GLOBAL MARKET COMMENTARY

August 18, 2016

GLOBAL MARKET COMMENTARY EXECUTIVE SUMMARY

The U.S. market moves ahead slowly and steadily, and in spite of high valuations, there is complacency among investors. We believe that the US market could undergo a mild 3-to-5% correction at any time, which would provide a buying opportunity. Among U.S. stocks we favor technology, both new and more mature companies, as well as growth companies that have been unrecognized by the market. Gold remains an area of focus, and we are noticing that demand for gold in the form of investment in coins and ETFs worldwide continues strong with India, the U.S., Southeast Asia, and Europe leading. Among official holdings, the governments of Russia, China, and Kazakhstan have all been buyers. While we are bullish on gold for the longer term, we are concerned that gold mining companies have risen far faster than the price of gold. On one hand this implies that gold mining stocks are vulnerable to a correction. We believe that the correction will be a an excellent buying opportunity. Silver continues to attract attention because of its use in solar electricity generation, which is expanding rapidly. Solar still requires government subsidies to be economic, but the dollar amount of the subsidies per kilowatt hour is gradually diminishing.

We are buyers of gold, silver, Brazilian bonds and stocks, and Indian stocks on corrections.. We will also use market declines to buy major growth companies among the technology leaders of the U.S., Europe, and Asia. 2. The U.S. dollar is still the key to global markets. The strength or weakness of the U.S. dollar is still the decisive factor in gauging market conditions. The development of the sideways-to-weaker dollar trend since February has gone hand-in-hand with the breakout of the U.S. stock market to new highs. Besides the absolute level of the dollar relative to the currencies of economic peers, the trend and speed of its movement are also key factors to watch. Every environment presents opportunities -- but to identify them, it is critical to put the dollar in the middle of your dashboard. 3. Putin’s worries are at home -- and his saber-rattling is just for show. Vladimir Putin is deploying bluster and threats to bolster approval at home and reshuffling his inner circle. The Russian economy remains in the doldrums, and he’s preparing to face a new election cycle that will see a presidential election in 2018. He is content with the state of affairs in Ukraine -- a frozen conflict which effectively prevents any moves for Ukrainian accession to NATO, which is one of Putin’s great fears. Despite current saber-rattling, and the deployment of new missile systems to Crimea, we don’t anticipate further aggression against Ukraine given Putin’s current economic and political environment. Europe has worries, but for now, worries about Russia will likely be transient.

© Guild Investment Management Inc.

1. Market summary. U.S., Brazil and India continue to be attractive. Brazil has shown that it can host the Olympics, begin to reorient its economy toward growth, and stabilize its political system as the impeachment of President Rousseff moves forward.

August 18, 2016

EDITORS

MONTY GUILD Chief Investment Officer

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Executive Summary, cont’d 4. The two major U.S. political parties have no meeting of the minds on “saving Social Security.” Both major candidates have pledged to “save Social Security,” which on its current path will exhaust its trust funds in 2034. Commonsense bipartisan solutions like those created in the 80s seem unattainable in the present highly polarized environment. The Democratic solution relies on higher taxes, and the Republican strategy on creating more robust economic and wage growth. The major parties also have differing attitudes towards Federal support for any private pension funds that run into trouble. The policies the winner enacts will affect retirees long before 2034. Both retirees and those preparing for retirement should pay particular attention to the tax consequences

of any changes, and make sure they consult with a competent advisor to optimize their retirement strategy as the tax landscape shifts. Many who favor gold as an alternative investment, or those who are concerned about the very high current U.S. debt level, argue that the U.S. government will handle the problems by devaluing the dollar. Devaluation will make pension obligations easier to fund by creating inflation -- which will reduce the buying power of the dollar and push Americans into higher tax brackets. As taxpayers move into higher brackets, more taxes can be collected to fund social security. Such a strategy has been used in the past, most recently after WW2 -- and many believe that it will be attempted once again.

Market Summary

RUDI VON ABELE Senior Research Anaylist

CONTACT INFO 1-310-826-8600 [email protected]

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and ETFs worldwide continues strong with India, the U.S., Southeast Asia, and Europe leading. Among official holdings, the governments of Russia, China, and Kazakhstan have all been buyers. Gold mining companies have recently risen much more than the actual metal, making them vulnerable to correction. Such a correction would be bullish, and provide an opportunity to buy gold shares.

Silver continues to attract attention because silver wire and connections are used in many solar installations, and the number of solar installations worldwide is expanding as solar becomes more efficient for electricity generation. Solar still requires government subsidies to be economic, but the dollar amount of the subsidies per Among U.S. stocks we favor technol- kilowatt hour is gradually diminishing. ogy, both new and more mature com- We are buyers of gold, silver, Brazilian panies, as well as growth companies bonds and stocks, and Indian stocks on that have been unrecognized by the dips. We will also use dips to buy major market. Gold remains an area of focus, growth companies among the technoland we are noticing that demand for ogy leaders of the U.S., Europe, and Asia. gold in the form of investment in coins The U.S. market moves ahead slowly and steadily, and in spite of high valuations, there is complacency among investors. The candidates of both major U.S. political parties are setting forth their programs in many areas, including their economic, financial, and tax policies.


