Global Market Commentary

April 28, 2016

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Market Summary

A year ago, in our letter of April 30, 2015, we noted:

“While we do not see a crisis as imminent, we believe that a global debt liquidation is becoming a more obvious eventuality sometime in the next two to three years.”

Since then we have continued to point out that a day of reckoning would be ahead for a global economy long juiced by extraordinary monetary policy, in which growth is suppressed by excessive debt — and that the ensuing crisis and recession would be a harsh awakening.

We would now put the timeframe for such a debt liquidation and its attendant recession, which we believe will resemble that of 2007–2008, as likely to be within the next one to four years.

A bigger question that has been in the front of some investors’ minds for years is whether a monetary reset will be necessary.

Will we see only a recession, or will the recession turn into a depression, either inflationary or deflationary?

Will the world’s present massive debt loads lead to a debt crisis where the system has to be reset, much as it was in 1944 with Bretton Woods?  In our view, the world is in the late stages of a debt-creation bubble, which will lead to a debt liquidation at some point in the future.  The big question: is that sooner or later?

Clearly, all the signs of trouble are evident.  Today, the world is near the end of a multi-decade global debt buildup which will need to be liquidated or restructured.

  • There is a massive debt buildup in the developed world.  The U.S. Federal debt alone is about $19 trillion.  According to the U.S. Debt Clock, public and private U.S. debt (of the Federal government, state and local governments, corporations, and individuals) totals about $64 trillion.
  • When we consider the rest of the world, there are additional hundreds of trillions in global debts… and future liabilities.
  • China is developing a massive debt bubble that may take longer to collapse due to the fact that it is internally financed within China.       
  • Europe has never recapitalized their banks as they were told to after the crisis of 2007 and 2008.
  • We’re seeing excessive spending by governments all over the world, as populists of the left and right take power in numerous countries.
  • Artificially low interest rates worldwide are damaging savers, the retired, and many financial industries (including the insurance industry), and creating massive global financial speculation and distortions of markets’ natural price-discovery mechanisms.

These are just a few of the manifestations of the debt cycle’s nearing end; many more could be listed.

Thousands of years of world history have shown the undying desire of politicians everywhere to put off the inevitable until they are out of office.  The most common and preferred solution to debt crises will be to devalue one’s currency so that debt can be paid back in cheaper coin.

This, combined with excessive taxation, will create a free-for-all, and at some stage, commodities with lasting value, including gold, oil, and land that can be used for productive purposes, as well as other perceived stores of value, will rise rapidly.

All of the above explains why we see gold as an important long-term investment.

There will be other alternatives for investors who are watching the unravelling of the world’s debt edifice.  These could be stocks of growing companies, or companies with large asset bases and low debt; general commodities, especially oil; base metals; gems; art; productive real estate which creates income; and many others.

Currently, the world and U.S. stock markets are slightly over-valued.  The wisest course of action, in addition to owning gold and gold shares, is to use dips to buy great companies which can grow due to technological advantages.  This includes companies that revolutionize business and consumer behavior such as Alphabet [NASDAQ: GOOG], Facebook [NASDAQ: FB], some biotechnology firms, and other revolutionary companies, including those making profound changes in the way business is done (for example, cloud service providers). (Note: Guild owns GOOG and FB for some clients.)

Buy oil shares on dips; buy income-producing real estate or real-estate stocks which are not over-levered.  Own quality companies which can grow through thick and thin, and which can do well in every environment, including periods of economic recession.

Avoid excessive leverage in every investment.  Those who are over-levered in any area — whether it is real estate, commodities, stocks or business — will be bankrupted if consumption and rents fall, recession takes hold, or inflation makes a rapid return.

Look for reversion-to-the-mean investments.  What do we mean by that?  Investments where major problems have developed and are on the road to being solved.  We see Brazilian and Russian bonds as good buys on dips as the prices of their commodities rise.  These are not long-term investments, but could be very profitable in the short run.