inflation as a problem, but not nearly so onerous a problem as a big deflation.  We continue to believe that every central banker will opt for inflation over deflation.
In our opinion, deflation will only occur after an accident which cannot be cured with inflation.  The accident could lead to an economic depression probably combined with a monetary inflation.  Whether such an accident occurs is yet undetermined.  Thus, we will closely monitor world events.


Inflation although currently strong, may temporarily moderate for a few months, leading some to conclude that it will not return for a long time.  We disagree.  We do believe that the current economic recession in the Europe and Japan will continue to bump along for several more quarters.  The banking system in the above countries and the U.S. is in poor shape. It is up to China and other emerging countries to pull the rest of the world along.  We see the world economy continuing to grow throughout 2008 and in 2009 due to the positive growth in China, India, Brazil and the oil producing countries.


The market is a discounting mechanism.  At some point it will discount the end of the global recessions of 2008 and 2009.
Today, the great majority of our assets continue to be held in cash, so we are very conservatively invested.  We are closely watching the world’s markets and will re-enter when we think the time is appropriate.

We thank you for listening.

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