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Inflation: Say Goodbye to Buying Power


Monte Guild & Tony Danaher

Inflation is taxation without legislation -Milton Friedman

Economy watchers see its growing presence in official government statistics. Yet you won’t hear government officials admitting it. It’s too politically unpleasant – and threatening – to do so. Official spin and fantasy aside, the reality is that inflation is here and here to stay for quite a while. That means the buying power of the dollar is declining and being experienced on a daily basis.

We have noticed for decades the decline in the purchasing power of the U.S. dollar, perhaps as a byproduct of spending significant time travelling outside the U.S. We’ve seen the dollar buying less and less and less. Looking ahead, we unfortunately see the rate of decline gathering steam, and that’s not just our opinion. It’s shared by many sharp economic minds, among them, Jim Sinclair who has been discussing this trend for decades. You can follow Jim’s worthy insights at www.jsmineset.com.

Another keen observer is MarketWatch’s chief economist, Irwin Kellner. He paints an excellent picture of the situation in a Jan 18, 2011 article very much worth reading at: http://www.marketwatch.com/story/the-incredible-shrinking-dollar-2011-01-18. Mr. Kellner succinctly points out that in the month of December alone, inflation rose a “whopping 0.5 percent,” the biggest monthly increase since June 2009. Besides food and energy other items in the consumer’s basket went up as well, including health care, apparel, and airline fares. “Few things fell,” he said. “In just about every year, the value of the dollar has gotten smaller, the only difference being the rate of shrinkage. In some years it was faster, while in others it was slower.”

In his article, Mr. Kellner cited a study by the American Institute for Economic Research which has tracked consumer prices from 1990 to 2010. During that period, the overall loss in consumer purchasing power is 30 percent. Many food items are heavily subsidized by Washington and not surprisingly, most of these were involved in larger-than-average price increases. The institute report also took aim at the Federal Reserve’s policies as a contributing factor.

Since the 1970s we have been bringing these issues to the attention of our readership. What is clear is this: the current growth of the U.S. and European money supply, and the oncoming growth in the velocity of money, will cause a more rapid depreciation of the buying power or value of the dollar. The current bout of acceleration in U.S. dollar depreciation is just beginning.

What Does This Mean to You?

If you are in business, it makes good business sense to think ahead and prepare for higher prices by buying inventory now…before prices rise. This is what smart business people are doing all over the world. Foods, base metals, energy, and other elements of production are being acquired and stored. If you run manufacturing or retail operations, you can help your future profit margins by buying extra inventories. Pay now…or pay more later.

If you are an investor, you have to protect yourself. Buy gold, oil, and other commodities. Hold some gold abroad, in case the U.S. Government decides it needs to confiscate all gold held by U.S. citizens and residents, as it did in the 1930’s during the Great Depression. There is an increasing risk that the government will be driven to do so again in the not so distant future.

Owning Stocks in an Inflationary Environment

Currency devaluation is not just a Made in the USA phenomenon. Europe has the same problem. Japan as well.

Q: In this environment, why would one want to own stocks?

A: In periods of currency destruction, necessity commodities such as food and oil, as well as gold, income-producing real estate, and stocks in companies that can grow all increase in value. All these asset classes rise in value because those with capital to invest do not want to sit on piles of their home currency which is losing buying power. They would rather trade the currency for an asset with the potential to rise in value. In short, an asset with real value denominated in the declining currency is going to rise. The asset maintains, and increases its worth, while the currency that it is traded away loses its value.

Global Investment Watch

Every fortnight we will focus on the investment climate in an individual country. Our globetrotting analysis covered Russia last time and continues today with Canada.

Canada: Small Numbers, Big Resources, Smart Management


Canada TSX 60 Index (February 9, 2010 to February 09, 2011)

We are enamored of Canada, its people, and its potential. It is the world’s second largest country by size with a population of about 32 million, a few million less than the state of California. Within its vast borders reside huge natural reserves of oil, gas, uranium, rare earths, timber, base metals, precious metals, and water. And behind all that ground wealth is a well-managed economic system led by a banking system that, to its great credit, stuck to its conservative fundamentals and avoided the catastrophic upheavals and failures experienced by other, less-principled, banking systems in the developed world. As a result, Canada is respected worldwide for its prudence and coherent economic policy. Its federal government is reasonable in its actions. It has a strong legal system and accounting traditions that give companies good reason to believe they will be fairly treated. Hence many foreign companies are attracted to Canada. The country also has served as an outsourcing manufacturing destination for some U.S. industries, although the high value of the Canadian dollar is slowing down new investments in this area.

We believe that the combination of small population, major resources, a solid banking structure, and a business-friendly government makes Canada an excellent investment destination. We have held investments in Canada for many years and will continue to focus on this attractive nation. We believe that many sectors of the economy are well-positioned to attract investor interest and provide good long-term returns.

Our favorite sectors are banking, insurance, manufactured goods, base metals, precious metals, oil, timber, coal and uranium. We like high-yielding Canadian oil producers who have recently lost the designation as energy trusts. There are a number of companies who produce mostly oil and have yields above 5 percent plus strong portfolios of acreage for future drilling that will produce growing assets and income. We look at temporary dips in Canadian stocks, or when the Canadian dollar falls out of investment favor and declines, as attractive opportunities to buy.

