President Obama was met by strong language from China’s chief banking regulator hours before he arrived in China.  Chief regulator Liu Mingkang said a weak dollar, low interest rates, and other actions have “led to massive speculation".  He was saying, in effect, that the U.S. carry trade (a process in which the U.S. Dollar is borrowed and then sold to purchase assets such as commodities, stocks, and real estate) is creating asset bubbles around the world.

He pointed out that many countries are experiencing a rise in real estate prices due partly to the low interest rates in the U.S. and elsewhere which encourages speculation.

It is true that speculative economic activity has continued in some countries unabated while the U.S., Europe, and Japan have experienced big recessions.  In the faster growing countries, there is no denying that prices are rising for investment assets.

MANY ARE ASKING “WHEN WILL THE CHINESE RENMINBI SEE A RAPID RISE IN PRICE?”

China, which up until last summer had let its currency rise versus the U.S. Dollar by a few percent per year, will have to allow their currency rise more rapidly to keep inflation at bay.  Over the years, we have observed that the Chinese are gradualists and will only let their currency rise when inflation starts to bite.  We see them letting the Renminbi’s value rise more rapidly when Chinese inflation reaches 5%.  This will probably occur in late 2010.

U.S. ECONOMY-A BAD CALL

We have been too pessimistic on the outlook for the U.S. economy.

Although we anticipated and correctly called the direction of the U.S. economy, we were too pessimistic about the duration and depth of the correction.  We now believe that the U.S. economic correction has probably seen its lows.  Over the next year, we expect to see slow growth from the U.S., Europe, and Japan.  The economic growth will be slow compared to what we expect from China, India, Brazil, Indonesia, Taiwan, Singapore and Hong Kong.

REWARDING THOSE THAT CONTRIBUTED TO THE CRISIS! 

THE NEW YORK TMES
Home Builders (You Heard That Right) Get a Gift
November 14, 2009
By Gretchen Morgenson

ON Nov. 6, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009 into law, extending unemployment benefits by 20 weeks and renewing the first-time homebuyer tax credit until next April.

But tucked inside the law was another prize: a tax break that lets big companies offset losses incurred in 2008 and 2009 against profits booked as far back as 2004. The tax cuts will generate corporate refunds or relief worth about $33 billion, according to an administration estimate.

Before the bill became law, the so-called look-back on losses was limited to small businesses and could be used to counterbalance just two years of profits. Now the profit offset goes back five years, and the law allows big companies to take advantage of it, too. The only companies that can’t participate are Fannie Mae and Freddie Mac and any institution that took money under the Troubled Asset Relief Program.

Among the biggest beneficiaries are home builders, analysts say. Once again, at the front of the government assistance line, stand some of the very companies that contributed mightily to the credit crisis by building and financing too many homes.

This is getting to be a habit: companies that participated on the upside and are now reaping rewards from the taxpayers on the downside. The banks that underwrote so many dubious loans, for example, received government aid to get them lending again. Unfortunately, that hasn’t been the result.

One can make an argument that throwing money at the banking system is necessary if we are to jump-start the economy. And banks need a bigger capital cushion to protect against future losses.

But dropping helicopter money on the home builders — the folks who massively overbuilt in community after community — seems decidedly less urgent (unless you are one of these companies, of course). Given that the supply of housing far outstrips demand, it is unlikely that these companies will use these tax breaks to hire workers (unless they go into a completely new line of business).

“I AM surprised that home builders are getting hundreds of millions of dollars given that many have very strong balance sheets,” said Ivy Zelman, chief executive at Zelman & Associates, a research firm. “We question the public policy decision to gift home builders with capital that many will not use to create jobs, since they admit that job growth will be dependent not on capital, but on improving demand.”

When Mr. Obama signed the law, his administration said the tax break would help “struggling businesses.” But as Ms. Zelman pointed out, many large home builders are sitting atop mountains of cash. Pulte Homes, which will receive refunds exceeding $450 million under the new law, has $1.5 billion in cash and cash equivalents on its balance sheet, according to its most recent financial statement.

Hovnanian Enterprises is another big beneficiary of the tax break. It anticipates a refund of $250 million to $275 million next year. It had $550 million in cash in its most recent quarter.

Smaller recipients include Standard Pacific, which is poised to reap cash refunds of $80 million under the new tax break. According to its most recent financial filing, Standard Pacific held $523 million in cash and cash equivalents.

Finally, Beazer Homes told investors that it expects to receive a refund of $50 million. The company reported cash and equivalents of $557 million at the end of September.

Some of the home builders poised to receive tax refunds have even more cash today than they did last year.  D.R. Horton, for example, has $1.966 billion in cash, up 45 percent from September 2008 levels. And some are healthy enough to have retired significant amounts of debt from their balance sheets this year. Pulte has bought back $1.93 billion in debt in 2009.

So what do these companies plan to do with their refunds?

Ken Campbell, the chief executive of Standard Pacific, said the money would allow his company to continue buying land. “Will we build more houses or will there be more people employed in the first quarter? Probably not,” he said. “Will employment accelerate when the market starts to grow? It will.”

Caryn Klebba, a spokeswoman for Pulte Homes, said in a statement that the company planned to use the funds it receives “to support its current operations and, when market conditions improve, fund future growth and expansion.”

In other words, job creation does not seem imminent, notwithstanding the claims of the administration or those in Congress who supported the giveaway.

Representative Lloyd Doggett, a Texas Democrat, has conducted a lonely fight against the tax break all year.

“Some have said this is like a bridge loan to these companies,” Mr. Doggett said in an interview. “Well if it’s a loan, it is like a no-doc loan, because the recipients provide no indication that they will create jobs or do anything other than keep the money. I just feel it is a total windfall.”

Unfortunately, this seems to be another example of an age-old phenomenon: Good Things Come to Those With Lobbying Power.

Securing this tax break was a top priority for home builders, lobbying records show. The Center for Responsive Politics reports that through Oct. 26 of this year, home builders paid $6 million to their lobbyists. Last year, the industry spent $8.2 million lobbying.

Much of this year’s lobbying expenditures were focused on arguing for the tax loss carry-forward, documents show.

Among individual companies, Lennar spent $240,000 lobbying while companies affiliated with Hovnanian Enterprises spent $222,000. Pulte Homes spent $210,000 this year.

That’s some return on investment. After spending its $210,000, Pulte will receive $450 million in refunds. And Hovnanian, after spending its $222,000, will get as much as $275 million.

Meanwhile, the bag that we taxpayers are left holding gets bigger and bigger.

THE problem here is that this public policy decision was made with little to no input from the public. Sure, tax rebates like these give a lifeline to companies that were about to sink beneath the waves, but would it be so terrible if some builders that lost their heads during the housing mania ceased to exist? It is not as if a housing shortage will result or that more jobs will be lost if these companies don’t receive these tax breaks.

Pretending to promote job creation, the government is dispensing cash to companies that either do not need it or need it precisely because they didn’t run their businesses prudently. Isn’t there something wrong with that picture?

IRAN HAS PROBLEMS, BUT THE AYATOLLAHS WILL NOT GIVE UP.  THEY MUST STAND AND FIGHT, BECAUSE THEY HAVE NO PLACE TO GO.

After all, who will take them?  Will Saudi Arabia to the South? Will Russia and Turkey to the North? Will Iraq to the West? Will Pakistan to the East?

The truth is very few places on earth would welcome them.  A new generation of Ayatollahs is rising.  They have yet to gain enough influence, power, and money to be satisfied, so they will continue to do what they must to stay in charge as long as they can.  The following article points out what they are doing to stay in power.

THE WALL STREET JOURNAL

Revolutionary Guard Tightens Security Grip

Intelligence Agency Replaced by New Organization Reporting to Khamenei; Fallout From Massive Street Protests Over Election
By: Marc Champion

BRUSSELS — Iran’s elite Revolutionary Guard has sidelined the country’s intelligence ministry, forming a new organization that reports directly to the Supreme leader, Ayatollah Ali Khamenei.

Interviews with Iranian analysts and opposition figures, along with recent government announcements, depict a shift under way since Iran’s clerical regime was shaken by the massive street protests that followed disputed presidential elections in June.

The loyalty of the intelligence and security services became a major concern for hard-liners running the regime, analysts say. The changes could have the effect of formalizing the tough and sometimes brutal approach taken with dissidents and protesters in the months since the election.

Some of the intelligence takeover has been publicized. Ayatollah Khamenei announced recently that the Revolutionary Guard’s small existing intelligence unit would be elevated to become a much larger official organization. State media named Hassan Taeb, previously commander of the Basij volunteer paramilitary organization, as the head of the new intelligence operation.

To read full article please visit http://www.guildinvestment.com

SUMMARY

As expected, oil, gold and foreign stocks continue to move up, but we are not ready to sell.  We continue to hold and look for higher prices in coming weeks and months.  Our favorite investments remain oil and oil shares, gold and gold shares, stocks in faster growing countries, export stocks in developed countries, and currencies that can appreciate versus the U.S. dollar.

Thanks for listening.  Please contact us with your comments and suggestions.

Does the Obama Administration want the U.S. dollar to decline?  We believe it does.  On November 5th, the U.S. Federal Reserve announced that they intend to keep “interest rates exceptionally low” for an “extended period of time.”  Given that the U.S. Dollar is already under pressure due to low interest rates, the Fed’s announcement is the equivalent of saying: “go ahead and short the dollar”.  In our opinion, it is clear that this announcement ushers in a period of extreme volatility and a continued downward bias for the U.S. Dollar.

During the Clinton and GW Bush administrations, it was common for U.S. Treasury officials to make statements about the need for a strong dollar.  Historically, financial leaders have been circumspect about declaring that their currency is overvalued.  This is especially true for countries like the U.S. where the government is trying to sell trillions of dollars of debt to investors to finance the immense current and expected future budget deficits.  We therefore find it shocking that the world’s most important central bank has made statements that strongly encourage a decline in its currency.

