Regime Change - A Global Domino Effect?

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“The superior man seeks what is right; the inferior one, what is profitable.” - Confucius

Tunisia.
Now Egypt.
The cabinet fired in Jordan.
Who is next and where?

Nobody can say for sure, but there are no shortages of possibilities, both inside and outside the Arab world. We see change unfolding and accelerating during the next two years. In addition to Tunisia, Egypt, and Jordan, civil uprisings have also occurred in Morocco, Algeria, Albania, and Yemen.

Often repressed, voiceless, and jobless, public masses are rising in protest against entrenched governments that are corrupt and out of touch with their people. These upheavals are the start of something big, a global tidal wave of anger that will sweep away ruling classes. In this dawn of a season of discontent, generals and presidents-for-life, and all their got-fat-cronies, will be well-advised to prepare departure plans and ensure the safety of the foreign bank accounts they have likely filled with state money and bribes over the years.

This wave of change will shake the world, a political earthquake of a magnitude perhaps equivalent to, or even greater than, the fall of the Soviet Union and its communist satellite states in the late 1980s. Non-democratic institutions all over the world will be vulnerable as the masses rise up in demand of greater individual freedom and more public representation within the political, social, economic, and educational segments of society. Even in democracies, the public will surely make sure its voice is heard. India, for example, is the world’s largest democracy. But corruption thrives at the very molecular level of government, education, business, and military, and the public has begun pressuring leaders for change.

Causes of Public Unrest

There are plenty.

Rising food prices; high unemployment among the poor; large populations of restless young; a lack of jobs for the educated; government repression; corruption; the all-too-common rigging of elections; police abuses; and the majority of the population with believing they have no voice. The list goes on and on.

Corruption and autocracy can be tolerated when the common man has a job and some expectations that he can better himself in the long run; but what happens when he faces a declining standard of living? Does he revolt? Does he throw out the oligarch or dictators who are getting rich on national resources or using political power to maximize their income while cutting off the common man from progress? The answer may soon be evident.

Technology Involvement

The speed of this revolutionary change fascinates us. Never before in history has there been such facility for information flow. We live in an Internet age of instant communication, an electronic hundredth monkey effect borne on the wings of cellular phones and cameras, texting and tweeting, Wi-Fi, iPhones, Androids, and YouTube. Images and messages can be transmitted into the nooks and crannies of all societies, stirring the masses, creating larger ripples in shorter time periods. Information is knowledge, and information today is empowered, magnified, and shared to a level never before possible. And right now, because of technology, the common man is less likely to be alone in his revolt.

The spread of discontent, anger, and outcry has been further stoked lately by WikiLeaks. Details of corruption, shady, self-serving dealings, and meddling in the affairs of other states have been pushed out of the classified closet into the open, often embarrassing the powers-that-are. WikiLeaks and other such Internet whistle-blowing vehicles have opened a whole new industry and the prospects of an endless stream of secret revelations.

We are seeing a quantum leap in the power and sweep of communication and information flow. We saw something similar more than two decades ago when the Communist rulers of Eastern Europe, with all their police state muscle, were unable to deter the influx and spread of ideas, visions of possibilities, and above all, the truth, flowing into their countries via Western television and radio programming. The Workers Paradise Propaganda was no longer a match for what people could see for themselves: an affluent, free world. So Eastern Europeans began to “vote with their feet,” leave for the more affluent West, if possible, and march in the streets. To be sure, some elements of Soviet-style statism and repression remain, but much is gone, including those Communist governments.

Today, communication technology has become a political weapon: a weapon of mass destruction threatening the very power base of despots, and for the common man, a weapon of hope and opportunity.

Investment Repercussions

The fallout from global political upheaval around the world will likely bring palpable benefits for the common man. We expect to see a spreading and redistributing of wealth. New groups will share in the benefits that current power groups have been keeping for themselves. These are profound, fast-moving changes and will create investment opportunities that we can’t yet imagine.

Here is a rundown of initial expectations:

The Positive

The events support all of the sectors we have recommended in the past weeks. In particular, the positive influence is growing stronger for oil, gold, silver, grains and other foods, machinery companies that produce food, oil production or mining equipment, and communication technology companies.

As investors seek stability, we expect to see money flow to the bigger, more liquid countries in Europe, and to the U.S. Capital will flow from unstable nations, industries and companies to more stable environments.

During the coming time of change, some quality investments may be ignored by investors seeking safety, even if they are in a country and industry which is attractive. The positive is that investors who are holding enough cash are well-positioned to capitalize on these opportunities.

