“It’s all in the mind, you know.”
– George Harrison

Obama Moves Towards The Center

It would appear that President Obama absorbed the fact that November’s midterm elections eliminated the Democrats’ majority control of the House of Representatives and lowered his party’s Senate majority.  He has been much more cooperative with the opposition party, and has agreed to compromise on the recently passed tax bill.

Clearly, the agenda of the new Congress will be to cut costs and dial back entitlements, and we expect to see many controversial and contentious debates on how to cut costs and whether to raise taxes.  Clearly, the American public is a moderate group, oriented as a whole toward neither left nor right.  There is the potential that President Obama could gain the support of some of those holding the middle-ground, at the expense of the Republicans, who seem in danger of losing control of the middle, while they cater to the conservative wing of the party.  If President Obama is able to attract this independent 40% of the U.S. electorate, he will have a chance at re-election in 2012, since the Democrats and Republicans each have a firm grip on about 30% of the electorate.  The far left is mad at Obama, and the far right is mad at the Republicans.  These more extreme groups are not the issue.  The issue is how to capture that huge centrist bloc that sometimes votes Republican and sometimes votes Democratic, and which does not trust any politician to spend the public’s money wisely.  The public is fed up, angry, and wants to throw the political and economic bums out.  The public needs more economic sophistication so that they do not make huge mistakes, but generally, their voice will be heard.  Politicians, bankers, and other snake oil salesmen are out of favor and must adjust.

We have been of the opinion that President Obama would be a one-term president as his policies were too liberal for the mass of the electorate.  However, if he moves to the center, he may be able to hold office for a second term and prove us wrong.  The next two years will be interesting.

U.S. Economy

U.S. leading economic indicators confirm what we have believed for months; that the U.S. economy and U.S. stock markets are off of the floor, and on their way up.  The U.S. tax bill will probably cause economic growth in the U.S. to rise close to 4% in 2011.  This is a substantial improvement from the last few years, and we can assume that a recovery in economic activity will take hold.  Jobs will grow, but slowly, as the business community is still very concerned about the approach the Obama administration has chosen for economic stimulus; the cost of hiring is high given the Administration’s recent healthcare bill and rising state taxes for disability and unemployment.

Our attraction to U.S. stocks continues.  Technology is one of the areas where the U.S. enjoys a comparative advantage.  Other strong areas for U.S. export are food production (grains, vegetables, and fruits), timber, mining, transportation equipment (planes, trains and trucks), construction equipment, autos, farm equipment, chemicals, and other heavy equipment.

It is popular to say that the U.S. does not manufacture anything except financial derivatives and financial products.  This is incorrect; the U.S. is a very large manufacturer of heavy equipment and industrial materials, and still retains their status as a global manufacturing powerhouse.

The World’s Biggest Banks Have A Combined 2.3 Trillion Dollar Gap…Banks Need Capital

According to the Basel III rules, a recent agreement by the Bank for International Settlements, the world’s international banks have four years to raise the 2.3 trillion dollars in additional capital, either through profit retention or through public offerings of securities.

This is one of the reasons why we are not recommending U.S. and European banking stocks.  Governments need to support their banks and allow them to obtain this capital.  For this reason, we do not expect short-term interest rates to rise in Europe and the U.S., however the yield curve will become steeper as long-term interest rates go up.  In an environment with a steeper yield curve, banks can borrow cheaply in the short-term markets and lend at higher rates for a longer term.  This could increase their profit spread greatly for the next four years.

China Focuses On Growth—Inflation Will Be A Secondary Emphasis

Many are concerned that interest rates will rise in China and other emerging markets, thereby stifling growth.  Their assumption is that China and other developing nations will use the western model.  In the developed countries western model, the amount of capital available is rationed by the price (interest rates).  The Chinese do not do it that way; in China the important variable is not the price of capital, but the amount of capital that is available for lending.

In China, the amount of credit is rationed, not the price.  In 2011 interest rate will rise slightly but will stay well below the inflation rate.  The Chinese government determines the amount of new loans to be made available each year.  It is very important to note that in 2010, Chinese banks were permitted to make 7.5 trillion Yuan available for loans.  Some fearful investors have been worried that only 6 to 7 trillion Yuan would be available in 2011.  Should that occur, investors could expect a slowing in China’s economic growth.

Recent pronouncements by high-ranking government officials imply that the available loans for 2011 will at least equal 2010 and may slightly exceed last year’s 7.5 trillion Yuan.  This implies solid economic growth for China in 2011, and our estimate is that GDP will grow at a 10% rate in 2011.  We expect a rally in Chinese stocks when people realize that the loans will be available.


Fraud Of The Week

The unbelievable power of the ethanol lobby – The U.S. presently levies a tariff of 54 cents per gallon on imported ethanol.  Additionally, U.S. ethanol producers get a tax credit of 45 cents per gallon.  Despite the fact that most cars over four years old do not run well on a 15% ethanol blend, the U.S. government votes an even bigger subsidies to blenders who make ethanol 15% of blended gasoline rather than the current 10%.  On top of that, corn ethanol producers receive 73 cents for each amount of bio fuel they produce that contains the equivalent energy to a gallon of gasoline.  

In plain terms, this is a boondoggle that costs U.S. taxpayers a huge amount, and does nothing to make the U.S. energy independent.  This is a type of corporate welfare to the farm states, a lightly populated region of the U.S. who have much more than their fair share of power in Congress.  In other words, American taxpayers are subsidizing the standard of living of farmers in America’s corn belt.  The tax credit alone is $6 billion a year and (as part of the recently passed tax bill) has been renewed through 2011.

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.

Food and food-related shares remain a favorite of ours and we believe that oil-related investments have promise.  We have been bullish on grains and farm-related shares since late 2008, and on oil since February 11, 2009, when 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 suggest using pull-backs in these currencies as an opportunity to establish long-term positions.

Those familiar with China and India know that it is not the cost of capital (interest rates) that determines whether economic growth continues, but rather that it is the continued availability of capital.  Bank lending will not dry up in India and China, thus we are remaining bullish on both countries.  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 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.  As mentioned in our last letter, we also recommend Canada as a country for investment.

A summary of our current recommendations 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




















In the coming days, we will have a page on our web site where you can view all of our current and past recommendations, including how our recommendations have performed.

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