In Part I, we discussed the history behind the current worldwide de-leveraging, which is the primary factor determining today’s economic landscape. In Part II, we explored the reasons for the current market volatility, and discussed the current game of tug-o-war between two contesting sides; those who anticipate a deflationary depression and those who anticipate inflation. As the contestants pull the rope in one direction and then the other, the market becomes volatile and fear spreads as both sides shout their views from bullhorns. Both Part I and Part II are available below.Click here to read full article...

“Entire ignorance is not so terrible or extreme an evil, and is far from being the greatest of all: too much cleverness and too much learning, accompanied with ill bringing-up, are far more fatal.”
-Plato


THE NEW ECONOMIC REALITY - PART II

Last week, we began to discuss this subject, sharing our views on the history and economic back drop for the past twenty years. If you missed it, you can go to http://www.guildinvestment.com/ARThome.aspx?ModuleId=0&Itemid=389&SType=F for a copy of the letter. Click here to read full article...

THE NEW ECONOMIC REALITY

THE DE-LEVERAGING OF THE DEVELOPED WORLD WILL CONTINUE FOR ANOTHER DECADE

There is too much debt throughout the developed economies, and not enough growth to service that debt.Click here to read full article...

THE U.S. BOND MARKET IS LOSING STEAM

U.S. bonds fell last week as the weekly bond offerings to finance the deficit met with weak demand.

It seems that Japan and China have been absent or muted in their recent demand for U.S. bonds.

This could be a substantial problem since they are the two largest holders of U.S. debt. Some argue that Japan’s absence from the market is temporary, attributable to the fact that the Japanese fiscal year ends on March 31.

China on the other hand has been gradually changing the composure of their investments. They have, in recent months, been diversifying away from U.S. bonds in favor of a more balanced portfolio that contains a greater amount of non- U.S. holdings. Now that the Euro is lower, perhaps they will reinvest in bonds issued by the better quality European sovereign issuers, perhaps Germany. It has also been noted by us that China expects to run an $8 billion trade deficit for the month of March 2010.Click here to read full article...

INTEREST RATE INCREASES ARE BEGINNING IN STRONG GROWTH COUNTRIES

India raised interest rates in a surprise move on Friday, March 19, 2010. This followed recent interest rate increases by Australia and Malaysia, all three countries are experiencing strong economic growth and rising fears of inflation.

There are of course consequences of rate increases, especially as they spread to more countries, some time in the future rising interest rates will lead to the moderation of the strong economic growth that Asia is currently experiencing.

In our opinion, this will not happen until Asia has dragged the world out of much of its current malaise.Click here to read full article...

Like many people and governments, China does not like to be told what to do. If the U.S. Government wants to succeed in getting the China to up-value the Yuan, it should refrain from pressuring the Chinese Government, and certainly not resort to threats.

If you read China’s pronouncements, it is clear that the Government is sending out repeated signals that it is willing to raise the value of its currency, yet will delay doing so if the U.S. or any other major nation threatens or pressures it to take action. China, like all nations wants to keep its dignity intact, and if European and U.S. politicians have any common sense they will not aggravate China. If the outside pressure ends, the Yuan will rise by 7 to 10 percent in 2010.

As soon as China can raise the value of the Yuan without losing face and looking as if they are taking advice from Western politicians, we believe that they will do it. We hold Chinese Yuan expecting them to rise in value, and if Western politicians can keep their mouths shut, we will buy more.

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STAGE 2: EUROPEAN SOVEREIGN DEBT UNDER ATTACK

Taken together, the Icelandic and Greek financial crises can be seen as the second stage of the larger global banking crisis. The first stage of the global banking crisis, which began in late 2007, was centered in the European and U.S. mortgage and mortgage derivative market. The second stage began with Iceland’s monetary and fiscal crisis in 2009 and continues with the current Greek crisis, and is centered in European sovereign debt.

The global crisis banking crisis is a multi-phase global economic crisis caused by years of over-borrowing followed by the current deleveraging. This deleveraging was, of course, set in place by all those who gambled with their own and other people’s money. As time passes, more and more of these gamblers will be unmasked and there will be more countries, companies, industries, and individuals who will lose face and capital in coming months and years. We anticipate that these problems will continue as various sectors delever over the next six to eight years.

Many believe that the other European nations will act to bail out Greece, and then perhaps Spain or other over-levered nations in Europe who experience debt problems. We disagree. In our opinion, the International Monetary Fund (IMF) is the lender who will bail out the damaged European nations. In our opinion, it is too hard for European nations to go to their taxpayers and tell them that they are directly or indirectly guaranteeing the debt of a foreign country.

As is their custom, the IMF will extract a high price in terms of the deep cuts in expenditures and increases in taxes demanded of the borrower. In our opinion, the period of easy borrowing is over for the Greeks, and probably for several other European nations whose debt will come under attack in coming months and years.

The current chaos is creating substantial demand for gold and other precious metals. Holders of Euros are seeking to acquire more gold, and holders of other currencies such as the Japanese Yen and U.S. dollar are undoubtedly thinking of following suit. Buying gold to hedge against the probability that the Yen and U.S. Dollar will be under attack in the not too distant future is not unwise.
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WORLD MARKETS DANCE TO CHINA’S TUNE…AND THEY ARE MISTAKING A MODEST SLOWDOWN IN TEMPO FOR A CALL TO STOP THE MUSIC

World markets are frightened that the fastest growing economy in the world will slow too rapidly. Thus, when China tried to slow real estate speculation with a series of actions over the last three weeks, many global investors panicked and sent stocks down in most of the world.
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“If a man empties his purse into his head, no man can take it away from him.  An investment in knowledge always pays the best interest.”

- Benjamin Franklin  

LOOKING AHEAD AT 2010

We believe that 2010 will hold many opportunities for the global investor as the continued improvement of business conditions will translate into higher equity and commodity markets.  Expectations of rising inflation will drive capital into commodities and into fast growing countries, industries and companies.

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