More Middle East Regime Changes Ahead Will Impact Oil and Gold

As we mentioned last week, we expect to see upheavals ahead for repressive governments around the world. In addition to the countries mentioned last week, we see increasing potential for revolutionary change in Saudi Arabia, Kuwait, Libya, and the United Arab Emirates. If Saudi Arabia experiences political upheaval, the price of gold could surge rapidly, and oil rise to around $150 level from the current price of about $88 per barrel.

WTI Crude Future (February 9, 2006 to February 09, 2011)

Japan

We are keeping a close eye on Japan. After many false starts over the last two decades, and in spite of demographic challenges, the investment climate may be improving. No recommendations yet, but stay tuned.

Special Report: Export-Oriented Machinery This week we want to shine the spotlight on an investment-worthy industry that is widely overlooked: export-driven machinery companies headquartered in the U.S., Europe, and Japan.You commonly hear people eulogizing the death of American manufacturing. It’s all gone abroad, they say. That’s not so. Wrong also is the idea that Japanese and European manufacturing is being hollowed out.

Here’s what’s happening. China, Brazil, and India have indeed made headway in improving manufacturing output, however, the U.S., Europe, and Japan still remain global leaders in many areas of manufacturing. For example, the developed world still leads in the manufacture of big ticket items such as transportation (planes, trains, autos, and trucks), electricity-generating equipment for coal, nuclear, and gas-fired plants, construction machinery, mining equipment, many types of machines for manufacturing, and component products serving these various industries

Demand is particularly strong for construction, mining, and industrial processing equipment, and at a record level of demand for makers of electrical systems, air conditioning, and fluid control systems. While orders are strong, there are some risks. Companies who make autos, trains, and airplanes are experiencing rising materials costs due to competition.

Our favorite sectors include parts makers for the above-named industries or those who make machinery needed in power generation, transmission, and power management, fluid controls, hydraulics, truck and engine parts, manufacturing controls, automated industrial processes, climate control, and data networking and transmission. These types of companies abound in the U.S., Germany, Japan, England, Korea, Taiwan, France, Eastern Europe, and Italy.

We have been bullish on manufacturers who make farm, mining, transportation, and energy exploration and production equipment. Now we are broadening our investments and recommendations to export-oriented machinery makers.

Our Recommendations – In Review

A Word to the Wise

The need to protect oneself from unwise governmental behaviors has never been greater.

Bonds

Continue to avoid intermediate and long-term bonds. They are going to fall and it will not be pretty.

Gold

Continue holding gold for long-term investment. We have been bullish since June 25, 2002, when gold was selling at about $325 per ounce. We see gold moving to $1,500 and then higher. Traders should sell spikes and buy dips.

Food and Farm-related Stocks

This remains a favorite investment target of ours. We have been bullish on grains and farm-related shares since late 2008. Continue to hold and acquire these industries on dips. The possibility of food crises in Africa, Asia and Latin America is very real.

Oil

We believe that oil-related investments hold promise. Our bullishness dates back to February 11, 2009, when oil was trading at $35.94 per barrel.

Currencies

For long-term investment, we do not like the U.S. dollar, Japanese yen, British pound, or the Euro. Since September 14th of last year we have been favoring the Singaporean, Thai, Canadian, Swiss, Brazilian, Chinese, and Australian currencies. We continue to do so. Use pullbacks in these currencies as an opportunity to establish long-term positions. They will rise as the U.S. dollar and European currencies fall.

Global Stock Selections

For stock investments throughout the world we base our recommendations on careful studying of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth. In developed countries, technology, precious metals, and commodity producers (food, oil, and base metals) will all benefit from an improving economy and a developing back-to-work trend in the U.S. and Europe.Since September 9, 2010, we have believed that U.S. stocks can rally further. The reason: over the longer term, liquidity formation through QE (money printing) will create demand for many assets, including U.S. stocks. A correction of 5-7 percent could occur at any time. We recommend using the correction as a buying opportunity.

We are also bullish on China, South Korea and Colombia. In Colombia’s case, half of our original position remains, and we still see Columbia as an attractive investment. In summary, investors should continue to hold shares of growing companies in China, South Korea, the U.S., Canada, and Colombia.

A summary of our current recommendations can be found in the table below:

Investment Date Recommended Appreciation/Depreciation in U.S. Dollars
Commodities
Gold 6/25/2002 319.7%
Corn 12/31/2008 65.5%
Soybeans 12/31/2008 46.4%
Wheat 12/31/2008 43.3%
Oil 2/11/2009 141.9%
Currencies
Singapore Dollar 9/13/2010 4.9%
Thai Baht 9/13/2010 5.5%
Canadian Dollar 9/13/2010 3.3%
Swiss Franc 9/13/2010 4.6%
Brazilian Real 9/13/2010 2.8%
Chinese Yuan 9/13/2010 2.6%
Australian Dollar 9/13/2010 8.3%
Countries
U.S. 9/09/2010 20.0%
Colombia (half of our original position) 9/13/2010 -0.5%
Canada 12/16/2010 6.9%
South Korea 01/06/2011 0.5%

To view current and past recommendations, and see how we have performed, please go to our Commentary Archive and Recommendation Tracker at www.guildinvestment.com.

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