However, an examination of the current administration’s economic approach provides a possible reason.  On November 2nd 2009, President Obama called for a new “post bubble growth model” with a greater focus on exports, and referenced the fact that Germany, which he called “a wealthy, highly unionized industrial nation,” has been a very successful exporter.  It does not take a rocket scientist to understand that his goals include more unionization and more exports.  And because U.S. union workers are in general much more generously compensated than non-union workers, we believe that the only way that the U.S. can achieve higher exports is to devalue the dollar.  We therefore believe that it is a goal of the Obama administration to see the dollar decline.

These events add credence to our view that one should avoid the U.S. dollar for major cash balances and instead hold the Australian, Canadian, Norwegian and Brazilian currencies.  We also continue to believe that investors should continue to hold oil, gold, and foreign stocks for the long term.  In our opinion, the profits in these areas may be just beginning to occur.

ANNIVERSARIES

November 5, 1999 was the 10 year anniversary of the removal of Glass Steagall.  We believe as do many others that the removal of Glass Steagall directly led to the financial melt down of the last two years.  Please see below for the New York Times article about the subject. 

CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
By Stephen Labaton
Published: Friday, November 5, 1999

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another’s businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

To read the full article, please visit our website: http://www.guildinvestment.com

This week we are celebrating the 20 year anniversary of the fall of the Berlin Wall.  As an international power Russia seemed quiescent 20 years ago.  Today, there is no doubt that the relative harmony of the Gorbachev years has given way to the militarism and bullying of the Putin years.

“THE SILENCING OF PAUL VOLCKER”

Maria Bartiromo of CNBC interviewed Paul Volcker on November 3, 2009. She entitled her interview with Mr. Volcker  “The Silencing of Paul Volcker.”

Ms. Bartiromo evidently believes that Mr. Volcker is unable to speak his mind about the need for separation of the banking activities of major banks from their trading activities.  As we stated in last week’s letter, Mr. Volcker has voiced the opinion that banks and their lending functions should be regulated by the Federal Reserve and that trading institutions should be separate from the bank lending system.

In GIM’s opinion, these trading activities, which employ immense leverage, are dangerous.  We believe that trading excesses could cause immense losses and instability to the entire banking system at any time.  And it is not hard to imagine that such a crisis would require further taxpayer bailouts for institutions that are “too big to fail.”

THE G-20 MET LAST WEEKEND AND MADE IT VERY CLEAR NO MONETARY TIGHTENING WOULD OCCUR AT THIS TIME

In effect, the G-20 said all systems are go for economic expansion globally.  The G-20 said in their news release, “Economic and financial conditions have improved following our coordinated response to the crisis.  However, the recovery is uneven and remains dependent on policy support. We agree to maintain support for the recovery until it is assured”

May we translate?  All systems are go for global economic expansion.  When this news became public the U.S. dollar fell and gold rose substantially.

U.S. MONEY SUPPLY CONTINUES TO BOOM

U.S. money supply is rising rapidly and this is another indicator of coming inflation and higher commodity prices in years ahead.  When combined with a lower dollar, this type of indicator has quite frequently led to inflation.  It is for this reason among others that we call for a resurgence of inflation in 2011.

INDIA AND SRI LANKA BUY GOLD

Many had feared that the IMF’s pre announced sales of 400 tons of gold would hit the market and cause the gold price to plummet.  We have long held that this decade, as in past decades, IMF gold sales are always taken by central banks that want to diversify out of currencies and into gold for part of their reserves.

Currently, the central banks of many emerging countries hold only about 3.5 percent of their assets in gold while developed countries have about 35 percent of their reserves in gold.  It is no secret that many emerging countries want to buy the IMF gold in order to raise their status in the community of nations and diversify their holdings out of the declining dollar.

India bought half the gold one month after it went on the market (a record quick sale) and Sri Lanka bought gold for their reserves in the open market.  Both purchases were at prices above $1,000 per ounce.  The purchase raises India’s gold holdings to 6 percent of their reserves from 4 percent. China’s gold percentage to total reserves is lower than India’s.  It seems obvious to us that many other nations will buy up any gold offered by the IMF or other central banks at market prices.  If they do, we expect the price of gold to rise much higher to accommodate a rise to 10 percent in India and China’s gold reserves.  China mines a great deal of gold internally.  If they decide to hold their domestic production to add to their reserves as Chinese financial figures have suggested they do, we could see gold move to much higher prices.

THE NEXT PRESIDENT OF CHINA

China’s next President will probably be the current Vice President, Xi Jinping.  He will inherit a number of problems that are developing in China such as public dissatisfaction with high home prices and public irritation with corruption and favoritism.  We anticipate he will favor the current policy of growing the economy with a well-planned series of goals to develop infrastructure, consumer spending and to provide new jobs in healthcare, consumer areas, education and construction to complement the existing factory job growth.

SUMMARY

This week’s pronouncements by President Obama and by the Federal Reserve add further conviction to our long held view that the U.S. Dollar will continue to slide in value. The GD-20 indifference to a declining dollar just raises the bearish thermometer. We remain bullish on oil, gold, non-U.S. currencies and foreign stock markets in fast growing parts of the world.

Thanks for listening!

Monty Guild and Tony Danaher
www.GuildInvestment.com

Last week, we had a short-lived rally in the U.S. dollar predicated on the unrealistic view that a weaker U.S. economy would send gold and oil down and the dollar up.  Only algorithm writers who are completely ignorant about stock and commodity markets could believe that a poor U.S. economy is actually good for the U.S. dollar.

After a few days, the dollar’s rally reversed and began to decline again while gold and oil are once again rising.  In our opinion, any declines in oil and gold prices over the next few months can be used as buying opportunities.

We expect oil to trade between $60 and $100 per barrel for the next two years.  After that, we expect oil prices to rise much higher.

We favor gold bullion and gold shares, oil stocks, U.S. technology companies that are poised to serve the world market through exports, and companies in emerging countries with growth potential.

INTEREST RATES

Last week, interest rates were forced up by the market, with the yield for U.S. ten year paper rising as the Treasury tried to sell $140 billion of new bonds.  Buyers are demanding higher rates, but the U.S. government is not going to raise short term rates until GDP growth increases substantially and remains good for a year or more.  Although the market may continue to force up longer term interest rates, we do not expect the Federal Reserve to raise short term rates.

Indeed, the U.S. Federal Reserve wants interest rates to stay low.  They realize that this is necessary to support asset values (even if they only move sideways).  A U.S. asset deflation occurred in 2008 and 2009, and the government is trying desperately to reverse the trend.  Although the stock market has succeeded in making a turnaround, real estate, cars, and many other asset prices remain deflated.

When it comes to keeping rates low and letting asset values rise, the U.S. Government clearly has a favorite method.  They prefer to depreciate the unit of measurement: the U.S. Dollar.

Most commodities are valued in dollars, so if one weakens the dollar, prices rise in U.S. terms, but many are falling in terms of strong foreign currencies, gold, oil and other stores of values.  While asset deflation continues in other currencies, asset prices have been rising in dollar terms.

CURRENCY CARRY TRADE

The currency carry trade occurs when investors borrow a given currency (let’s say the dollar) at very low interest rate and use the borrowed money to buy other currencies, stocks, and commodities.  It also occurs when and investors sell dollars short and later buy them back with depreciated dollars.  The carry trade is dependent on both interest rates and the value of the dollar.  And it has been one of the biggest factors responsible for the stock market rally in recent weeks.

The dollar’s recent rally has some believing the carry trade is winding down.  Perhaps fear of the big budget deficits and the low demand for U.S. Government bonds is causing investors to expect U.S. interest rates to rise sooner.  When the fear of rising interest rates pervades the markets, this causes speculators to unwind their carry trade by buying dollars back and selling their stocks and commodities.  In other words, the “carry trade” and the stock market rally are being endangered by potential higher interest rates caused by the big budget deficits.

We do not know if the market has reached its highs for 2009, but we do know that a small wave of fear is once again washing through investment markets.  The big decline of 2008 and early 2009 was cathartic.  The rally from this cathartic bottom has been normal, so any correction in global stocks and associated commodities will be short lived.  Perhaps short-term fears of a technical market correction causes speculators to cut borrowing (on which the carry trade depends), and to sell stock positions.

U.S. DEBT

The Economist magazine echoes many of our arguments regarding U.S. debt and deficits.  Last week’s Economist magazine had an important article entitled “Tomorrows Burden: Americas Debt Crisis will be Chronic Not Acute, and Long Lasting.”  The article elucidates many of the points that we have repeatedly made in our commentaries over the last several years.  It is well written, and I will take the liberty of paraphrasing the main points.

The author makes the point that there are three things that could lead to an acute crisis:

1.) A lender’s strike (no debt available)

2.) A crash in the dollar (possible not probable immediately)

3.) A rise in inflation (this seems remote to the Economist. It does not seem remote to us.)

The authors reason that the debt crisis will be long-lasting and chronic, but not acute.  That is unless one of these three issues develops.  We believe that we could experience all three of the above within a couple of years.  For those who would like to read the entire article, please see this link:

http://www.economist.com/displayStory.cfm?story_id=14699754

THE NEXT U.S. FINANCIAL CRISIS IS ALREADY ON THE WAY.

It will be an inflationary crisis, and it will commence about 2012.

The U.S. Government has guaranteed banks and the housing market.  It has borrowed hundreds of billions of dollars to strengthen the economy at the same time tax revenues are collapsing.  Social Security and health care financing will add to the burdens.  The banking crisis will probably turn into a long-term government debt crisis.

The United States has been living beyond its means, over-borrowing, and engaging in other irrational, unwise, and destructive behaviors.  These behaviors have been encouraged and abetted by the Congress, former Federal Reserve Chairman Greenspan, and both Republican and Democratic administrations.  A less powerful country, perhaps one which was not providing a military shield for much of the world, would have seen their currency and debt markets subjected to immense scrutiny and widespread suspicion and may have been forced to default long ago.