The sectors which are hurt by turmoil are those industries in the countries with autocratic governments. We suggest that investors raise cash to be able to take advantage of any stock price corrections. Some countries will lose investment capital simply because of the instability. Over the long-run, more stable countries will see that capital move into their markets.

The Negative

In general, we envision only a short-term negative for emerging markets. Obviously, it is both short and long-term negative for markets in countries which have autocratic and non-representative governments such as Iran, Pakistan, and other parts of the Arab world, as well as Venezuela, Bolivia, Mexico, and some eastern European nations.

Global Inflation Rising — Here’s Why We Expect it to Continue

The last 6 to 12 months have seen inflation ramping up in much of the world. Here are the drivers as we see them:
1. The velocity of money is finally picking up. Think of this as an accelerator and multiplier of commercial activity. As velocity increases, it stimulates growth and demand for products and services. A huge amount of money has been created, the result of QE1 and QE2 in the U.S., QE in Europe, continuing currency manipulation in Japan, and QE activity in many developing nations that are printing their own currency to buy U.S. dollars and thus forcing their currencies down so they can export more.

The banking systems in the U.S. and Europe have survived the first of their financial crises, and are at the stage of lending more to business and to individuals. This is increasing the speed at which money moves through the economy, and where we speak of more rapid velocity of money. When this process acts upon the massive amount of money that has been created in the U.S. over the last 2 years, it will send wave after wave of inflation through the developed and developing worlds alike.

2. Developed world economies are strengthening, led by better exports and demand for manufacturing equipment in places like China, India, and Brazil. Big U.S., European, and Japanese companies respond to strong business trends by spending money to grow. They will build new factories. They will stockpile raw materials. They will buy more manufacturing equipment.

This cycle of increased demand for raw materials and equipment will exacerbate cost-push inflation worldwide. The developing world has already been experiencing demand-pull inflation as the public increases its appetite for more cars, machines, better food, consumer goods, technology products, and infrastructure.

U.S. Stock Market

S&P 500 Index (February 1, 2010 to February 01, 2011)

U.S. Stock Market

Since September 9, 2010, we have been bullish on the U.S. stock market and will continue to be so. Over the longer-term, liquidity formation through QE will create demand for many assets, including American stocks. We are not removing our buy rating and in fact we continue to own many fast-growing, export-oriented U.S. stocks; we are saying that it is reasonable to expect a correction of 4-10 % in the U.S. market at any time. 

Developed Countries — U.S., Canada, Australia and Europe

Canada's TSX 60 Index (February 1, 2010 to February 01, 2011)

Developed Countries

Technology, precious metals, and commodity-producers (food, oil, iron ore, and other base metals) will all benefit from an improving economy and a slowly improving back-to-work trend.

Commodities

Headed for higher ground, pushed by expanding liquidity and the oncoming inflation, already a growing problem in much of Asia and Latin America, and coming to the U.S. and Europe later in 2011 and 2012. Our favorite commodities are coal, oil, and food grains. Investors can trade copper and uranium for a few more months.

Precious Metals

Silver - Comex (February 1, 2010 to February 01, 2011)

Precious Metals

Gold - Comex (February 1, 2010 to February 01, 2011)

Gold Comex

The correction in gold and silver is about over. Upward global inflation, along with current instability and the potential for more in the future, adds additional allure for gold and silver. Various precious metals, including platinum group metals, may also rise, but gold and silver are our most favored choices. We are buying on the dips, large or small, adding to our holdings.

Oil

The correction in oil is drawing to an end. Oil remains attractive thanks to demand from emerging countries as well as the newly vibrant developed world economies. This collective demand for new oil exceeds the rate of discovery. Oil also serves as an inflation hedge. Dips, whether large or small, is a signal for us to add to our holdings.

Colombia

Due to a strike of truck drivers and a rising tide of labor unrest we are taking profits on half of our recommendation in Columbia.

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 312.4%
Corn 12/31/2008 63.6%
Soybeans 12/31/2008 46.7%
Wheat 12/31/2008 37%
Oil 2/11/2009 152.6%
Currencies    
Singapore Dollar 9/13/2010 4.9%
Thai Baht 9/13/2010 5.0%
Canadian Dollar 9/13/2010 3.7%
Swiss Franc 9/13/2010 7.7%
Brazilian Real 9/13/2010 2.8%
Chinese Yuan 9/13/2010 2.5%
Australian Dollar 9/13/2010 8.1%
Countries    
U.S. 9/09/2010 18.4%
Colombia (sold half of our position) 9/13/2010 3.9%
Canada 12/16/2010 6.0%
South Korea 01/06/2011 1.4%

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.

Co-Authors: 
Tony Danaher

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