July 2011 Investment Journal
The month of July was a tenuous one for investors, as the ongoing debt problems in Europe were swiftly eclipsed by concerns about the U.S. debt ceiling, leaving everyone nervous about a potential default and possible credit downgrade of U.S. Treasury securities. The S&P 500 declined 2.1%, bonds were up 1.40%, and commodities advanced by 3.17%. Gold rose by 8.4%.
As we write this, President Obama has signed the debt ceiling compromise. So, as we predicted, the politicians took it down to the wire, but in the end compromised to get "something" done. Our early read, though, is that it does not address the long term entitlements/structural issues, and the verdict of the markets so far tends to agree, as stocks are down, and perceived safe havens are up (both Gold and the Swiss Franc traded to all-time highs in July).
The U.S. debt ceiling compromise effectively kicks the can down the road to the 2012 Presidential Election, where investors (and voters) are going to have to decide whether government spending ("stimulus") and transfer programs help or hurt the economy. It is reasonable to consider that the markets may have another "event" which shocks the politicians to "do something", as this continuing lack of real progress will only be tolerated for so long. Volatility looks set to increase, and investors should prepare for a bumpier ride for the next few months.
U.S. GDP numbers last month were a real dud, with Q1 being revised down from +1.9% to .4%, and manufacturing indices looked punk. Economic data has turned softer in many regions of the world, and is reflected in weaker stock markets globally. Some say that this is the worst time to reduce government spending (PIMCO among others makes this argument) due to this "soft patch", but all the spending so far has produced little economic progress, and it may be time for a different approach. Investors should watch carefully the proceedings at Jackson Hole later this month, when the U.S. Federal Reserve hosts its annual "retreat". We think it likely that some new form of stimulus will be devised by global central banks, as they realize that fiscal reforms are not speedy enough or sufficient to support growth.
Gold rose 8.4% in July, and is now up 14.1% year to date. The gold story continues to gather momentum, as gold bullion buying by the central banks of Mexico, Russia, and Thailand has helped to increase total buying this year to an estimated 204 metric tons, almost triple the level of 2010, according to the World Gold Council. This is especially meaningful considering that central banks had been net sellers of gold for every year since 1998 - until 2010. It appears to us that these slow moving, but highly sophisticated buyers, are joining a trend begun several years earlier by mom and pop investors and sensible advisors (like us!) who are convinced that the global currency system is in need of an overhaul and that gold should become an anchor once again to rein in profligate governments who spend well beyond their means. The risk to owning gold is a sudden and unanticipated rise in interest rates, but that does not appear feasible given weak conditions in the U.S. and Europe, so ultra-low rates will continue to support gold prices, in our view. The latter half of the year is also seasonally strong for gold.
The real issue for investors remains Eurozone debt problems. European banks are stuffed to the gills with PIGS bonds (their stocks have been hammered this year), and now the "I" (Italy) is in the crosshairs of the bond vigilantes. Since most of Europe is on vacation in August, it an ideal time for attacks on the bond market, and this could be the time when Spain weakens also. The ratings agencies have downgraded Greece to near default, and Portugal is a sick sister. The various "rescue" plans offered by the ECB and IMF are hopelessly inadequate given the size of the liabilities, and it seems likely that the Eurozone is entering the final "breaking point" where Germany will have to put up or shut up. All of this spells more volatility ahead for Europe. And, to be perfectly clear, U.S. Treasury bonds are a candidate for credit downgrades this fall also, as the vaunted "AAA" rating of the U.S. could fall by the wayside. This means that what is happening in Europe (rising interest rates/credit spreads) can happen here too.
Lastly, the events overseas have been quiescent lately, but trouble is percolating in North Africa and the Middle East, as Syria bubbles up and Egypt continues to struggle. In Russia, Czar Putin called Americans "parasites" living off the world economy because of the world reserve currency status of the U.S. Dollar. We note that the U.S. Government just stepped up the heat on Iran, by accusing it of being allied with al- Qaeda, which was the same window dressing used to justify the attack on Iraq during the Saddam Hussein era. You can read the story on the FT here: http://www.ft.com/intl/cms/s/0/43c235e8-b936-11e0-b6bb-00144feabdc0.html#axzz1Tz4m3zto
Is an attack on Iran now advancing on the chessboard?
In closing, we want to encourage our readers to think about the concept of sacrifice for the common good, especially with the ongoing debt debate here and globally. Nowhere is the idea of sacrifice better exemplified than in the service of our military, and it was especially evident fifty years ago on August 13, 1961. On that day in what was then the occupied and divided city of Berlin, East German and Russian forces irrevocably hardened the confrontation begun in 1945 by erecting a permanent Wall to separate East Berlin from West Berlin. That Wall eventually spread to divide most of Germany, and symbolized what is now known as the Cold War.
The father of our Managing Principal Emery Pike was then a young First Lieutenant in the U.S. Army Military Police Corps stationed in Berlin Germany. Vern Pike has just finished his memoirs of that time, and the following is a note from the publishers, Jim McGillan and Charlie Holbrook, and their website "Voice of NC":
"The book is Checkpoint Charlie - Hotspot of the Cold War
, by Vern Pike. The book is written about his military experiences commanding an MP unit in Berlin that was responsible for policing the Checkpoint Charlie crossing between East and West Berlin with all the associated challenges, tensions and strife before, during and following the building of the Berlin Wall 50 years ago in August. It is published as an e-book and can be downloaded to any computer for $4.99. One can either read the book on the computer or transfer it to one of the popular electronic reading devices. It is available at http://voiceofmoorecounty.com/
. The book will also be offered for sale by a number of other e-book sellers such as Amazon, Barnes & Noble, etc. in addition to our website."
Vern is on the right at Checkpoint Charlie in the photo above. We would be grateful if you would consider purchasing a copy and having a read. It's a great story, and we're sure you will come away with a better appreciation of how tense those times really were. And, take a moment on August 13, 2011 to think about how incredible it is to live in a country where no one is shot trying to scale a fence or climb a Wall to escape totalitarianism and lead a free life.
Until next month...thanks for reading our Journal.
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