History has demonstrated two likely outcomes for the situation in which the U.S. currently finds itself.  The first is that bond and currency market speculators make default the inevitable outcome.  The second is that they devalue their currency substantially in order to pay back their debts in a diminished currency.  The day approaches when the U.S. dollar will meet the fate that so many other currencies have faced over the millennia…it will suffer a substantial decline and inflation will resurge.  This will probably occur no later than the end of 2012.

DEBT MARKETS

Contrary to the beliefs of some efficient market theorists, financial markets can remain highly irrational for extended periods of time.  Few things prove this better than the behavior of the U.S. debt market.

The reality is that investors should be scared of the U.S. debt market.  The U.S. continues to go to the markets with bond offerings, financing huge sums of borrowing to feed its ravenous appetite for spending that far exceeds the means of the taxpayers…or the logic of markets.

The markets continue to support the dollar beyond a reasonable level.  This support can be partially explained by the many relationships and financial activities the U.S. Government currently undertakes.  Over the years, the U.S. military’s largess and the dollar’s status as a world reserve currency have helped sustain the value of the dollar.  For example, the U.S. still incurs a large percentage of the military protection costs of Germany and Japan 64 years after the end of World War II.

The value of the dollar has also been preserved because the major debt holders; Japan, China, Saudi Arabia, and Britain are large exporters to the U.S. and/or those that are allied with the U.S. militarily.  Below is a chart from the U.S. Treasury Department:

LEVERAGE IN THE BANKING SYSTEM

Remember the terrible banking crisis of 2008-2009 that brought down Bear Sterns, Lehman, and Washington Mutual, and threatened others in the U.S. and Europe?  You haven’t forgotten, and we haven’t forgotten, but it seems that Congress has.  What’s more, they are squandering an opportunity to repair and revitalize the U.S banking system.  Today, the U.S. banking system continues to be dangerously speculative and interconnected.  Banks deny credit needed for small business, the major driver of employment, while engaging in unproductive speculation.  And although this is clearly a serious defect in the system, Congress has failed to address it.

Even more disconcerting is that the banking lobby has Congress’ ears.  Instead of listening to the proven, wise, and honest former Fed Chairman Paul Volcker, Congress is listening to the folks that brought us the last crisis.  So when Volcker makes the reasonable suggestion that banks and speculative trading activities should be separated, and that only banks with no involvement in trading for their own account should get government guarantees and bail outs, Congress isn’t listening.  Sadly, we fear that Congress’ unwillingness to face down the banking lobby guarantees that a new crisis is on the agenda for future years.

This is in sharp contrast to Holland, where the country’s largest bank is forced to sell its U.S. Internet banking operations and its insurance company in order to attain and maintain the use of government funds.  In Britain, the trend toward breaking up large banks is being pushed by the top economists at the Bank of England, and in other countries there are demands that banks stop speculation for their own account.  In our opinion, disallowing speculation by commercial banks is the only effective method to forestall the next system-wide financial crisis.

Thank you for listening and please do not hesitate to contact us with your suggestions.

Monty Guild and Tony Danaher
www.GuildInvestment.com

A new era in computing and delivery of information has begun.  If you aren’t yet familiar with cloud computing, you probably will be soon.  We expect there to be an onslaught of news articles, editorials, and advertisements about cloud computing accompanying Microsoft’s launch of their new computer operating system, Windows 7.

The term cloud refers to the Internet (most computer network diagrams use a cloud shape to depict the Internet).  Cloud computing allows companies and consumers access to virtually limitless processing power and storage.  In this new era, the personal computer (PC) will no longer be doing as much of the computing.  Rather, a vast network of data centers replete with huge storage systems and servers will operate complex programs, store information, and deliver web based services to computer and mobile device users worldwide.

Already, online games, web based email, and social networking sites operate from the cloud, and many new services will join them.  Smart phones, tablets, game platforms, net books, and other devices will get new operating systems and programs optimized to run from the cloud.  The cloud will change the way the technology business operates and how technology companies will compete with one another.

Longer term, this is not good for Microsoft’s old business model.  The PC has been their power base and there will be a very vibrant competition between Apple, Google, and Microsoft for dominance in the data center business and associated suites of services and applications.

Intel

MOBILE TELEPHONY AND INTERNET

Clearly, one of the great trends of 2009 and the coming few years is mobile Internet access.  With cloud computing so much in the news, and with the knowledge that the Internet is the basis of cloud computing as opposed to the desktop, we are looking at companies that access the Internet through mobile means via 3G (third generation) smart phones.  These include (as we have mentioned in previous memos) service providers, device makers, component makers, and software developers.  Our favorite ways to play the trend are through device makers and their suppliers.

This week, we had a number of conference calls from semiconductor companies who supply the necessary internal components for mobile devices and for cloud computing.  We also heard a stunningly bullish conference call from Apple Inc. which laid out how rapidly mobile 3G telephony is expanding in many countries.  Apple of course does many other things besides smart phones, and currently several of their consumer advice and retail businesses segments are also doing very well.

Apple

THE ECONOMIC GROWTH MODEL FOR JAPAN, EUROPE, AND THE U.S. IS POOR WHEN COMPARED WITH THE FAST GROWING COUNTRIES IN ASIA, AND WITH BRAZIL

CHINA, INDIA, AND BRAZIL

We can see China, India, and other countries growing, and the economic data is very supportive of this view.

We do not believe the same about the developed world.  Rather than inundate readers with every new data point about China’s growth, suffice it to say that their growth is fast and accelerating.  China just announced their third quarter GDP growth at 8.9 percent.  China’s foreign exchange reserves grew by $318 billion in the last six months.  Contrary to misinformed and naive reports, this came in spite of a big slowdown in Chinese exports.  The increase was due to the growth in foreign direct investment; foreign companies building plants, distribution facilities, retail outlets, and other enterprises in China.  The bears and naysayers on China’s economy are looking more incorrect with each passing day.

China’s economy has been moving from an export model five years ago to a hybrid model based on infrastructure, the consumer, and exports.  They have strengthened their relationships with markets within Asia and Europe, and are no longer as dependent upon the U.S. for exports as they once were.  The Chinese politburo is made of clearer thinking, and long-term goal driven engineers, and is very rational in its top down management and goal setting for the economy.  The banking system, although not perfect, is stronger than the U.S., European, and Japanese banking systems.  Capital is being allocated more wisely in China, and the country has huge trade balance of payments and current account surpluses.

India is also doing very well.  The national need for infrastructure is finally being addressed, and Indian entrepreneurs are running a strong economy.  India is still hampered by a socialistic bureaucracy that has always found a way to slow progress, as bureaucrats have used delay tactics and interference to make themselves more important and more wealthy.  Nonetheless, the country is showing strong growth and the middle class continues to expand rapidly.

Brazil is another success story.  Their banking system is operating very efficiently and the consumer is responding with increased demand for auto and home loans.  Much of this is due to the fact that Brazilian rates are now low enough for consumers to be able to borrow to buy a car or house.  Previously, periods of strong inflation and high interest rates had priced consumers out of the market for credit.  Today’s more reasonable rates and lower inflation have set the stage for a period of consumer demand and growth of the Brazilian middle class.

These three countries and many others in Asia are growing their middle classes rapidly.  The opposite is true in the U.S., Europe and Japan as many are falling from middle class security in these more mature economies.  All of this is the manifestation of today’s major world economic trend the decline of countries with overleveraged, weak banking systems and consumer focused countries of the developed world; and the rise of the emerging powers with stronger banking system, underleveraged economies, and industrial oriented leadership.

SUMMARY

Within the developed countries we are sticking to export oriented companies especially in high technology areas.  We remain bullish on most of the emerging nations of Asia.  Longer term, we like India and Brazil, but their markets have run ahead of their peers and may be vulnerable to a short term decline, we are monitoring them and looking for buying opportunities.  We continue to believe that oil, gold, and non U.S. currencies will appreciate.

Thanks for listening.  Please contact us if you have any questions or suggestions.

Monty Guild and Tony Danaher
www.GuildInvestment.com

In the last twelve months, wheat, corn, soybeans, and the prices of many soft commodities and foodstuffs have fallen at the wholesale level.  This has been due to a cool and rainy summer in the Midwestern U.S. and in Europe, and a strong soy crop in Brazil.  The old saying held true in 2009; “rain makes grain”.  The exception has been sugar which has risen in price due to crop issues in Brazil and India.

We continue to believe that food prices and most commodity prices will rise versus the dollar but the rises will be modest.

In addition to the grains, some industrial metals have struggled to rise.  Industrial commodities are less attractive than oil and gold.  We expect global demand for industrial metals in Europe, Japan, and U.S. to remain weak while demand will be stronger than expected in China, Brazil, India and other emerging nations.

The ample excess capacity in the developed world’s economies has convinced some people that inflation can not return for some time.  A few years ago we would have expected inflation to be rising by this point in time.  We were wrong.  Inflation does not appear to be a problem in the developed world for the immediate future.  At some point, inflation will resurge, yet a falling dollar will keep selected investments rising long before inflation appears.

If inflation is not returning in the next year, why have many non-food commodities been rising lately?  Most notably are oil and precious metals.  In addition, while gold, oil, and foreign currencies are rising, so too are the U.S. and world stock markets.

While there may not be inflation right now, investors are beginning to prepare for it.  Driving the rise in these markets and commodities is the falling value of the U.S. dollar.  It is important to remember that when professional investors want to invest to hedge against a declining dollar, they will buy the oil and gold, and foreign currencies.

CURRENCIES

The global currency markets are huge, trading hundreds of billions of dollars a day.  We prefer to buy the currencies of smaller countries such as Norway, Switzerland, Canada, Australia, Brazil, and a few others.  Why have we chosen to invest in the currencies of the smaller countries?  Smaller countries lack the capital to fight a rise in the value of their currency.

