This Week We Make Some Changes To Our Recommendations

After several months of bullishness on a number of emerging markets in Asia and Latin America, we are no longer recommending investment in Indonesia, Malaysia, Singapore, Thailand, Chile and Peru.  We are reinstating our bearish view on U.S. long and intermediate term bonds.  For more on these recommendations, see the Recommendations section below.

U.S. And European Fiscal Policy Is The Key To Bond, Currency, And Stock Markets In 2011

Many of those who have been holding U.S. bonds have made a mistake by thinking that the incoming Republicans in the U.S. Congress would do more substantial cost-cutting than is likely to occur.  The argument is that cost-cutting would depress economic activity and cause a decline in bond yields (in spite of the Fed’s QE 2, and rounds of QE ahead). 

Now that Congress is back in session, it seems clear that the recently announced tax cuts and economic stimulus spending plans will produce significantly larger U.S. budget deficits over the next two years, even after some cost-cutting has been implemented.  This will cause the dollar to fall and the U.S. bond market to continue its decline. 

We have long argued that for newly elected officials the politician influence is more powerful than the reformer influence.  A person may be elected as a reformer, but history has shown that few continue as reformers once they get into office.  Most moderate their election rhetoric, and many completely sell out to the existing system.  The U.S. budget deficits will rise in spite of the tea party, and the budget will stay out of balance for some time.  In our opinion, this situation is ultimately negative for the value of the U.S. dollar, and bad for the price of U.S. bonds.  They will both decline in price over the longer-term.

Europe will continue granting one bailout after another.  Germany will complain (and with good reason), because their economic conservatism has not been shared by others in Europe, and German taxpayers are going to be asked to pay a disproportionate share of the bailout.  The reality is that the European Central Bank will have to provide liquidity as needed to bail out several more European nations before the crisis in Europe ends.  We will see a great deal more QE from Europe in 2011.

As 2011 Commences, Major Pension Funds Are Shifting From Bonds To Stocks

We have observed with interest that some major U.S. pension funds have shifted their allocations for 2011, cutting their bond exposure and increasing their commitment to stocks.  Current low interest rate levels make the outlook for bonds precarious, while boosting investor interest in alternatives such as stocks, commodities, and commercial real estate for pension funds that invest with a long-term perspective.  This is bullish for equities in general.


For Public Employees The Days Of Big Income and Big Retirement Benefits Are Drawing To A Clos

Guild Investment Management is based in California, which is a poster child for public employee control of the legislature.  In this state, many public employees enjoy the right to retire at age 50, and have their pension be based on the amount of their last year’s pay.  In some municipalities, public employees have been allowed to accrue large amounts of overtime in their last year before retirement.  This can send their last year’s income up to levels 50-100% higher than the average of the prior 10 years’ income.  Their retirement benefits are then based on a high salary level.  Add to this, the fact that they can enjoy early retirement, spend longer time in the pension system than other workers, that they have generous health benefits, and it is not surprising that the California state budget is a mess.  Historically, Federal bailouts may have helped; we do not see that happening in the future.

The taxpayers of many states are waking up to these behaviors and we expect a rash of renegotiated public employee contracts, the typical strikes by public employees, and general media excitement about this crisis and chaos.  The fact is that reform is long overdue and will result in more comparable pay between public and private employees.  Throughout the U.S., municipal bond markets will be hurt and public employee unions will be hard-hit as states and municipalities go broke over the next two years.  This makes us more bearish than ever on U.S. government bonds and municipal bonds. 

In addition to the mounting fiscal issues, bonds are unattractive because we believe inflation will rise, causing investors to sell bonds to buy other assets.  Rising inflation will give an upward push to stocks that can grow or that produce commodities, since these are viewed as stores of value that people hoard in an inflationary environment.

Dividends And Dividend Growth Are Important As We Look Ahead

Under the proposed extension of the Bush tax cuts, the top rate of 15% on dividends will be continued for 2 more years.  This clearly boosts interest in dividend-paying stocks.

