European Union GDP was down an estimated 5.9% annual rate in the fourth quarter of 2008. Japan’s GDP shrank at an annualized rate of 12.7% during the same quarter according to their announcement yesterday. Japan’s exports fell because their currency has risen so strongly against all currencies. The fact is that the world’s economy is in a steep slide.
Later in this memo, we will share an opinion from one of our favorite U.S. economists on how long the economic malaise will last.
THE TIME FOR POLLYANNA NEWS IS OVER. PEOPLE ARE STARTING TO TUNE INTO STATIONS PLAYING ACCURATE ECONOMIC NEWS.
Those media outlets that discuss the view that the U.S. must print trillions of dollars to bail out the banks have a growing audience.
It is becoming more obvious daily to all careful observers that Treasury Secretary Geithner, Chairman Bernanke, and most certainly congressional politicians do not know how to bring the U.S. and world economies out of their current slide. It is also becoming clear that we can expect a long term trend toward lower world currencies (including eventually a lower U.S. dollar) and toward higher gold prices.
These days, there are a lot of frightening international political situations. Pakistan looks pretty frightening, as do many other countries in the Middle East. Saudi Arabia is moving further and further from the U.S. orbit daily. Iran remains a big problem. Iraq, Afghanistan, and other countries are continuing to be money pits for the U.S., which is spending large sums on wars within their borders. Russia has deep problems, and so do Poland, Hungary, and several other Eastern European countries.
WILL U.S. CREDITORS KEEP BUYING THE MASSIVE OFFERINGS OF U.S. DEBT?
We do not understand what could possibly tempt other countries, who are U.S. creditors, to continue buying U.S. debt. Perhaps it is the promise of U.S. military security and/or to ensure an end market for the creditor’s export goods. The Japanese are finding out that the U.S. is no longer a reliable end market for their exports. The Chinese have already stated publicly that they have alternatives to U.S. bonds for their huge accumulated reserves, as reported this past weekend:
CBRC Official Says U.S. Bonds Not Only Option, China News Says
By: Judy Chen
Feb. 13 (Bloomberg) — China Banking Regulatory Commission official Luo Ping said holding U.S. government bonds is not the only option for investing reserves, clarifying comments made a day earlier, the China News Service reported.
U.S. debt is one option in addition to gold and other government debt, Luo, head of the training center at the banking regulator, was quoted as saying in an interview with the news agency late yesterday. If the U.S. government issues too much debt in its efforts to revive the economy, all Treasury holders will suffer losses, he added, the Chinese-language report said.
Dow Jones on Feb. 11 cited Luo as saying that there are few real alternatives to holding U.S. Treasury securities. CBRC said late yesterday in a statement that Luo’s comments don’t represent the view of the regulator.
U.S. ECONOMIC OUTLOOK IN 2009 AND 2010
We read the economic models and reports from many economists around the world, and our favorite U.S. based economist is David Rosenberg of Merrill Lynch. We will try our best to paraphrase what he has been saying lately:
The U.S. GDP will decline 6.5% in the first quarter of 2009. Then, it will decline 4.5% in the second quarter 2009. After that, it will rise to 3.5 % in the third quarter, and 3.0% in the fourth quarter of 2009. In 2010, we will see slow up and down growth and if we are lucky, we will have a GDP equal to the GDP at the end of 2007 or early 2008.
We agree with him. In other words, we are 14 months into 48 months of no economic growth. In general Rosenberg expects that the 4 years of no growth in GDP will be made up of 18 months of very rapid economic shrinkage, followed by 30 months of slow up-and-down growth.
We wish President Obama every success, and we believe that his administration may well bring more social justice to the U.S. However, his speeches and early actions indicate that the U.S. will have a much more government-oriented economy, and a populist tone to economic activity. This recipe argues for slower economic growth in years to come.
Therefore, over the long-term, we look for 1% to 2% economic growth in theU.S., not the old 3% growth rate. The U.S. is too big and saddled with too many bureaucracies. When thinking of a comparison for future U.S. economic activity, we think more of France, not China.
FOREIGN HOLDERS OF US DOLLAR DEBT MUST BE VERY NERVOUS
Why do they continue to hold an asset which is being diluted like soap in a shower?
When you print more money, raise the money supply, and commit to quantitative easing (all three of which are going on in most industrialized countries), you dilute your currency value like soap in a shower. For more on this topic, see the following article:
The dollar’s direction is hard for us to call short term. Currently, many are seeking refuge from their own declining currencies in the U.S. dollar. Longer term, the dollar’s fundamentals are very poor…and in our opinion it can only decline over time. The same can be said of many other currencies as well. Thus, we hold gold related shares, as gold serves as a currency in difficult times.
We prefer to use gold mining shares to gain exposure to rising gold prices in our portfolios. The physical gold market has been tight for months, and we have questions about the asset coverage for some gold ETF’s. It does not appear to us that enough gold is being delivered from commodity exchanges to cover the amount of new share issuances of the gold-backed ETF’s, and we do not know why. Jim Sinclair, for whom we have the highest respect, as well as other professionals, are also questioning this conundrum.
For no charge, as a service to our readers, we will be happy to examine your current investment portfolio, and explain how we might restructure it to meet your needs for income and capital appreciation in the current environment. Please give us a call if we can help you in this regard.
Thanks for listening.
Monty Guild and Tony Danaher