All governments will want to defend their respective currencies if they move too far.  After all, governments are pressured by their home exporters to keep their currency down and stimulate exports.  While bigger countries have more capital to defend their currencies and try to keep them from rising, it is harder to do if you are smaller and the capital at hand to sell your currency and buy dollars is limited.

Conversely, the currencies from larger economies like Japan or Europe have much more money to buy dollars and sell their own currency thus keeping their currency lower and stimulating exports.

HOW TO HEDGE AGAINST A FALLING DOLLAR

1.  Own select commodities.
2.  Own select foreign currencies.
3.  Own U.S. stocks which are beneficiaries of inflation
a)  exporters who benefit when the cost of exports fall as the dollar declines.
b)  stocks which are connected with the strong commodities oil stocks and gold stocks.
c) stocks which are generally benefiting from low interest rates (U.S. rates are being held artificially low, and will be for some time).
4.  Own foreign stocks denominated in strong currencies of companies which can grow.

FINANCING THE DEFICIT

The U.S. Federal Reserve has purchased $2.2 trillion of U.S. paper, bank bonds, corporate bonds, U.S. agency bonds, and U.S treasury debt.  They will have to buy much more to finance the U.S. budget deficits of the next few years.  The purchases thus far have been both to finance the deficits and to bail out the banking system.

China, seeing the error of this strategy has been open about looking for ways to reduce their reliance on the dollar, and they have been steadily moving along to curtail the use of dangerous derivatives in China.  We will discuss this in more detail next week.

The Expanding U.S. Debt

IT IS APPARENT THAT U.S. CONGRESSPEOPLE OF BOTH MAJOR PARTIES ARE DOING NOTHING ABOUT THE U.S. DEFICITS

The Greek playwright Euripides wrote; “Those whom the gods would destroy, they first make mad.”

Clearly, the Congress of the United States is ignoring the budget, current account, and balance of payments deficits that are currently exploding on their watch.  The argument of many we have talked to who are connected with Congress sound something like ‘during the Reagan Administration we ran deficits, and soon after during the Clinton Administration we had surpluses to counterbalance them.’  Their logic being that some similar gift in the form of budget surpluses will magically appear in the near future.

May we respectfully point out that the actions being taken today are in many ways the antithesis of the actions taken during the Reagan Administration.  Today, the U.S. is running trade, current account, and off the charts record budget deficits while the current administration is proposing raising taxes.

The Reagan administration, with congress’ agreement ran deficits, in part because they cut taxes, especially capital gains taxes.  The tax cuts created incentives to invest and to create new capital.  As a result of this decision, venture capital flowed into the high technology companies, and many new industries were fostered, such as semiconductor, communications, biotech, software, the internet, and many other high tech areas were stimulated.  This growth produced many millionaires and created huge tax receipts for the government in the 1990’s and early 2000’s.

The current situation is just the opposite.  Congress is discussing raising taxes while financing two wars and spending huge sums on social programs.  There is less incentive for the entrepreneurial to take risk, build companies, and form capital.  Venture capital is not pouring into new technology or any other type of new ventures.  In fact, businesses today are having a hard time getting bank financing.

INVESTING IN NEW BUISNESS IS AN ECONOMIC NECESSITY

Simply put, no nation will generate big tax revenues from new businesses if they do not invest in them.

When this is pointed out to politicians of both parties, they revert to the old hope that something good will happen…but they are unable to suggest what that something good might be.

IF YOU BUY FINANCIAL STOCKS IN THE DEVELOPED WORLD…REMEMBER THEY ARE TRADES, NOT INVESTMENTS

The fact is that many banks are for all intents bankrupt.  Accounting tricks have been allowed by the AICPA, the group that governs what CPA’s allow in financial statements. They have agreed to be very lenient about the classification of certain risk assets and to value them in a manner that is more positive than the underlying market reality.  In other words, many of the assets could not be sold for close to the prices shown on financial statements.  Governments around the world, including in those in the U.S., Europe, and Japan have purchased the assets of severely compromised financial institutions to keep them from declaring bankruptcy. The hope is that the wide differential between the cost of deposits and the returns of loans will allow the banks to make enough money to recoup their capital and to float more shares in the public markets.  This story is a long way from being over so, be sure to remember that financial stocks in the developed economies are trades, not investments.  This is not the case for most of the banks in Canada, Brazil, Australia, and many developing countries in Asia which have been more conservative about purchasing exotic debt instruments which became toxic.

SUMMARY

We continue to expect a weak U.S. dollar, strong gold and oil prices, and plenty of profit opportunity in selected non U.S. stock markets.  In our opinion, investors should look for companies that export to faster growing parts of the world when investing in the U.S., Europe, and Japan.  In the emerging world, we prefer financial and consumer stocks that can grow.  You might consult our archives at www.guildinvestment.com for stock markets and industries we favor.

If you have questions feel free to contact our office.  Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

THE MIDDLE EAST AND ITS IMPACT ON STOCKS AND COMMODITIES

Many of our wise friends have been concerned for years that the world will see another Middle East war.  Simultaneously, others who we respect are currently concerned that peace in the Middle East will cause oil prices to fall. Recent news coverage of the Iranian nuclear program has heightened these fears among many investors. Will Iran get the bomb? Will they use their nuclear power rashly? Although we believe that eventually Iran will have nuclear warheads, we believe that sane behaviors will prevail.

Before we do too much worrying about the above outcomes let us look at the winners and losers should there be an outbreak of war in the Middle East.

Who imports oil from the Middle East?  We reason that those who import oil from the Middle East are quite vulnerable to higher oil prices and possible shortages in the event of a protracted Middle East conflict with or without nuclear weapons.

Japan, Europe, U.S. and China are the largest developed areas importing Middle East oil.  These nations share a common purpose to keep Middle Eastern oil flowing.

WHO BENEFITS FROM HIGHER OIL PRICES?

Russia has recently become the worlds biggest oil producer. Russia is a weak economy with a big deficit which needs oil prices to stay at current levels [approximately $70 per barrel] or to rise if Russia is to balance their budget in 2009/2010. Higher oil prices would be a great boon for Russia.

Venezuela, another mismanaged economy which produces oil, would also benefit.  Venezuela has financial problems, and higher prices for crude oil would be greatly to their advantage.  Much of their oil is heavier and harder to refine, therefore it sells for a discount to lighter more easily refined Middle Eastern grades of oil.

The oil producers in the Middle East benefit as long as there is no destruction of their properties. The problem for them is that a war in their region could decrease their production over the short or intermediate term and could block transportation routes for their oil to reach market. In our opinion, most Middle Eastern producers sincerely wish to avoid a war in their region.

Clearly, there are extreme groups in many oil producing countries who wish to hurt the oil consumers and would be thrilled to destroy Israel.  However, the governments of Saudi Arabia, Iraq, United Arab Emirates, and even Libya, which are the big oil producers in the region, do not want the major oil consumers to be enraged at them, nor do they want war to disrupt their shipping lanes and thus curtail their income. In our opinion, these producers would be happy with higher prices, but not at the risk of not being able to sell or deliver their production.

The exception may be Iran, who is increasing their alliances with Russia to the consternation of the oil-consuming regions.

One big consumer who has not weighed in on the political standoff between the anti-nuclear forces and Iran, but who may be pressuring all parties behind the scenes is China. China is a very big consumer of Middle Eastern oil.

WE BELIEVE THAT MANY OF THE TENSIONS IN THE MIDDLE EAST CAN BE TRACED TO RUSSIA.

Russia wants to increase their geopolitical influence.  One way to do this is to work with difficult nations such as Iran, and to make life more difficult for the Europeans, the U.S., and China. Russia is supporting Iran’s nuclear program with technical personnel, selling weapons to Iran and supporting them  in world political bodies.

OUR EXPECTED OUTCOME—–MORE TENSION, BUT NO WAR

With four big power blocs against war (Europe, China, Japan, and the U.S.) the only one big power bloc who may be in favor of war is Russia.  We doubt that war will occur.  Skirmishes may occur and there is the possibility of the bombing of one Iranian enrichment facility by Israel, but we do not believe that the U.S. and other Israeli allies will allow Israel to take unilateral action.

THE MAJOR INFLUENCE ON THE PRICE OF OIL AND OTHER COMMODITIES ON THE WORLD STOCK MARKETS WILL BE THE CONTINUED DECLINE OF THE U.S. DOLLAR

In our opinion, people will flock to stores of value that are priced in U.S. dollars, especially oil and gold to hedge against a weak U.S. dollar.  The logic is that if demand remains stable and the dollar falls in value, consumers who buy with other currencies will continue to pay the same number of other currencies as before, allowing the price in U.S. dollars to rise.  In the past, a declining U.S. dollar has also caused many investors to buy non U.S. stocks and real estate as a method to diversify while hedging against the U.S. dollar decline.

Certainly, there is a lot of complaining by European nations that the U.S. dollar is too weak and is attaining an unfair trade advantage as a result of its decline.  We see this as typical during periods of serious economic decline in Europe.  Politicians are desperate to shift the blame for their inept handling of the economic situation to others, and the U.S. dollar is a good proxy.

A big concern of ours is that competitive devaluations may begin as one country after another starts to try to manipulate their currency. We believe that all three of the major currency blocs the Yen, Euro, and U.S. want their currencies to decline so that they may export more. The expected outcome is that they will all stay in a fairly narrow trading range with one another for the next few months as their parent governments manipulate their values in the currency markets. While these three currencies are being manipulated to maintain export parity, we expect the smaller non-manipulated currencies, such as the Norwegian Krone, Brazilian Real, Australian Dollar and Canadian Dollar to continue to rise versus all three of the major currencies.

WILL THERE BE A BIG STOCK MARKET DECLINE IN 2009?