Brazil and India continue to be attractive. Brazil has shown that it can host ANTHONY DANAHER the Olympics, begin to reorient its President economy toward growth, and stabilize its political system as the impeachment of President Rousseff moves forward. Next week, we will write about some of the new goals that the Brazilians are setting to stimulate economic growth and employment, and how the implementation of these goals is progressing.

August 18, 2016

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The U.S. Dollar: Still the Key to World Markets

Source: Bloomberg

trend in the dollar began to look sideways-to-down at the beginning of February, and after February’s dip, the U.S. stock market has recovered; with that sideways-to-down trend continuing since then, the S&P 500 has finally advanced to new highs.

Source: Bloomberg


The movement of the U.S. dollar still holds the key to world markets. The dollar rose rapidly between the middle of 2014 and the first quarter of 2015, and then moved sideways at a high level until December 2015… and the end of that rise corresponded with a long sideways period for the U.S. stock market. The

August 18, 2016

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Dollar Still the Key to World Markets, cont’d Of course, there are many forces at work, but we believe that dollar strength (or weakness), at this juncture, is still the decisive one. Not just the level of dollar strength is decisive -- the trend and the trend’s rate of change are also key factors. Every environment presents opportunities for investors. A rising dollar offers rising bonds as well as falling commodities and emerging-market stocks. A falling dollar offers rising commodities, foreign currencies, and U.S. growth stocks -- as well as bolstering the profits of U.S. multinationals. Overall, the U.S. market performs well with a weaker dollar, but we are in a global macroeconomic environment characterized by sluggish growth in which many countries are weakening their currencies so that they can boost exports and repay their domestic debt in coin of lesser value. A strong downtrend in the dollar will be difficult to see under such con-

ditions. But the sideways-to-lower dollar that has been the pattern since February will create some of the same opportunities. We recommend investors put the dollar front and center in your dashboard of economic and political data to watch. Investment implications: The strength or weakness of the U.S. dollar is still the decisive factor in gauging market conditions. The development of the sideways-to-weaker dollar trend since February has gone handin-hand with the breakout of the U.S. stock market to new highs. Besides the absolute level of the dollar relative to the currencies of economic peers, the trend and speed of its movement are also key factors to watch. Every environment presents opportunities -but to identify them, it is critical to put the dollar in the middle of your dashboard.

Putin’s Worries Are At Home

The Russian government has also ratcheted up tensions with Ukraine, accusing the Ukrainians of terrorist plots against infrastructure in Crimea, and responding with the deployment of missile systems to the peninsula. A land invasion of Ukraine from Crimea is impractical -- the narrow crossings could easily be blocked -- but the missiles being deployed can reach deep into Ukrainian territory. Russia also withdrew from official ongoing peace talks with

Ukraine -- although he signaled that he might meet with Ukraine’s President, Petro Poroshenko, on the sidelines of the G20 summit in China that will happen in October. Is Putin planning a renewed offensive in Ukraine? Our view has long been that Putin’s goal is not the wholesale annexation of Ukraine; that might be a dream, but it is politically and militarily unachievable at present, and Putin knows it. Rather, his goal is the creation of a frozen conflict like the ones that Russia has created in other ex-Soviet states such as Georgia. That frozen conflict will go hand-in-hand with a push to federalize Ukraine and render its eventual accession to NATO impossible. Putin is in a defensive position, and above all wants to prevent the tightening of NATO’s leash.


Things are happening in Russia that are making observers nervous. First, Vladimir Putin has reshuffled some of his inner circle, demoting one longtime advisor and sidelining others. His actions seem focused on creating a younger group -- one comprised of people who have come of age politically under Putin, owe him everything, and will be more reliably loyal.

August 18, 2016

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Putin’s Worries, cont’d Putin’s Fires His Old Chief of Staff, Brings In a Younger Face

Putin’s other great worry is his own power. Parliamentary elections are occurring soon, and they are viewed as the first taste of an election cycle that will see presidential elections in 2018. The Russian economy has largely stabilized after the collapse of oil prices and the imposition of sanctions, but that stabilization is not a robust recovery. On the contrary, the country has now been in recession for a year and a half. Putin predictably uses saber rattling to strengthen support from his base. It is highly unlikely that such saber rattling would progress to a war that would potentially involve western powers -- a war Putin knows that he would lose, despite all his bluster for domestic consumption. The bottom line: Putin’s eyes are on domestic affairs and his own power base. The frozen conflict in Ukraine suits him fine under his current geopolitical and economic constraints. We are monitoring Russia’s moves, however we’re not worried about further Russian aggression at this juncture.

Source: Xinhua

Investment implications: Vladimir Putin is deploying bluster and threats to bolster approval at home and reshuffling his inner circle. The Russian economy remains in the doldrums, and he’s preparing to face a new election cycle that will see a presidential election in 2018. He is content with the state of affairs in Ukraine -- a frozen conflict which effectively prevents any moves for Ukrainian accession to NATO, which is one of Putin’s great fears. Despite current saber-rattling, and the deployment of new missile systems to Crimea, we don’t anticipate further aggression against Ukraine given Putin’s current economic and political environment. Europe has worries, but for now, worries about Russia will likely be transient.