The Wall Street Journal, in an article entitled, “The Obama Stimulus Impact? Zero”, recently discussed an economic study by John F. Cogan and John B. Taylor of the Hoover Institution and Stanford University.  Both had been senior officials in Washington, under presidents Ronald Reagan and George Herbert Walker Bush respectively.  According to their study, the 2009 Obama stimulus had zero economic impact.  Renewed tax benefits will provide more economic stimulus. 

In their summary, they state, “The implication of the research…is not that the stimulus of 2009 was too small, but rather such countercyclical programs are inherently limited.  The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy.  They did not work then (in the 1970’s) and they are not working now.”  Cogan and Taylor conclude that “…general tax cuts are a better fiscal stabilization device.”

]We attach a link to the article here for those who want to read it in detail.

Today we have continued tax cuts, and the U.S. economy is enjoying a better psychological tone than it has enjoyed for the past two or three years.  We expect reasonably good economic growth of 3% or 4% in 2011 in the United States.

Our Recommendations

Investors should continue to hold gold for long-term investment.  We have been bullish on gold since June 25, 2002 when it was selling at about $325 per ounce.  In our opinion, it will move to $1,500 and then higher.  Traders should sell spikes and buy dips.

Investors should continue to hold oil-related investments.  We have been bullish on oil since February 11, 2009, at which time oil was trading at $35.94 per barrel.

For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro.  As we mentioned in our September 14th letter, we like the Singapore, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies.  We would use pull-backs in these currencies as an opportunity to establish long-term positions.

We continue to believe that the rally in U.S. stocks and in other developed countries such as Canada (a new recommendation of ours) will continue.  As for other countries, we are temporarily moving out of some Asian and Latin markets.  The markets we are selling include: Indonesia, Malaysia, Singapore, Thailand, Chile, and Peru.

Recent fears of high inflation and high interest rates have caused some investment money to flow out of certain emerging Asian countries.  Some investors fear higher interest rates could lead to lower economic growth.  We believe that strong economic growth will continue in Asia but we are taking some profits in parts of our Asian and Latin American portfolio while continuing to hold others.

Those who know China and India know that it is not the cost of capital [interest rates] that determines whether economic growth continues; rather it is the continued availability of capital.  Bank lending will not dry up in India and China, thus we are remaining bullish on China and India.  We also remain bullish on Colombia.  In Colombia’s case, it is due to the very low valuation of Colombian stocks.

In summary, investors should continue to hold shares of growing companies in India, China, and Colombia.  We have been recommending these markets since September 14, 2010, and we would use any pullbacks as an opportunity to add to or initiate positions for long-term investors.

We continue to believe long-term investors should continue to hold food-related shares such as grains, wheat, corn, soybeans, and farm suppliers.  Since we said the grains had bottomed on December 31, 2008, they have all appreciated substantially.  We see more price rises ahead.

We believe U.S. stocks can rally further.  Our reason for becoming more bullish on U.S. stocks on September 9, 2010 is that over the longer-term, liquidity formation through QE will create demand for many assets, including U.S. stocks.  Today, we are also recommending Canada as a country for investment.

We do not plan to avoid the countries that we took profits in forever.  We may recommend them again in the near future.

A summary of our recommendations and changes can be found in the table below.


Date Recommended

Appreciation / Depreciation in U.S. Dollars


















Singapore Dollar



Thai Baht



Canadian Dollar



Swiss Franc



Brazilian Real



Chinese Yuan



Australian Dollar







Malaysia (SOLD)









Indonesia (SOLD)



Thailand (SOLD)






Chile (SOLD)



Peru  (SOLD)



Singapore (SOLD)







Important Demographic Information

Lastly, we would like to share a video by a Swedish researcher, Hans Rosling.  The video is an entertaining and eye-opening illustration on how quality of life has changed since the year 1810, and how rapidly the developing world is gaining on the developed west with respect to life expectancy and wealth.  We hope you enjoy it.  The link to the video is titled Hans Rosling’s 200 Countries, 200 Years, 4 Minutes – The Joy of Stats.  It can be found at:

Best wishes for a happy, healthy holiday season and New Year.  Thanks for listening