We certainly don’t know about the timing, but we have no reason to expect more than a normal 15 percent correction in U.S. and European stocks over the next few months. A major market decline will not occur, in our opinion, until fear of another banking system collapse returns.  If this fear does return, it will be due to a new crisis in the banking system: the crisis will be the result of the behaviors surrounding the current banking system bail out. We believe the bailout of 2008-2009 has created “moral hazard” which will eventually lead to even greater speculation in derivatives, and will eventually lead to new types of risk taking couched in much the same faulty mathematics as the last batch of toxic securities.

Derivatives are profitable to those who create them. The instruments may have big commissions connected to them that are quite opaque to the buyer of the derivative. This makes them immensely attractive to those who create them and the creators are fighting hard to keep their creation as unregulated as possible.

U.S. POLITICIANS WILL NOT REGULATE DERIVATIVES BY REQUIRING THAT ALL SUCH CONTRACTS BE CLEARED THROUGH AN EXCHANGE

We were not encouraged to see that last Friday that the U.S. House of Representatives Financial Services Committee released a draft bill that plans to only mildly regulate derivatives.  The politicians are avoiding the strong medicine that former Fed Chairman Paul Volcker has recommended.  They are not even agreeing to the much less stringent suggestions of the Obama administration.  The draft bill proposes to exempt many of the world’s largest commercial hedgers from processing derivatives through clearinghouses. We believe that this will open loopholes through which speculators and major institutions will get exemptions from requiring their derivative transactions to be cleared through clearinghouses.

Because they are unwilling to take the politically difficult, but in our view necessary regulatory action to avoid a further recurrence of the problem, there is no question in our minds that a new crisis will occur.  The only question is, when will it occur?  We will monitor the situation and hopefully we will be fortunate enough to again predict when a new type of derivative will bring down the banking system.  Our preliminary guess is that it will take a minimum of two to three years for a new crisis to unfold.

SUMMARY

We believe that the U.S. dollar will continue to decline in value against the smaller and less manipulated currencies such as the Brazilian, Australian, Canadian, and Norwegian, barring a war in the Middle East, which could offer the U.S. dollar temporary safe haven qualities.  In our opinion, to hedge against a decline in the currency, U.S. dollar holders should consider holding oil, gold, and foreign company shares which are not denominated in U.S. dollars.

Our favorite foreign markets are Brazil, Hong Kong, Taiwan, Singapore, and India.  Within Europe and the U.S. we favor those companies which can excel in exporting to the fast growing segments of the world. In these regions we would wait for market corrections before initiating large positions.  Please do not hesitate to write or call with questions or suggestions.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

The end of September is here.  We wish you a happy and healthy fall season in the northern hemisphere and spring in the southern hemisphere.

THE G-20 MEETING

Last Thursday and Friday, the G-20 meeting was held in Pittsburgh.  At this meeting, it was decided that world economic power, which had been the bailiwick of the eight G-8 countries, should be broadened to give more voice to twelve additional countries.  This gives the G-20 power to set world economic policies. 

The Group of twenty includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Netherlands, Russia, Saudi Arabia, South Africa, Spain, Turkey, the United Kingdom, and the United States.  The most powerful of the twelve newcomers to the economic setting body are India, Brazil, Saudi Arabia, and China.  It is interesting to note that both Saudi Arabia and China are big creditor nations to the U.S., and India and Brazil are among the world’s fastest growing nations. 

The G-20 summit also included much political furor about the pay of bankers.  Legislation will undoubtedly ensue as a result of the political outrage of the man in the street.  Does anyone really think that this will stop high pay for traders and bankers?  It is a big world.  The companies who hire the high-priced traders and bankers are big global companies, and they can pay you anywhere and at any time.  Our guess is that this will create some fees for international tax lawyers but very little change in income for bankers.

In an article last week, Martin Feldstein, professor of economics at Harvard, was Chairman of President Ronald Reagan’s Council of Economic Advisors and President of the National Bureau for Economic Research discussed his expectation for rhetoric, but little substance from the G-20 communiqué this past weekend.

Martin Feldstein: The G-20’s empty promises

Talk about “exit strategies” will be high on the agenda when the heads of the G-20 countries gather in Pittsburgh a few days from now. They will promise to reverse the explosive monetary and fiscal expansion of the past two years, to do it neither too soon nor too late, and to do it in a coordinated way.

These are the right things to promise. But what will such promises mean?

Consider first the goal of reversing the monetary expansion, which is necessary to avoid a surge of inflation when aggregate demand begins to pick up. But it is also important not to do it too soon, which might stifle today’s nascent and very fragile recovery.

But promises by heads of government mean little, given that central banks are explicitly independent of government control in every important country. The US Federal Reserve’s Ben Bernanke, the Bank of England’s Mervyn King, and the European Central Bank’s Jean-Claude Trichet will each decide when and how to reverse their expansionary monetary policies. Bernanke doesn’t take orders from the US president, and King doesn’t take orders from the British prime minister (and it’s not even clear who would claim to tell Trichet what to do).

So the political promises in Pittsburgh about monetary policy are really just statements of governments’ confidence that their countries’ respective monetary authorities will act in appropriate ways.

That will be particularly challenging for Bernanke. Although the Federal Reserve is technically independent and not accountable to the President, it is a creation of the US Congress and accountable to it. Because of the lagged effects of monetary policy and the need to manage expectations, early tightening by the Fed would be appropriate. But the unemployment rate could be over 9 per cent — and possibly even more than 10 — when it begins to act. If so, can we really expect Congress not to object?

In fact, Congress might tell the Fed that it should wait until there are clear signs of inflation and a much lower unemployment rate. Because Congress determines the Fed’s regulatory powers and approves the appointments of its seven governors, Bernanke will have to listen to it carefully — heightening the risk of delayed tightening and rising inflation.

Reversing the upsurge in fiscal deficits is also critical to the global economy’s health. While the fiscal stimulus packages enacted in the past two years have been helpful in achieving the current rise in economic activity, the path of future deficits can do substantial damage to long-run growth.

In the US, the Congressional Budget Office has estimated that President Barack Obama’s proposed policies would cause the federal government’s fiscal deficit to exceed 5 per cent of GDP in 2019, even after a decade of continuous economic growth. And the deficits run up during the intervening decade would cause the national debt to double, rising to more than 80 per cent of GDP.

Such large fiscal deficits would mean that the government must borrow funds that would otherwise be available for private businesses to finance investment in productivity-enhancing plant and equipment. Without that investment, economic growth will be slower and the standard of living lower than it would otherwise be. Moreover, the deficits would mean higher interest rates and continued international imbalances.

In contrast to monetary policy, the US president does have a powerful and direct impact on future fiscal deficits. If the presidential promise to reduce the fiscal deficit was really a commitment to cut spending and raise taxes, we could see today’s dangerous deficit trajectory be reversed.

Unfortunately, Obama shows no real interest in reducing deficits. The centrepiece of his domestic agenda is a healthcare plan that will cost more than a trillion dollars over the next decade, and that he proposes to finance by reducing waste in the existing government health programmes (Medicare and Medicaid) without reducing the quantity and quality of services.

A second major policy thrust is a cap-and-trade system to reduce carbon emissions. But, instead of raising revenue by auctioning the emission permits, Obama has agreed to distribute them without charge to favoured industries in order to attract enough congressional votes. Add to this the pledge not to raise taxes on anyone earning less than $250,000 and you have a recipe for large fiscal deficits as long as this president can serve. I hope that the other G-20 leaders do a better job of reining in their budgets.

Finally, there is the G-20’s promise to reduce monetary and fiscal excesses in an internationally coordinated way. While the meaning of “coordinated” has not been spelled out, it presumably implies that the national exit strategies should not lead to significant changes in exchange rates that would upset existing patterns of trade.

In fact, however, exchange rates will change — and need to change in order to shrink the existing trade imbalances. The dollar, in particular, is likely to continue falling on a trade-weighted basis if investors around the world continue to set aside the extreme risk-aversion that caused the dollar’s rise after 2007. Once the Chinese are confident about their domestic growth rate, they can allow the real value of the renminbi to rise. Other exchange rates will respond to these shifts.

In short, it would be wrong for investors or ordinary citizens around the world to have too much faith in G-20’s promises to rein in monetary and fiscal policies, much less to do so in a coordinated way.

Additional news which came out Friday is that while world trade is picking up, trade is still shrinking in the U.S. and Europe.  World trade is rising in large part due to Asia, Australia, Canada, Brazil, and European, and U.S. machinery and technology companies exporting to Asia. 

We had been concerned about a possible trade war during this economic contraction. Lately, the U.S. and China have been behaving in a reactionary manner, which appears is more for political purposes. This leads us to believe their actions are not a precursor to a trade war.

ECONOMICALLY, AS GOES CHINA…SO GOES THE WORLD

As the world economy continues to stumble ahead, we can see signs that the deflationary recession / depression that we have experienced is becoming less deflationary, and that inventory restocking is causing some growth in the world.  However, the world, excluding China, India, and some other parts of Asia remains very dependent upon Asian economic activity to provide the economic growth. 

Much depends on what amount of economic growth China’s top officials determine is necessary to stimulate.  This will determine how much the world can recover.  China is moving to shift some of the huge build-up in liquidity caused by foreign direct investment and export income from China into neighboring economies.  China is buying more supplies from their Asian neighbors, and the manufacturing of low-labor-cost articles is moving to other countries, such as Vietnam.

China is encouraging Chinese investors to buy gold and other investments which will mop up excess liquidity.  China is now allowing more money to flow out of the country into neighbors like Hong Kong through granting special licenses for investing abroad.

THIS IS A BIG WEEK FOR THE U.S. DOLLAR.  WE EXPECT IT TO FALL.

Fundamentally, there is no compelling reason to hold dollars over the long term.  Last week, there was a Federal Reserve meeting in which the Fed said that they will leave interest rates unchanged for an extended period of time.  They neither did nor said anything to buoy the falling dollar. 

