Global Market Commentary

March 27, 2014

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Cross-Currents Affecting the Markets

We see many cross-currents that are currently, or soon will be, affecting U.S. and European markets and the
psychology of investors:

Positives:

1. Money is leaving money market funds and moving into stocks in a big way. Interest rates have risen slightly, yet money market funds pay virtually no interest; meanwhile many stocks with dividends of around 2.5 percent for the S&P 500 are attracting money. Also many investors who were panicked after the decline of 2007 to 2009 are finally returning to stocks.

2. The Federal Reserve will stop their current quantitative easing (QE) by the end of 2014. Many bond holders are dreading the end of QE because it may cause a rise in interest rates. Stock market bulls argue quite correctly that the current amount of money in the system is massive, and what is needed is for the velocity of
money to increase. The velocity of money is finally rising. Banks are loaning money and the public and business are borrowing. As a result, the U.S. is seeing the first real increase in the velocity of money in several years. This is bullish for GDP growth in the U.S. and bullish for corporate profits. As we know, higher corporate profits lead to higher stock prices.

3. Foreign markets with the exception of Europe are unattractive for investment, so more money is moving
from foreign markets into the U.S.

4. Gold will continue to be in demand as investors lose confidence in their governments.  Some technical analysts that we respect believe that gold will be a buy at about $1200 per ounce. We do not know where the technical bottom will be found, but agree with most technical analysts who believe that gold will enter a bull market after reaching a bottom.

Gold often rises during periods of inflation and economic turmoil. What these two factors have in common is that the public is unhappy with their government. As we look around today, we see that: (1) in China, worries about the banking system are causing citizens to worry; (2) in India, unwillingness to hold money in the banking system by many citizens causes ongoing demand for gold; (3) in the U.S. and Europe, people buy gold when the governments fail to keep inflation under control and when the government fails to manage the economy effectively; and (4) gold is priced in dollars and Russia (see below) continues to try to decrease the value of the U.S. dollar. For all of these reasons, gold will be increasingly in demand in the long run. We will continue to
buy gold on dips.

Negatives:

1. Russia is not a friend of the west, but rather an enemy.

Russia has decisively taken Crimea and Crimea’s offshore hydrocarbon reserves. In so doing, Russia completely ignored the international law that they pledged to uphold when they were embraced by the G8 and when they became a so-called “friend of the west.”

Clearly, we are now seeing who Vladimir Putin is and what he represents. Putin is a modern day oriental despot of the type that has ruled Russia for more than a thousand years. Mr Putin wants to reassemble as much of the former Soviet Union as he can in the form of a Russian Empire. He may leave the largely Muslim areas in the hands of some of his puppets, but we can be sure they will support him in every aggressive move he makes.

Mr. Putin does not believe that his economy can ever grow. He believes that for Russia to grow, it must take the lands and raw materials of others. Russia’s economy certainly failed massively under communism and has continued to flounder since Yeltsin supposedly opened it up to democracy 20 years ago. Russian “democracy” is really an oligarchy where Putin’s friends and supporters (many of whom were KGB functionaries like himself) have become billionaires while the population as a whole has made no progress, lives in a third-world country, and suffers economically.

We can reasonably expect Putin to take the eastern part of Ukraine, and all of it if he can. He doesn’t need to take Belarus; it is already a puppet state, but he would like to take Moldova and Georgia. They have installed puppets in Kazakhstan, Uzbekistan, and other countries on their southern flank, and these puppets will not condemn Russian aggression. They would like to take the Baltic states, but that will be harder, as they are members of NATO.

2. We are approaching April/May — the time of year when stocks often go sideways or until September/ October.

3. We are seeing higher interest rates as the Federal Reserve tapers their current QE. QE will be finished by December 2014 on the current schedule. When this happened in 2010, 2011, and 2012, the U.S. market had a 10 percent + correction every time.

4. European and U.S. leaders are not willing to act to stop further land grabs of sovereign countries by Russia or China or others who act aggressively. The world will see a great deal of aggression against sovereign nations by aggressor states until the U.S. and Europe decide to stand up to them. These behaviors will create market volatility. 5. 2014 is a U.S. election year, and election years often lead to stock market volatility as politicians position themselves by proposing politically expedient (and economically unwise) policies.

Neutral:

1. Russia will try to substitute other currencies for the dollar to make oil payments. They tried to do this 7-8 years ago, and it remains part of their long-term plan to dethrone the U.S. dollar from its position as the world reserve currency. Politically and economically, a great deal of U.S. power and advantage comes from the U.S. dollar’s position as the world reserve currency.

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