“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...

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...

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...

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.
Click here to read full article...

“He who asks is a fool for five minutes, but he who does not ask remains a fool forever.”
-Chinese Proverb

DEBT LEVELS IN G-7 COUNTRIES

We continue to be positive on Asia. One of the major reasons we currently favor Asia is the fact that public debt in the G-7 nations (U.S., Britain, France, Canada, Germany, Japan, and Italy) is expected to be over 119% of their combined GDP in 2014; a stunning figure.

Imagine owning a business with gross revenues of $1 million, outstanding debts of $1.19 million, and cash flow from your business to service the debt of about 5% of gross revenues. This means the company has only $50,000 per year to service the outstanding debt. If the average interest rate on the company’s debt is 5%, the debt load on your company would be increasing your debt each year. Your repayment of $50,000 would be less than your interest expense about $59,500.

Imagine further that you forgo using the cash from the business for debt payment, and choose to borrow more to keep your debt payments current. Bankruptcy would seem to be only a matter of time for the company. At some point, finding suckers (lenders) will be difficult.
Click here to read full article...

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.
Click here to read full article...

WILL HISTORY REPEAT ITSELF?
 
The Resolution Trust Corporation (RTC) was the organization created to clean up and liquidate insolvent savings and loans during the last major U.S. real estate crisis in the late 1980’s and early 1990’s.  We predicted the coming of a new RTC-like organization over a year ago.  That prediction has materialized, as the Federal Deposit Insurance Corporation (FDIC) is now undertaking the same role played by the RTC twenty years ago.
 
Let us examine the parallels to today.  In the late 1970’s and 1980’s, the real estate finance industry was a big donor to politicians in the U.S. Congress and to the executive branches at both state and federal levels.  After a decade or two of influencing legislation in their favor, too much power was in the hands of the savings and loan industry.  This led to abuses in banking and real estate finance that created the savings and loan crisis, and the failure of over 700 institutions.  The government’s plan to resolve the crisis called for the formation of the RTC to manage the liquidation of bad saving and loans portfolios, and the taxpayer picked up the bill for the losses. Click here to read full article...

Theme #1 – Equities will outperform early in 2010

We believe that new money will flow into stocks for at least the first few months of 2010.  Like most professional investors, we see stocks as the most attractive investment option for 2010. 

Let us look at the alternatives to stocks for investors.  In an environment where inflation is starting to resurge in many countries, bonds are in danger of declining in value as inflation pushes long term interest rates up in 2010.  Due to overleveraging and excess inventory, real estate is doing poorly in Japan, U.S., and Europe.  Collectibles are not in demand.  Private equity has performed poorly.  Globally, stocks and commodities are the investments of choice as we enter 2010.

Theme # 2 - Profits for cyclical companies will rise strongly.

Large companies in cyclical industries worldwide should do well as their global export business continues to pick up and corporate profits surge due to the high operating leverage inherent in cyclical companies.  Economically cyclical companies often have high fixed cost businesses, where a small change in revenues creates a big change in earnings due to their high fixed cost structure.  We expect revenues for many cyclical industries to rise in 2010; hence we expect their profits and stock prices to rise.

We especially favor companies which produce machines for building infrastructure, for installing new manufacturing capability, and for producing or extracting commodities.  Some of our favorite sectors are: machine tools, construction equipment, semiconductor, computer and telecommunications related companies, mining equipment, farm equipment, transportation equipment manufacturers and the suppliers to all of these industries.  The major manufacturers of these products are located Germany, U.S., Japan, Korea, Norway, and Taiwan.Click here to read full article...