The G-20’s increased power diversifies global economic power away from the U.S. dominated G8.  This can only be bad for the U.S. dollar, and bad for the U.S.’s unilateral influence over world economic and financial activity.  This is yet another of the many steps that have been progressing for some time and will be needed to transfer world currency dominance from the U.S. dollar to another currency.  The next major step may be to use a basket of currencies to replace the dollar.  The basket approach has been shown to be ineffective in the past.  The final solution, which could take over a decade or longer be agreed upon, will be for the Chinese Yuan to be the world reserve currency.

We see only one reason that people will flock to U.S. dollars in the future, and that is due to the dollar’s perceived value as a safe haven; for example if there were renewed fears of a collapsing global banking system.

We believe the next leg down in the global banking system may be some years away when the derivatives market once again comes around to bite the naïve and the greedy.  Since we foresee no global banking collapse in the coming months, there is no reason to believe that the dollar can experience more than a temporary rally. However, we will use any rallies as an opportunity to further diversify out of the dollar.

We are considering buying more currencies such as the Brazilian real and the Indian rupee, in addition to the old standbys like the Euro, Canadian, Australian, and Norwegian currencies.  Within the U.S. dollar sphere, we believe it is safe to own oil and gold stocks in this dollar-declining environment.  Also within the dollar sphere, we feel comfortable owning export-oriented stocks with demand from abroad.  Some examples are: manufacturers of semiconductors, machine tools, some other technology products, and farming related products.  These benefit from a weaker dollar since their prices become more competitive as the dollar falls.

RARE EARTHS

I am happy to report that the limited availability of rare earth metals has finally come to the attention of investors and businesspeople in the developed world.  China has dominated the mining and trading of rare earth metals, and they have been hoarding rare earths for years as we have mentioned in our past commentaries.  China now controls many of the rare earth minerals that are necessary to produce certain high tech and energy saving products, and they are threatening export restrictions of these minerals. 

For years, the U.S. and European governments and other buyers of these raw materials who use them in critical military and security devices, have been doing nothing to prepare for the coming emergency.  We can only assume that long-term planning is anathema to politicians who are only worried about collecting enough money to be re-elected, and who ignore the longer-term consequences of their selfish and short-sighted approach. 

In any case, we are happy to see that rare earth mining is increasing outside of China and that substitute products for rare earths are being created when possible.

SUMMARY

Many markets, including most world stock markets, oil, and gold have been getting a correction in price as the end September has approached.  We will use corrections in oil gold and foreign markets as opportunities to buy.  The trader-oriented rumors that an oil glut is coming are patently absurd.  China, India, and many other countries are increasing oil demand, and global oil supply is falling.  New discoveries offshore in deep water which have recently been announced will take the better part of a decade to begin to flow.

Within the U.S. and Europe we will consider buying export-driven stocks.  Last, but not least, foreign currencies are a must for all U.S. based investors to protect them from a current and expected decline in the value of the U.S. currency.

Thanks for listening.  Please do not hesitate to contact us with your questions or comments.

Monty Guild and Tony Danaher
www.GuildInvestment.com

The technology of the moment, as we all know, is the handheld device.  It is part phone, part computer, part game console, part camera, part GPS system, and music player, and it is evolving very rapidly.  There are several companies that are active in this industry, with more entrants joining all the time.  We believe that the rapid evolution of handheld computing through many different devices will remain the most important of emerging technologies that is likely to substantially change the way we live. 
We are watching carefully to identify new companies and new developments of this trend that we anticipate will branch off into many new technologies.

IN DEVELOPED COUNTRIES, OUR ATTENTION IS DRAWN TO EXPORTERS OF DURABLE GOODS TO THE DEVELOPING WORLD

In our opinion, it will take years for consumers in the developed countries to rebuild their liquidity after the shock of the recent economic decline.  Therefore, we expect the savings rate in the developed world will remain high as these people reign in their spending.  However, this is not the case in the developing economies. 

Consumers and businesses in developing economies demand durable goods, especially machine tools and electronic products.  Many of the manufacturers of the best durable goods are in the developed countries.  Who exports these highly engineered goods to China and India?  Germany, Japan, and the U.S. all have companies that excel in this area.

IN DEVELOPING COUNTRIES, OUR ATTENTION IS DRAWN TO CONSUMER AND FINANCIAL STOCKS.

In India, China, and other developing countries, our focus is on the consumer and the financial stocks.  As we travel on our research trips, we see that the consumer demand is growing rapidly in the developing world.  In China, Brazil, and India, we favor banks, housing, insurance, autos, and other consumer areas.

OIL

Many of our readers have inquired about why we have steadfastly remained bullish on oil over the last few months as depressions in business activity have wracked Japan, Europe, and the U.S.; which are the world’s major consumers of oil.  There are several reasons for our continuing bullish stance on oil.

Reason 1: Global conventional oil production has peaked.

As many of you know, according to the world’s most accurate experts on oil production, the peak in conventional global oil production already occurred back in 2007.   Moving ahead from that time, there will be new conventional oil discoveries, but they will not be able to produce enough to supplant the declines in oil from existing production and the fields will be expensive to discover and develop.

To put it another way, all of the oil that can be produced and sold profitably for below $50 per barrel has been discovered.  New fields will be costly and difficult to complete and bring to production. 

The most obvious example in recent years is the major field of oil and gas discovered beneath the Atlantic Ocean off the shore of Brazil.  These energy deposits are miles below the surface under thick salt domes, and the technology to bring these fields to production does not currently exist.  New technologies will have to be developed to extract the oil, which is far out to sea and deep under the ocean floor.  Extracting it subjects equipment to immense pressure, heat, cold, weather, and other logistical and production challenges.

Certainly, non-conventional energy production from tar sands, oil sands, gas to liquids, coal to liquids, and many other technologies will impact the market.  But in a strategic and practical sense, these additions to global oil supplies will have a modest influence on the global oil market.

Reason 2: Oil benefits from the continuing global economic stimulus programs and easy monetary policies.

Recently, the central bankers from major countries got together in Wyoming.  The message of the meeting was that they agreed to keep the money spigots open.  They stated that inflation is not among their immediate concerns.  More important, and higher on their priority list, is to stop an economic depression/recession and attendant deflation that seems to be causing severe economic hardship among the middle class in Europe and the U.S. 

In our view, the markets will react to this by increasing global demand for assets that will benefit when inflation does return.  Oil, along with, gold, real estate, and stock markets of countries with strong economic growth will benefit as investors hedge against the rising costs.

GOLD

Gold prices have performed well if you look over the past five years, but in the last year and a half, gold has not risen…in spite of a banking and financial system crisis in the developed world.  Is gold’s period of flat performance due to fear of deflation attendant to a global economic meltdown?  Many would have expected gold would fall in price while the global inflation threat temporarily stalled.

Gold has been going sideways.  In our opinion, gold’s price is inversely correlated with the value of the U.S. dollar.  We believe that the dollar will decline in value in the long term as the U.S. budget deficit rises from over $9 trillion today to an expected $18 trillion in 10 years.  Our review of monetary history over many centuries clearly shows that a deficit country will do anything to keep borrowing including let its currency fall in value.

In our opinion, it is simple; as the dollar falls in value, gold will rise.  Our experience however, tells us that this can take time.

SUMMARY

When investing in developed countries, we prefer to focus on exporters of durable goods machinery and technology.  In developing countries we prefer to focus on consumer related, housing, and banking stocks.  We see gold and oil as wonderful long-term stores of value that will do well as global economic growth continues.

Thanks for listening, and we look forward to hearing your thoughts and comments.

Monty Guild and Tony Danaher
www.GuildInvestment.com

China has requested more security in the value of the U.S. bonds that they hold. To answer this need, the U.S. has agreed to sell more inflation protected treasury securities.  These bonds can protect investors because the bond’s effective return to investors rises (albeit after the fact) if inflation rises.

The problem for China is that if the U.S. dollar falls, and we believe that it will, the Chinese will still lose a lot of money in Chinese Yuan in terms on their purchase of any U.S. bonds, including TIPS.

Here is an article from last Thursday’s Wall Street Journal.

U.S., in Nod to China, to Sell More TIPS
August 6, 2009
By: Rob Copeland and Maya Jackson Randall

The Treasury Department, responding to growing demand from China and other investors, will boost the sale of inflation-protected bonds that hold their value as consumer prices rise.

"We continue to hear growing demand for the product," Treasury Deputy Assistant Secretary for Federal Financing Matt Rutherford said at a news conference announcing the plan on Wednesday.  The decision to increase sales of Treasury Inflation-Protected Securities, or TIPS, is part of a broader effort to ensure there is enough demand for Treasury bonds to help the U.S. finance its swelling budget deficit. The Treasury already has issued a record amount of debt in the past year, and the department said Wednesday it will sell a record $75 billion next week.

In particular, Treasury officials need to ensure demand from China, the largest holder of U.S. government debt. Last week’s auctions of fixed-rate notes saw lukewarm demand from China and other investors. Chinese officials had indicated they want inflation-protected securities, especially as the U.S. economy starts to recover.

"Inflation is the No. 1 worry," said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. "This is the government saying, ‘We will take that inflation risk away from you.’"

Even with an increase, TIPS would remain a fraction of the overall market for Treasurys. Of the $6.66 trillion of government bonds issued between Oct. 1, 2008 and June 30 of this year, just $44 billion were TIPS.

The Treasury could easily sell as much as $10 billion more, said Jeffrey Elswick, director of fixed income at Frost Investment Advisors LLC. But those extra sales mightn’t be such great news for existing owners of inflation-protected notes. If the Treasury continues to ramp up TIPS sales, it will "cheapen" the bonds of existing investors, said Don Martin, a financial planner with Mayflower Capital in Los Altos, Calif.

The value of the securities fell after the announcement, sending the gap between TIPS and comparable nominal notes to a two-month high. The gap ended at 1.93 percentage points, signaling that investors expect annualized inflation of 1.93% over the next decade.

