We believe that it is important that the new Brazilian administration continue the many successful programs that flowed from the Lula government. Currently, Dilma Rousseff, Lula’s hand picked successor is enjoying a 20 point lead over her opponent Jose Serra according to one Sao Paulo newspaper. Should Rousseff win, will she be able to continue along the path blazed by Lula?

Brazil has prospered this past decade for a variety of reasons. After Lula’s election in 2002, a fortunate confluence of good national economic management, strong industrial production, strong exports, and relatively moderate inflation [by Brazilian standards] created increases in the standard of living for many Brazilians.
Lula’s policies have been more centrist than leftist. Brazil has enjoyed a surge in demand for products and raw materials from Asia. They have experienced a calming of inflation as a result of moderate monetary and fiscal policies, and have also enjoyed some luck as the world experienced a dis-inflationary trend at the same time. These combined events have led to strong economic growth, large increases in auto and home ownership, improvement in infrastructure build out, and an expansion of the already strong auto, aircraft and computer industries.

Brazil’s successes have had significant positive influence on the world and especially on Latin America. Brazil’s future trends will be heavily influenced by the October 3rd election and the psychology of Brazilian and global investors that result from the election.

Lula’s centrist path caused interest rates to decline. The decline allowed the purchase of autos, homes, and other goods by Brazilians, which of course stimulated economic growth and raised more families to middle class status.Click here to read full article...

The municipal bond market has performed well in recent years. A long period of declining U.S. interest rates and growing fears of rising tax rates have helped them outperform other investments. In our opinion, there are many under-disclosed risks and problems in municipal bonds of which investors should be made aware. Muni bonds are a nearly $3 trillion market, and are often sold as conservative assets. The following opinion piece from today’s Wall Street Journal by Steve Malanga discusses how some states have been less than forthcoming about their fiscal health.

Due to years of fiscal manipulations, many states, counties, municipalities, school districts, and public utilities are going to have trouble refinancing their debt in the coming years. It is not just the Wall Street banks and large public companies who have used financial trickery with their balance sheets.

Some municipal bond investors, underwriters, and issuers are hoping that the Federal Government money printing machine will come to the rescue of insolvent states, counties, and municipalities. We do not believe that hope is an investment strategy. If you have a municipal bond portfolio, please feel free to call us and we can help you understand what investment actions you might consider.
Click here to read full article...

EMERGING MARKET GDP GROWTH: THE PAST TWO DECADES, AND OUR PROJECTIONS FOR THE NEXT DECADE

According to the IMF, World Bank, and the United Nations’ historical data, GDP growth rates have varied widely for emerging markets over the last fifty years. We will focus on the past twenty years from 1990 to the present so that we may draw conclusions to help us project future growth in the developing world. Once we are able to make an educated guess of the GDP growth, we will be able to compare it to the more thoroughly analyzed and widely predicted growth expected for the developed world.

In the 1990’s, we saw a secular decline in demand for oil and commodity prices that caused oil-producing developing nations to slow their growth. For example, Russia fell from 12% of total emerging market GDP in 1990 to only 3.3% in 2000 (source: Jonathan Anderson chief emerging market economist at UBS - see chart below). By the year 2000, the best GDP growth was found in China, Brazil, Mexico, India, Korea, Taiwan, Argentina, Hong Kong and Indonesia. China, after two difficult decades, had once again returned to the top of the rankings.

Between the year 2000 and the present, emerging markets were dominated by the fast growth of China, which greatly increased its share of emerging market GDP from 15% to 24%. India, Indonesia, Brazil, Turkey, Russia, and Korea grew nicely, although at a slower rate.

Click here to read full article...

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 EUROPEAN DEBT CRISIS KEEPS EXPANDING

Greek debt has been rated as junk quality, Spanish and Portuguese debt have undergone downgrades and there are rumors circulating of a possible Italian debt downgrade.Click here to read full article...

WE HAVE BEEN ASKED OVER AND OVER ABOUT THE RISKS IN CHINA…AND OUR ANSWER IS THE SAME: WE EXPECT CHINA TO REMAIN STRONG!

The press always carries questions about China’s perceived risk, thus they are on peoples’ minds. Though we have addressed many of these questions and concerns in previous letters, we are happy to explain our fundamental optimism about China.

We hear three main questions: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...