August 18, 2016

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Trump, Clinton Plans Diverge For Retirees

Where the candidates agree, we have some sense of what waits for us after the election. In many areas, though, their visions of the way forward for the U.S. differ substantially. This is certainly true for the approach each would take to retirement and tax issues. Both candidates agree that Social Security must be “saved” -- that is, something must be done to insure the solvency of the system, which will exhaust its “trust funds” by 2034. If nothing is changed, at that point Social Security would be financing payments purely with the contributions of those currently paying into the system, and by current estimates would be able to pay only 79% of its obligations. The situation would continue to get worse as the population aged, so politicians on both sides of the aisle are eager to come up with a solution that will keep the system intact and solvent. Bi-partisan deals made changes in the past -- such as the one made in 1983 under Republican President Ronald Reagan and Democratic Speaker of the House Tip O’Neill. Such bi-partisan agreements have been tougher to come by in the more polarized environment that has prevailed recently. The Republican Party platform says that “all options should be considered” and leaves open the possibility of further rises in the retirement age, and of changes to the system of cost-of-living adjustments, as well as more radical reforms such as privatization. However, on the campaign trail Donald Trump has consistently made comments such as “We’re going to save your Social Security without any cuts.” (This is one of the areas where his populism has departed

from Republican orthodoxy.) Hillary Clinton likewise was brought around to a forthright rejection of the old bipartisan consensus by the challenge of Bernie Sanders on her left, and now rejects any reforms that could be construed as “cuts,” especially changes to cost-of-living adjustments and changes to the retirement age. Then what do the candidates propose to keep the system solid? In a nutshell, the Clinton campaign proposes that Social Security taxes be raised: “There is no way to accomplish [the goal of protecting Social Security] without asking the highest-income Americans to pay more, including options to tax some of their income above the current Social Security cap, and taxing some of their income not currently taken into account by the Social Security system.” On the other hand, the Trump campaign looks to boosting Social Security tax revenue by boosting economic growth and wages: “You do it by bringing jobs back, by being smart, by getting rid of waste, fraud, and abuse.” This prescription is short on detail, but refers Social Security concerns essentially to Trump’s economic agenda: reviving economic growth, job creation, and wage growth by reducing corporate taxes, reducing regulatory burdens that discourage small business formation, driving harder bargains with trading partners, and reforming immigration policy. The candidates also differ widely on issues surrounding private pension plans. Both the Republican and the Democratic platforms note the problems faced by private pensions; the Republican platform notes the risks posed by inadequately funded plans that are insured by the government’s Pension Benefit Guaranty Corporation. (Many government employee unions fall in this category.) The Democratic platform, on the other hand, straightforwardly promises to protect the benefits paid by such pensions -- which could exacerbate fiscal strains on insolvent municipalities or states. Workers turning 48 this year will be eligible to retire in 2034, the year the system is set to hit


As the U.S. presidential election nears, we are doing a series of reports on the differences and agreements of the major parties on various economic and financial topics. Last week, we noted one area where the major-party candidates are in agreement: trade. In different ways, the candidates have challenged the free-trade status quo. U.S. multinationals will face an environment in which established free-trade treaties are renegotiated, and treaties that are currently in the works (such as the Trans-Pacific Partnership) are scrapped or drastically revamped, potentially disrupting long-settled plans.

August 18, 2016

7

Trump, Clinton Plans Diverge For Retirees, cont’d

Investment implications: Both major candidates have pledged to “save Social Security,” which on its current path will exhaust its trust funds in 2034. Commonsense bipartisan solutions like those created in the 80s seem unattainable in the present highly polarized environment. The Democratic solution relies on higher taxes, and the Republican strategy on creating more robust economic and wage growth. The major parties also have differing attitudes towards Federal support for any private pension funds that run into trouble. The policies enacted will affect retirees long

before 2034. Both retirees and those preparing for retirement should pay particular attention to the tax consequences of any changes, and make sure they consult with a competent advisor so optimize their retirement strategy as the tax landscape shifts. Many who favor gold as an alternative investment, or those who are concerned about the very high current U.S. debt level, argue that the U.S. government will handle the problems by devaluing the dollar. Devaluation will make pension obligations easier to fund by creating inflation -- which will reduce the buying power of the dollar and push Americans into higher tax brackets. As taxpayers move into higher brackets, more taxes can be collected to fund social security. Such a strategy has been used in the past, most recently after WW2 -- and many believe that it will be attempted once again. Thanks for listening; we welcome your calls and questions.


insolvency. We do not know all the effects that will follow a Democratic or Republican strategy to “save Social Security.” However, the decisions made by would-be reformers will be affecting retirees long before then.

August 18, 2016

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GLOBAL MARKET COMMENTARY

GLOBAL MARKET COMMENTARY

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