The Treasury also said it may issue 30-year TIPS in place of 20-year TIPS.

EUROPEAN MARKETS CONTINUE TO RALLY

We have not been bullish on Europe, thinking that Asia would do better. Asia has done better, and we are now revising our view in the case of Western Europe, especially Germany and Norway.  We see these countries as areas of opportunity as new liquidity flows into Europe, the U.S., and Asia at an astounding rate.  One very important statistic many brokerages are reporting is that their average retail client has over 20 percent of their assets in cash.  This is a very high historical percentage, and one not associated with market tops.

We agree with many economists that the world economy remains mired in a major recession, or depression, whichever you wish.  However, this is not stopping global investors from sending massive amounts of money that they had withdrawn from markets back into them as the battle for performance forces money managers to be invested.

We see Germany and Norway as being better positioned than other European economies and free of the difficulties that currently characterize Eastern Europe and the Baltic countries, and not in a very difficult situation like much of Eastern Europe and the Baltic countries.  The latter are countries we prefer to continue to avoid.

Germany’s DAX Index

Norway’s Oslo Exchange Benchmark Index

ASIA IS GETTING A SMALL CORRECTION

We will continue to use any correction in Asian markets as an opportunity to add to our positions in Singapore, China, and Hong Kong.  We will also buy India if the correction is big enough to account for the poor monsoon in the northern parts of the country. This will decrease GDP by about 1 percent  in the current fiscal year, although GDP growth will still be substantial in India.  We like India but do not believe that the market has yet adjusted to the fact that the monsoon is poor this year.

EMERGING ECONOMIES

The economic data form China is stunningly strong, and India has been doing much better than many expected.  Export oriented markets like Hong Kong and Singapore have had a decline in activity, but as business picks up in Asia they will continue to recover.  We think it is important to remember that much of the trade in Asia is between Asian countries, including Japan.  Secondarily, Asian trade is with Europe, and only thirdly with the U.S.

The emerging economies of Asia also continue to perform well, as do the emerging economies of much of Latin America.  It is Eastern Europe and the Baltic countries where emerging economies continue to struggle.  A bright spot in Eastern Europe is Poland, which has demonstrated that it has a more vibrant economy than its neighbors.

U.S. MARKET CONTINUES TO BE STRONG

We view the strength of the U.S. stock market as a reflection of people’s hope rather than reality, but we are not averse to making money with trading positions in the U.S.  We are concerned about the possibility of mortgages continuing to go bad.  It is clear that the U.S. needs more stimuli; both general economic stimulus and industry-specific bailouts like the financial industry and the auto industry have received.

Of course more stimulus means bigger and bigger deficits.  This puts the value of the U.S. dollar very much in question.

BRAZIL

We are watching and waiting for a correction to get more excited about Brazil, although Brazil continues to get huge inflows of cash from investors worldwide.  We congratulate President Lula on the job he has done navigating his country these past few years.

OIL AND GOLD REMAIN HIGH ON OUR PRIORITY LIST

This year, oil has risen nicely in spite of fears that a global depression could squash demand.  We continue to see oil, gold, and copper as being in a different and stronger category than other commodities.  I write this email from Denver where I am attending an energy conference and will be meeting with the CEO’s and CFO’s of many energy companies.  We continue to expect oil to rise as the reality of impending shortages becomes recognized by the majority of investors.

We believe gold will rise as an alternative to the U.S. dollar, which we continue to see as a poor long-term investment.  The dollar can get a rally at anytime, but the long-term fundamentals of the greenback are quite poor.  There has been much talk about how are we going to be able to finance the budget deficits in the U.S.  I believe the deficits can be financed, but the dollar must fall for this to be accomplished.

SUMMARY

In summary, the world stock markets have risen from their bottoms.  Asia has led and the U.S., Europe, and Japan have followed.  Oil has outperformed most other commodities, and we continue to see oil and gold as offering opportunity.

In our opinion, Asian markets especially China, Singapore, and Hong Kong offer opportunity, as do Germany and Norway.

SUMMER READING

There are a couple of books on our summer reading list that we think you might like.

The first book is titled In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel.

This book highlights how many of the regulators and officials were naïve and slow to understand the scope of the problems, and the financial system’s near unraveling in 2008, especially in the hours surrounding the Lehman Brothers’ failure in September 2008.  As the delicate and complex system where global institutions assumed the financial health of their counterparties was failing, Ben Bernanke and others were pressed to taking some previously unthinkable measures.

Regulators, like the SEC and the governmental officials charged with overseeing the banking system were slow to recognize the warning signs (of leverage and derivative abuse) that Jim Sinclair, we, and others kept writing about in the years leading up to the meltdown.

The second book is The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox.

This book takes a historical look at Efficient Market Theory, the theory that markets are rational and efficient.  The author points out how these intellectually compelling but practically flawed theories came into favor in academia and on Wall Street.  Investment portfolio construction based on mathematical modeling and the efficient market theory has not worked as planned.  In fact, a reliance on mathematical models and forecasts that ignore the unpredictability of human behavior and psychology was largely responsible for the financial system’s meltdown last year.

We encourage you to contact us if we can answer any questions or be of service.

Thank you for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Where available, I believe you should give significant consideration to taking delivery of your investment shares.

Where not available, you might consider an alternative investment that does deliver shares. I can assure you from personal knowledge few people, even here, have exercised that right.

People simply will not make the small effort to protect themselves.

Where you own physical gold, please take delivery. This is in your best interest.

Regards,
Jim

Dear CIGAs,

You may remember that about a year and a half ago we began a campaign to inform our clients and readers of certain risks to their financial assets that exceed SIPC (Securities Investor Protection Corp.) insurance limits of $500,000 (up to $100,000 in cash is insured and up to $400,000 in securities is insured).

Many brokerage firms previously purchased insurance from major insurance companies to provide insurance for client accounts that exceed the SIPC limits.  However, earlier this decade, the major insurers stopped offering excess SIPC insurance to brokerage firms.  Apparently, the major insurers were prescient on the risks of brokerage firm solvency.

As a result of the loss of excess insurance for larger accounts, in 2003 many brokers banded together to form  a private insurance company called CAPCO (Customer Asset Protection Company) to insure their clients accounts above $500,000 .  In theory, the industry would self insure against the failure of one of its members.

Lehman was a member of the CAPCO consortium.  When Lehman went bankrupt in September 2008, many large investors lost money and assets that were deposited at Lehman.  CAPCO was supposed to insure the losses in excess of $500,000.  Not surprisingly, it appears that CAPCO was under funded and may not have the money to pay the creditors.

This following article explains why we have suggested that our clients and readers consider having their assets that exceed the SIPC and FDIC insurance limits held in custody accounts, preferably in the private banking division of a major bank.  We have looked for custodians whose legal documentation includes provisions describing the segregation of assets and audits to ensure that client assets are segregated from the assets of the institution itself and from the assets of every other client of the institution.

Please read the article below from the New York Times for a great deal more information.

Billions in Lehman Claims Could Bury an Elusive Insurer
By ZACHERY KOUWE, July 30, 2009

Next to a Chinese restaurant in Burlington, Vt., lurks a quiet guardian of Wall Street — an obscure insurance company that is supposed to protect big-money investors in the event of a catastrophic failure of a major brokerage firm.

A failure, for instance, like the one that brought down Lehman Brothers nearly 11 months ago. Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl.

The worry is that the company, which has never paid out a claim, might be unable to cope with the Lehman bankruptcy.

If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars.

Capco representatives dismiss such concerns, but state insurance regulators are keeping an eye on the company. Officials at the New York State Insurance Department are concerned about the company’s ability to withstand the Lehman bankruptcy, the largest in history.

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

The issue has even reached Washington, where a member of the Senate Finance Committee, Robert Menendez, has sounded an alarm. Mr. Menendez, Democrat of New Jersey, wrote the Treasury secretary, Timothy F. Geithner, in June to express his concern.

“It has become clear that this entity is thinly capitalized,” Mr. Menendez wrote in the letter. Capco, he said, potentially posed “systemic risk.” Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain.

Capco is virtually unknown even in financial circles, but it is being thrust into the spotlight by the events at Lehman. Creditors and former customers are battling over who will get what and when from the fallen bank, including more than $32 billion of assets that have been tied up in Lehman’s London prime brokerage unit. Untangling the mess could take years. Some former Lehman clients, which include big hedge funds, are looking to Capco for answers — and money.

Dewey & LeBoeuf, the law firm that represents Capco, said in a statement that Capco had no current policies outstanding and was “preserving all assets to address claims that might arise out of the insolvency of Lehman Brothers Inc. and Lehman Brothers International (Europe).”

The law firm called worries about Capco’s potential exposure to Lehman “speculation.”

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances.

Capco’s owners referred questions about the company’s liability to Dewey & LeBoeuf. Since it stopped writing policies on Feb. 16, most of Capco’s owners have purchased account protection for their clients through private insurance companies like Lloyd’s of London. Pershing, a unit of Bank of New York Mellon, told clients in a December notice that their Capco insurance would expire and that the firm had a new policy with Lloyd’s to “provide our customers and their investors with extra comfort that their assets are safe.”

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley.” A unit of Marsh & McLennan, the giant insurance services company, is listed as Capco’s administrator, but no contact information is listed on Capco’s Web site. The unit is based in the same Burlington building as Capco.

Brokerage companies used to buy account protection insurance from large insurance companies like Travelers and the American International Group. But in 2003, those insurance companies stopped offering such policies, saying it was impossible to calculate their liability. Enter Capco.

The Capco members played up their coverage when pitching their brokerage services to clients, especially large hedge fund customers who could lose billions of dollars if a firm went under. Although Capco’s finances were never disclosed publicly, the company was initially a given high rating by Standard & Poor’s.

