PRACTICAL PHILOSOPHY
by Monty Guild and Tony Danaher
Guild Investment Management, Inc.
April 9, 2007

WELL THIS TIME WE ARE GOING TO ANNOY YOU WITH A LITTLE PRACTICAL PHILOSOPHY

We normally wouldn’t want to bother you with it, but to us it seems key to understanding how the economic world works.

WARS ARE LESS AND LESS IMPORTANT….ECONOMICS IS MORE AND MORE IMPORTANT

Some people like the war in Iraq. Some hate it. We see it as mostly irrelevant except as a psychological event. As we have said in these pages many times, the war is bad for the U.S. economy and the U.S. dollar because it expands the budget deficit.

If history is any guide, the war will have bad consequences for the political party which initiated and supported it. For example, the Democrats were badly hurt by President Johnson’s pursuit of an unpopular Vietnam war in the 1960’s. The Tories were badly mauled at the polls in England for years after the British war in Mesopotamia in the 1920’s.

LOOKING AT THE LAST 60 YEARS

Since the end of World War II, U.S. political power definitely grew even though the U.S. was not very successful in its recent war efforts. The Vietnam and Korean wars were not successful, and yet the U.S. grew in power and influence. One could argue that over the last sixty years. U.S. power grew the most during the periods when it was not involved in combative campaigns around the world. Much of the power was a result of the ingenuity, the drive to achieve, the generosity, and thus the economic growth of the U.S. over that period; not from military campaigns. 

We believe that the economic and technological advancements, and projects that the U.S. undertook, positively impacted the world. The U.S. created an environment where people could pursue their dreams. Immigration was allowed, and sometimes it was encouraged.

The country’s systems generally worked. It had: a fair legal system, an honest accounting profession, financial markets that were very transparent compared to global peers, a transparent, regulated banking system, moderate taxes, and a decent educational system. Innovation was incentivized by wise tax policies, and capital was allowed to be accumulated. Corruption, although not absent, was under control. All of these created a global demand for the U.S. lifestyle. During this period, Japan, and much of non-Soviet Europe also grew for similar reasons.

IN THE FINAL ANALYSIS, THE U.S. / WESTERN EUROPEAN / JAPANESE SYSTEM HAS WORKED AS WELL AS ANY OTHER…AND BETTER THAN MOST

Will that pattern continue? There will always be threats. There will always be fears that this group or that group will cause an end of the world as we know it, and bring an end to our way of life. One of the advantages of being older is that you have seen all of the fears. In our case, we have seen most of them turn out to be incorrect.

The system in the U.S., Europe, and much of the developed world has been successful because the system has tended toward moderation. Most voters are moderate; not right wing, not left wing, but in the middle.

RECENT NEWS: EQUITIES MARKETS IN EUROPE ARE NOW BIGGER THAN IN THE U.S.

According to the Financial Times, the European markets are bigger in total dollar value than the U.S. market for the first time since World War I. This is partly because Russia and Eastern Europe are being included after a long period on non inclusion, due to their membership in the Soviet Bloc. Additionally, the Euro has risen versus the U.S. dollar raising the value of European equities.

COMMODITIES

Many heads of commodity companies are commenting on the strong demand for metals. 

In addition, the chief of the world’s largest pension fund, CALPERS (California Public Employees Retirement System), has recently begun to lead a move by the giant pension fund into China and India, and into more commodities. He began managing the $230 billion fund in June 2006 and has begun to put more money into oil, copper and other commodities. He is investing much more heavily in Asia for the fund, especially in India and China. The Wall Street Journal reported on April 3, 2007 that he said “Asia is just starting its upward climb”…..India and China have reached “critical takeoff conditions”…..Their ultimate development is “inescapable and compelling”…..Further, he is quoted by the Wall Street Journal as saying “It is inconceivable frankly, that we can be successful without critical successes in Asia.” He is of course referring to the need for his fund to produce strong investment results for the retirees of the state. 

He certainly agrees with us about the long-term potential in Asia. CALPERS’ size does not really allow them to be traders. CALPERS is investing because they see that the same areas we have long endorsed are the keys to producing good returns in the coming years and decades. 

© 2007 Monty Guild
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