September 19, 2013

September 19, 2013

What Is The Next Bubble Set To Burst?

The United States profited mightily from its powerful growth and global economic power in the decades after the Second World War.  U.S. equity markets mirrored that growth and power. The U.S. stock market has risen over the decades, and we believe that the rising stock market trend remains firmly in place today.  However, the economic history of the past decade and a half, has been a history of bubbles — first the dotcom bubble, then the subprime bubble, then the European debt bubble…

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The Tourism Industry, What Country Will Most Likely See A Pick Up?

With burgeoning middle-class populations, some developing nations are shifting to become the world’s biggest sources of outbound tourist travel.  China, Russia, and to a lesser extent some southeast Asian nations are growing their appetite for tourism at a rapid clip…

Who Will Most Likely Profit?

Its tourist infrastructure is already good, and set to expand with regional airports growing to meet overcapacity demand.  Analysts see hotel and airport operators and low-cost airlines set to reap rewards from a Chinese and Russian tourist influx for at least several more years.

Fifth Anniversary of the Lehman’s Collapse Prompts Reflection on Post-Crisis Policy

The fifth anniversary of the collapse of Lehman Brothers has caused some reflection on the nature of financial reforms that have been proposed or enacted since 2008.  While we don’t feel that the reforms have been adequate, we’re encouraged by the general landscape of changes.  These have focused on (1) bringing derivatives trading, especially swaps, onto electronic trading platforms; (2) the shift of trading from over-the-counter products to exchange-traded, standardized products traded through clearing-houses to reduce counter-party risk; and (3) more transparency for market participants and regulators to have accurate knowledge of prices and risk exposures…

Inflation in the Developed Economies Remains Muted –But Globally Appears to Have Turned Higher

We, along with many others, have been expecting that all of the monetary debasement in recent years would create inflationary spikes.  In the U.S., Europe, and Japan — some of the most aggressive debasers — inflation has been stubbornly low.  In spite of the many calls for rising inflation, it has been held in abeyance by deleveraging in the developed world’s financial system.  The developing, faster-growing economies, however, have been experiencing rising inflationary pressure for years.  India, for example, seems always to be fighting high inflation.

In our research, we are seeing more data suggesting that a turn is at hand.  Credit Suisse recently wrote that “Global inflation continues to pick up gradually in recent months…”

Global inflation turned higher in recent months…
Global Inflation.jpg

Their report added that there are “signs of a bottom in core inflation” in the U.S.

After declining for more than a year, U.S. core inflation (which excludes food and energy) inflation picked up this past summer.  Based on our GBNI data below, inflation including food and energy bottomed sooner.

US Core Inflation.jpg

When Inflation Picks Up, Will It Look Like the 1970s?

The Economist recently printed an article discussing how inflations and inflationary cycles differ.  The article discusses that the 1970s super-inflation in the U.S. may have been the result of U.S. demographics (and the desire to have full employment), rather than the result of loose monetary policies.  The truth is probably a combination of the two.  During the 1960s and 1970s the U.S. economy was expanding rapidly.  The U.S. economy grew into the 1970s at a pace that exceeded its productive capacity.  U.S. productivity had stalled from earlier decades — and of course cheaper imports from overseas were not as plentiful as they are today.  The bulge in the U.S. workforce (baby boomers in their most productive working years), and the boomers’ desire to spend their wages created a cycle of rising consumption that exceeded the economy’s output efficiency.  Prices of goods and services rose almost twice as fast in the 1970s as they did in the prior decade and in the following decade.

In the 1970s, Rapidly Rising Prices Triggered Hoarding and Asset Price Speculation


By 1981, price increases were ameliorating.  Among the factors that helped end the 1970s inflationary cycle were the tight monetary policies and high interest rates under Fed Chairman Paul Volcker, cheaper imports, and the advent of the computing age which kicked off decades of improvements in efficiency.

Many of the economic growth, labor pressure, and productivity drivers of the 1970s are absent in 2013.  What do we have?  We do have QE and other forms of money printing from around the globe; we do have very low interest rates in the developed world that could fuel asset price speculation.  We do have a global, interconnected economy with capital sloshing around the world in massive quantities; and we have hundreds of millions of new consumers in the developing world.  We also have had enough crises around the globe to make people uneasy about the health of the financial system and thus drive them into real assets.  These are different ingredients than those that drove the 1970s inflation.  Therefore, the next cycle of high inflation will look different than the inflation of the 1970s.

2013 — With an Ageing Population in the U.S., Can Inflation Stay Low?

Another point made by the Economist article is the notion that aged populations do not have the same consumption habits of the young and optimistic, and therefore there is less demand-driven inflation in mature economies with ageing populations.  This is evidenced by the current low inflation rates in “mature” societies like Europe, Japan, and the U.S.  Meanwhile, higher inflation rates can be found in the “younger” emerging economies.  Eventually, we expect that inflation will rise in the U.S., but it will be substantially less virulent and more external cost-induced than internal demand-driven.

What To Look For, So That When Inflation Comes Roaring Back, You Can Be Prepared and Modify Your Investment Strategy

One way we watch inflation is by tracking the prices of underlying, basic, essential needs.  As we watch the official inflation bottom, our Guild Basic Needs IndexTM (GBNI) has been flashing yellow for some time.  The Guild Basic Needs Index tracks certain fixed food, clothing, shelter, and energy components, and includes items that are consumed by all Americans every day.  Since 2000, this index of basic, essential needs has increased about 86.1 percent.  Meanwhile the often adjusted basket of goods contained in the Bureau of Labor Statistics’ Consumer Price Index has risen by about 39 percent since January 2000.

Guild Basic Needs IndexTM

July GBNI.jpg

As you can see, the basic, essential needs in the GBNI are more volatile, but it is clear that the general trend in their prices is higher, and at a faster pace than the official data suggest.

Investment Implications of Rising inflation — Interest Rates Tend to Lead the Data

Investors should not assume that inflation will stay low forever.  The interest rate rise of the past several months is an indication that bond buyers do believe that inflation will rise.  At Guild Investment Management, we follow inflation and interest rates very closely.  Interest rates respond directly to inflation expectations, and interest rates are a critical data point in determining an appropriate asset allocation.

In the final analysis it is clear that after a 30-plus year period of declining inflation and interest rates, it is time to bet the other way.  Rising rates and higher inflation appear to be the obvious outcomes for the near future.  Therefore we recommend investing for growth, and being conservative about investing solely for income.  Even though official inflation data are low in the U.S. and Europe, the purchasing power of money has been in decline.  Assets that can grow or appreciate in price are more attractive than bonds that just return your depreciated money to you at a later date with a modest income that has not kept your purchasing power intact.

In coming issues, we will discuss in more detail the strategies for investing in a rising inflationary environment — so stay tuned to these pages.

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In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:


  • A Brief History of Market Time — 1950 to the Present (With Apologies to Stephen Hawking)
  • Chinese, Russian, and ASEAN Travelers Boost Tourist Sector
  • Fifth Anniversary of the Lehman’s Collapse Prompts Reflection on Post-Crisis Policy
  • Inflation in the Developed Economies Remains Muted –But Globally Appears to Have Turned Higher

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