That rating, however, was cut to junk status last December, and the ratings were withdrawn altogether in February. In its report, S.& P. said it was concerned about potential claims from customers of Lehman’s London unit, which “could create a liability for Capco that exceeds the insurer’s resources.” Charles Schwab, UBS and Merrill Lynch never opted for Capco, arguing that the arrangement seemed risky. Schwab requested the company’s financial statements from the insurance department through a Freedom of Information Act request in 2004, but was told the books were confidential.

The New York State Insurance Department later told Capco’s members that the company would eventually have to release the information. Before that happened, however, Capco relocated to Vermont, a haven for so-called captive insurance companies, whose owners are the ones buying the policies.

“Right away, the whole Capco thing just did not pass the smell test,” said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company.  “Schwab was not about to go to their clients and tell them we’re providing account protection and, oh by the way, they were owners of the insurance company.”

Firms who sought coverage elsewhere, mainly through Lloyd’s of London, could buy only up to $150 million of insurance per account and a maximum of $600 million for the entire firm. As a result, some customers moved their money to firms that offered Capco coverage.

“Let’s face it, none of us could have foreseen an event like Lehman, but we didn’t feel the capitalization of Capco as it seemed to be forming was going to be adequate in the extremely unlikely event that something happened,” Mr. Meave said.

Owners of the assets tied up in Lehman’s London unit, including pension funds and university endowments, believe they may have claims against Capco if all of their money is not returned by Lehman’s liquidator.

If Capco can’t pay out the claims and files for bankruptcy, several customers said they would bring lawsuits against the other brokerage houses.

“The bottom line is, this insurance should have never been sold to clients, and it just shows how Wall Street again miscalculated the risks involved with one of their own going under,” said an adviser working on the Lehman bankruptcy who was not authorized to speak for the company.

If you have accounts above $500,000 at brokerage firms and are interested in how we would protect those assets please do not hesitate to contact Aubrey Ford from our office at 310-826-8600.

Thank you for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Jim Sinclair’s Commentary

Here is an interesting review of the DTCC system that asks a most interesting question.

However if you believe in MOPE, why worry?

Who Really Owns Your Stocks? Hint: It’s Not You

So, do you think you own the stocks you’ve bought?

Think again.

For those of you who have not heard of the Depository Trust & Clearing Corp. (DTCC) and you own stocks … sit down.  This might change your your whole way of thinking.

Who is the DTCC and what does it do?  The DTCC actually provides clearing for 3.5 million securities from the United States and, get this, from 110 other countries and territories as well — all valued at roughly $28 trillion.  In 2008 alone, the DTCC settled more than $1.88 quadrillion in securities transactions.

The DTCC is also the registered owner and holder of your stock.

At present, the DTCC holds $23 trillion in assets.  It has a virtual monopoly on clearing.  In fact, 99% of all stocks in the USA are legally owned by it.

When Was the Last Time You Saw a Stock Certificate?

Remember the good old days when you bought a stock and received a certificate for it?  The SEC changed that law and went from stock certificates for individual investors to, well, your broker holding the certificate for you so that he or she will be able to legally trade it on your behalf.

The stock certificates were issued in the name of the brokerage … remember, just so they could trade them for you.  In reality, you became the beneficiary of the stocks you bought rather than the owner.

But the SEC, out of the goodness of its heart, changed the laws again, so that now the brokers can’t have the stocks in their name. Instead, the stocks must be placed in the name of "Cede & Co."

The excuse you’ll hear from your broker is that it is just a fictitious name used by the brokerage so it can trade your stocks for you because brokerages can’t, by law, put the stock certificates in their name any longer.

To Whom, Exactly, Have You ‘Ceded’ Your Stocks?

What we have now suddenly all come to find out is the Cede & Co is actually not a fictitious name, but a subsidiary company of DTCC.  In essence, DTCC owns probably 99% of all the stocks in the entire world.

This is how it works.  You buy some shares of stock at your brokerage.  Your broker tells you that, in order to do business on your behalf, you must give the brokerage power of attorney to buy and sell.

Therefore, your stock purchases are placed in a "street name" because, according to the SEC, no brokerage can place a stock in its own name.  The brokerage then notifies the DTCC of the transaction.

The DTCC is a banking trust company and, by SEC regulation, cannot own shares in its own name, either.  So it transfers the certificates to its subsidiary, Cede & Co.

What do you own?

How about nothing?

And now you are not even the beneficiary.  The brokerage is technically the beneficiary.  You are twice removed!

Guess Who’s Also Behind the Mortgage Mess

Recently, DTCC presented testimony before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.  The hearing was on "Effective Regulation of the Over-the-Counter Derivatives Markets," just a couple of weeks ago, and the transcripts were just released.

The subcommittee is attempting to find out how mortgages could come to be packaged and then sold, and then re-packaged and resold many times over.  Since DTCC owns 99% of all derivatives, it seems only fair that it would be called to give testimony.

Larry Thompson, general counsel for DTCC, applauded the good works of the DTCC.  In his opening statement, he said, "Now, many of you may not have heard of DTCC before. That’s purposeful. We have traditionally kept a low profile, given the critical nature of the role we play in U.S. financial markets."   (Dah … who would have guessed?)

In truth, DTCC knew all about the Collateralized Debt Obligation (CDO) markets, who owned what, how often the same collateral was used and repackaged, etc.  Why?  Because they own it all.

DTCC created a massive computer warehouse and keeps records of all CDO trades, all stock transactions, all derivatives, etc.  It has a monopoly on clearing.  And to justify its great job, Thompson added to his testimony.

"I’d submit to you Mr. Chairman, and Members of the Subcommittee, that had DTCC not had the foresight to create this Trade Information Warehouse and load the Warehouse with all these records of CDS trades in 2007, we might still be sitting here today in 2009 trying to sort out the total exposure of trading obligations following the Lehman bankruptcy, i.e., who traded with whom, at what point in time and at what price?”

Next time you are in the market to buy stocks, trade futures.  You’re only in the trade for four minutes or less.  Not enough time for Cede & Co. to get their mitts on your money. …

Barbara Cohen
Contributing Editor
The Tycoon Report

A Lesson In Super Sovereign Currencies: An End To The MOPE and SPIN
Posted: Jul 11 2009     By: Jim Sinclair      Post Edited: July 11, 2009 at 4:52 pm
Filed under: General Editorial

Dear CIGAs,

Of course the world is not going to replace the dollar as a reserve currency immediately, or for that matter ever. What is going to happen is the IMF or an Asian entity will formulate a basket of currencies and possibly gold into a unit much like the USDX.

There will be an issuing agent and much like the SDR it will be an accounting unit representing the underlying bits and pieces.

It is from this base that Japan has proclaimed major nations should support the dollar. This is management of perspective economics and spin.

What is presently occurring and will accelerate over the coming weeks and months is DIVERSIFICATION out of dependence entirely on the US dollar and the adopting of other currency types even if it takes time to produce the super sovereign currency basket.

The risk the MOPErs take is that the longer the IMF waits due to the risk of dollar damage by issue of this SSCI (Super Sovereign Currency Basket Index), the greater the probability that another entity in the Asian trading block will design this simple entity themselves. An Asian entity would be based on the usual suspects plus their own currency like the Yuan and probably gold.

MOPErs are now caught between facing the fact that central banks outside of North American and Euroland are sharply decelerating their purchase of US Treasury instruments or are playing games for their hot air dollar support that results in the marketplace revealing the SSCI plan by sharp dollar depreciation into the final quarter of 2009.

If the dollar market makes the decision for the IMF then anticipate the last quarter of 2009 to the last quarter of 2010 as the year of dollar hell. The dollar market making the decision for the IMF means the bottom drops out of the dollar rather than the exercising of MOPE’s "Strong Dollar Policy" which is defined as the dollar dropping slowly, rather than catastrophically.

MOPErs have not distinguished themselves by preventing the problem before it has occurred or fixing the real problem. The economic school of MOPErs simply issues more paper to attempt to fix the problem via more MOPE.

You see, the MOPErs are primarily Yalees from one fraternity that control Wall Street which has captured Washington, installing their school of economics of which Greenspan is a major practitioner. When you MOPE you produce nothing but paper bubbles, not sustainable economic gains. You must recall his speeches on market perceptions creating economic occurrences.

You see, one day the MOPErs paper planet melts down. Of course they save themselves by issuing more paper – this time dollars to themselves and they truly don’t give a rat’s ass what happens after that.

So the lesson you need to learn is that all things economic are processes. The dollar is losing its position first as the universal reserve currency, now as the major constituent of international central bank reserves and finally as just another part, not necessarily the majority part, of a new SSCI (Super Sovereign Currency Index) used then as the universal reserve currency.

This make the school of the "dollar will always be a reserve currency" right and wrong. It is right in that it will always be a PART of the reserve basket but WRONG in the implication that this lasting presence means anything bullish whatsoever for the dollar.

Those that hold, like I do, that the value of the US dollar has a long way to go on the downside are right on price, but if they then conclude it is no longer any part of the reserve system they are stone wrong!

Quiz:

1. Does the statement that major government will support the dollar as a reserve currency mean it should rise in price?
2. Will the US dollar always be part of the reserves of central banks?
3. If the US dollar is always part of the reserve of central banks should that be bullish for the US dollar?
4. Why is buying momentum so important to the value of the US dollar now?
5. Why would increased interest rates on 30 year US Treasuries be bearish for the US dollar?

If you can answer these five questions with certainty then you understand what a SSCI is and why MOPE will be useless in 125 days.

Answers:

1. No
2. Yes
3. No
4. A decline in the momentum of buying, even without central bank selling, would hold the most bearish implications for the US dollar.
5. Because that would occur as non-USA buyers of long US paper exited the market as buyers.

Jim,

Gold, silver and dollar contracts certainly suggest that they have been caught flat-footed. I expect another line in the sand to be drawn at 1200-1300 now. It is a dangerous, dangerous game for traders here.

CIGA Eric