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Commentary on planning for inflation this year:
ARE YOU KIDDING US JOHN?
Posted On: Tuesday, April 22, 2008
Author: Monty Guild & Tony Danaher
Hello and warm wishes to you this April21, 2008.
ARE YOU KIDDING US JOHN?
In the three way battle for worst economic policies, Obama has a narrow lead but both Clinton and McCain are close behind.
In our opinion, there is a simple and accurate one word description of John McCain’s proposed economic policies…terrible. Is he really a Republican? I doubt it after seeing his proposals.
One thing is sure, if any of the three were to implement the economic policies that they have so far proposed, inflation would take off like a rocket in the U.S. I know it is early, and they all are pandering to the mass of uninformed and economically strapped voters. I also know that their wild ideas will probably not be implemented in full, but come on folks…your economic ideas are inflationary, with a capital “I”.
THERE IS A BIG TREND WHICH WE SHOULD ALL BE AWARE OF…AND INVESTMENTS SHOULD BE POSITIONED TO TAKE ADVANTAGE.
THAT TREND IS…
INFLATION IS HIGH AND RISING IN EVERY GEOGRAPHIC REGION OF THE GLOBE
We research about 20 countries carefully. We research about 30 industries and about 400 companies worldwide.
We have been talking about the coming inflation for two years now. Individual countries started to notice it about eighteen months ago, and a few months ago inflation finally came to the public’s notice on a worldwide scale. However, the seeds of the current price increases were sown at least two or three years ago. What is more important is that the growing season for prices is nowhere near complete.
A few salient points for those who want to protect themselves from the current and oncoming inflation.
1. Inflation takes a long time to incubate. Its soil is the fertile ground of irresponsible monetary policies that take the form of governmental money creation.
2. Countries then institute price controls and government imposed export curbs.
3. Shortages develop in world markets for commodities.
4. Inflationary psychology lags inflation by a long time, but once inflationary psychology begins to grip the populace there is a scramble to acquire and hoard goods instead of money, bonds or bank accounts.
5. Citizens of inflation ridden-countries wish to hold something other than cash, bonds, bank accounts and income producing stocks. The psychology begins to be, “Every day that I hold cash it is losing value to the inflation rate.” So countries and investors take the following actions: People buy stocks, hoard food, gold, oil, commodities and other resources and in normal times. If credit is available, they hoard real estate. Currently, real estate can be hoarded in the developing world but in the developed world there is a credit liquidation going on due to an increasing illiquidity in the credit markets…simply put, real estate cannot be easily financed so hoarders go to other assets.
6. Countries begin to raise taxes on extractive industries or even force them to sell their companies to the government at low prices. Then the government operates them inefficiently with political goals in mind. A politically operated company is usually grossly inefficient, production falls and prices rise even faster.
7. Investors begin to call their money managers, stock brokers [financial consultants] mutual funds managers and ask “how can I stay ahead of inflation?”
8. Before this stage hits (it is about 6 months away in our view), you are wise to be invested in the industries and companies which benefit from inflation.
WHO BENEFITS FROM INFLATION? ENERGY, GOLD, FOOD, BASE METALS AND THE FAST GROWING COUNTRIES, SUCH AS CHINA ALL BENEFIT.
LET US TAKE THESE AREAS ONE A TIME AND BRIEFLY DISCUSS OUR INVESTMENT STRATEGY FOR EACH
ENERGY
In the past six years (having owned a lot of energy investments while oil has gone from $30 to $116 per barrel) we have invested in several sectors. Currently, we are focusing on those companies which find energy or provide services in finding energy in harsh environments, in unpopular countries, and in offshore deep water environments where most all of the big new discoveries are taking place. We focus on the foreign and harsh environment companies because of the expertise that they possess, in the form of country contacts, and/or technical expertise that will be very valuable in finding energy located off the beaten path. The reason for this is that the energy investments on the beaten path are more highly priced. In our opinion, bigger profits can be found off the beaten path.
GOLD AND SILVER
For the past six years we have focused on precious metals of the following type. When owning mining companies, we favor companies with a royalty model or with a model that uses equity financing and no debt with derivatives attached. Companies who do not sell forward future production as collateral to pay off their loans, and whose growth model does not use derivatives (selling forward future production to get the mine started) are preferred. Such companies are few.
For those who do not want to own stocks, buy precious metals ETF’s assuming they are solidly and fairly constructed.
FOOD
Food prices have only been rising for a couple of years, and for that long we have been focusing on it. Food prices will rise much more because politicians are starting to manipulate food prices for their political gain. They are installing price controls, export controls, tariffs and other artificial boundaries which have always led to long-term inefficiencies and problems. These actions tend to cause long-term price increases as they spread incoherence in the farming, distribution and consumption process.
Investing in food is easier now due to the proliferation of ETF’s, especially grains. Many ETF’s exist to buy grains in several countries. Meats are harder to buy because meat producers consume a lot of grain and grains will rise a lot more in price longer term. In addition to grain ETF’s we like to buy fertilizers. We have analysts focused purely on fertilizers, which has been a very successful investment area for us.
BASE METALS
Base metals are in huge demand to build the infrastructure of China and other fast growing countries like Russia. The world’s biggest sellers of base metals are Brazil, Canada, Russia, Australia, U.S., and Africa. To a lesser degree other Latin American and Asian countries also sell base metals.
FAST GROWING COUNTRIES
Most economists agree that it looks like the growing countries, especially China, India and Brazil have decoupled from the U.S. and Europe. They are growing, and growing fast. While Brazil is still growing much slower than the other two, its income distribution plan has worked only because the commodities that it sells are rising rapidly in price. Brazil and India must develop more manufacturing and services to supplement farming and commodity sales.
China is a phenomenon, and thus far a very successful one. China is a commodities importer. China has a much more developed manufacturing sector, and now its growing consumer sector is developing.
Even though there were huge snow storms in the first calendar quarter throughout southern China, the GDP growth was stunningly good. The government is trying to slow inflation and is raising interest rates. Thus far, there has been little effect on Chinese economic growth.
To us, Brazil and India are OK if you focus on special companies, but both markets are more vulnerable than China. China’s stock market has fallen 50% from the highs while corporate profits grew about 25% in the last year. In our opinion, some Chinese stocks are getting quite cheap and amount to a good long term play.
GIVING THANKS
Thanks to the many important members of our network who do not work at Guild Investment Management Inc. They are our friends and contacts who provide us irreplaceable information about their area of expertise, be it company, industry or country information. Thanks to these key contacts for all of your wisdom: By Cartmell, Jeff Cohen, Tom DeHudy, Steve Emerson, Earl Gould, Larry Jeddeloh, Lars Lindgren, Gary Mintz, Dan Norcini, Barry Sahgal, Ron Silverton and of course Jim Sinclair.
AND FURTHER THANKS TO ALL OF YOU…OUR READERS.
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