Taken together, the Icelandic and Greek financial crises can be seen as the second stage of the larger global banking crisis.  The first stage of the global banking crisis, which began in late 2007, was centered in the European and U.S. mortgage and mortgage derivative market.  The second stage began with Iceland’s monetary and fiscal crisis in 2009 and continues with the current Greek crisis, and is centered in European sovereign debt.

The global crisis banking crisis is a multi-phase global economic crisis caused by years of over-borrowing followed by the current deleveraging.  This deleveraging was, of course, set in place by all those who gambled with their own and other people’s money.  As time passes, more and more of these gamblers will be unmasked and there will be more countries, companies, industries, and individuals who will lose face and capital in coming months and years.  We anticipate that these problems will continue as various sectors delever over the next six to eight years.

Many believe that the other European nations will act to bail out Greece, and then perhaps Spain or other over-levered nations in Europe who experience debt problems.  We disagree.  In our opinion, the International Monetary Fund (IMF) is the lender who will bail out the damaged European nations.  In our opinion, it is too hard for European nations to go to their taxpayers and tell them that they are directly or indirectly guaranteeing the debt of a foreign country.

As is their custom, the IMF will extract a high price in terms of the deep cuts in expenditures and increases in taxes demanded of the borrower.  In our opinion, the period of easy borrowing is over for the Greeks, and probably for several other European nations whose debt will come under attack in coming months and years.

The current chaos is creating substantial demand for gold and other precious metals.  Holders of Euros are seeking to acquire more gold, and holders of other currencies such as the Japanese Yen and U.S. dollar are undoubtedly thinking of following suit.  Buying gold to hedge against the probability that the Yen and U.S. Dollar will be under attack in the not too distant future is not unwise.


The coming phases of the deleveraging crisis will simply be different flavors of one major phenomenon with one major cause.  We are saying this because we do not believe that most investors realize how long and pervasive this deleveraging crisis will be.  If this were a baseball game, we would only be in the 2nd inning (for non baseball fans among you, that means we are only 20-25 percent through the crisis).

Furthermore, crises are still brewing with respect to the solvency of U.S. states, and the legal subdivisions within the countries in the European Union.  These crises have yet to become globally recognized.  In order to bail out the states and other governmental entities below the national level, a huge quantitative easing (money printing) process will eventually be instituted in many countries.  The effect will be to keep the developed nations economies (and their currencies) under pressure for years.

Governments are not alone.  Many industries, such as banking, financial services, and insurance remain under pressure to decrease their leverage and raise capital.



The global demand for oil is created by demand for energy in China, India, and other Asian nations.  The world’s supply is not sufficient to handle all of the demand.  Although some pessimists talk about gluts, any price declines in oil will be short-lived.  We are buyers of oil on dips and we continue to expect oil prices to top $90/barrel by the end of 2010.


Europeans have been buying gold (which is at a new high in Euro terms).  The obvious reason for their purchases is to hedge the negative effect of a declining Euro.  Many Europeans remember that two world wars were fought on their territory, and that owning some gold has saved many lives and many  fortunes.  During times of crisis they gravitate strongly to gold, and the current crisis is no exception.  European central banks and the IMF may sell gold, but the average European is more likely a buyer than a seller.


U.S. stocks have been gradually rallying, and we believe that this rally could continue for a few months.  It will cease when short term interest rates in the U.S. rise one or two more times.  We continue to see a broad range of U.S. companies that are overpriced, but there are also values to be found for those who are bargain hunters.


Interest rates in the U.S. and other parts of the world are starting to rise.  The U.S. raised the Discount Rate last week and many pundits argued that the increase was of no importance.  We disagree.  For many decades, we have seen interest rate increases as a warning signal to get out of markets.  In every country, stocks compete with short term interest rates for investors.

If short term rates start to rise, stocks always correct.  U.S. interest rates have seen their lows.  Historically, after the second or third rise in rates, U.S. stocks undergo a larger correction.  When will the second and third rate increases take place?  We imagine that they will happen before the end of 2010.


China’s economy continues to expand in spite of concerns among uninformed observers that a slowdown is looming on the horizon.

It is worth noting the many internal changes taking place in China during its continued growth phase.

Change #1

For the past twenty years, migrant workers have streamed into the Eastern seaboard from the nation’s interior agricultural centers in search of manufacturing work, but today, that trend is changing.  Farming families are now making money in agriculture or finding work closer to home.  Migrants are no longer pouring into the East coast and the resulting shortage of migrant workers is sending up the price of labor.  In many manufacturing areas wages are up 20 percent or more.

Change #2

Economic growth is now taking place in many regions of China, and the once ubiquitous assembly line manufacturing for export is now a smaller percentage of economic activity.  Most new jobs are to be found in retail, consumer products, infrastructure, and heavy industry.  These jobs are located throughout the country.

Change #3

A consumer economy is gradually developing.  The savings rate, which we believe to be about 30 percent in China, will gradually fall as the government installs the beginnings of a social safety net.  Currently, the (extended) family is the only social safety net and saving is key to family survival.

Change # 4

China has been building out their infrastructure for many years.  The infrastructure development is by no means complete, but the build-out is very impressive not only in big cities but in second tier cities as well.  This infrastructure will give China a competitive advantage in developing faster economic growth.


China is targeting new industries to lead the world in the 21st century.  Clean energy in all forms is one of their major undertakings.

Also worth noting:

Food price inflation in China and India is another worry.  We expect inflation to be 5 percent in China in 2010.

China’s stock market has been consolidating and moving sideways due to a concerted raising of reserve requirements to stop speculation on real estate.  We believe that about six months before rates peak China’s market will rise strongly.  In the interim, we are selecting low P/E, fast growing companies.


India’s economy is booming and, in our opinion, the Indian stock market is currently overpriced.  Inflation is rising and we expect interest rates to follow.  Although we applaud the job that Prime Minister Singh has done on the economic front, we will wait for a correction before moving into Indian shares.  The growth areas include many sectors of the economy such as construction, pharmaceuticals, technology, consumer banking, real estate, and consumer goods.  The nation’s infrastructure is slowly improving but will take decades to become first-world.

As many have heard, the IMF is selling a large amount of gold that was contributed to them by member countries in order to raise cash to help countries with problems.  The countries who deposited the gold with the IMF have agreed to the sale, yet even with this large sale hanging over the market, gold prices remain strong.  It is widely rumored that India will be the purchaser of the IMF’s gold.

Indian officials have stated from time to time in the world press that they are buyers of gold at market prices.


Bargains continue to be available, but one must be thorough and careful in picking them.

We continue to see growing countries that are well situated to supply the Chinese economic machine with raw materials or partially manufactured products as attractive investment opportunities.

We are concerned about some emerging markets due to high valuations.  This has kept us out of India and Taiwan.  We are currently focused on U.S. and European technology and energy companies, fast growing companies in the developed world, gold bullion and Canadian gold mining companies, companies with new oil discoveries (wherever they may be located),  Indonesia, Thailand and some specific Chinese companies.

Thanks for listening.

Monty Guild and Tony Danaher

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