Guild Investment Management, Inc. present a global market commentary.
We note two important themes of which investors should be aware. First is the likely future impact of the Affordable Care Act (ACA), which our contacts suggest will (1) broadly push healthcare delivery into more informal venues such as pharmacies; (2) cause the overall financial health of the system to deteriorate; (3) raise prices for those already insured; (4) lead in the longer term to reduced services for end-of-life care and procedures for elderly patients; (5) push more Americans to seek care abroad for major procedures; and (6) reduce the availability of expensive drugs and increase the use of generics.
Another important theme is that inflation looks likely to begin making a comeback. We believe that commodity prices will be increasing this year for a variety of reasons — including continued economic acceleration in the U.S. and Europe, and continued growth in China, coupled with an increase in the velocity of money as QE continues. Pressure on oil supplies may also come from geopolitical instability and the ongoing retreat of the U.S. from its role as “global policeman.”
2. Venezuela. Venezuela is an excellent case study in the “resource curse” and instructs us in how to look at resource-heavy authoritarian regimes. Venezuela is descending into chaos as it continues down its destructive path, and other oil regimes elsewhere in the world — such as Libya, Iraq, Iran, and Nigeria — are experiencing their own forms of instability. As noted above, we see the problems of these regimes as a potential constraint on the growth of the global oil supply as producers struggle to keep pace with rising demand.
3. Google Fiber. Google announced 34 more cities being added to its “Google Fiber” project. Google Fiber currently provides internet connectivity to Provo, UT and Kansas City, giving consumers there a connection 100 times faster than the competition at comparable prices — and free slower service to anyone who wants it. Some analysts think Google is serious about building out a nationwide system. Others think it is just sending a warning shot to the controllers of the internet’s pipes, to deter them from making deals which would favor data traffic from Google’s competitors.
4. Inflation. Brazil, the world’s number one exporter of coffee and sugar, has seen rising prices in these commodities due to severe drought conditions in the country, and according to a Brazilian weather service, January and February have been the driest months in Brazil in 30 years. Some analysts say that the impact of too much rain in Indonesia is damaging that country’s large cocoa harvest, and in North America, a brutally cold winter may have damaged the wheat crop. With respect to other grains, in the U.S, farmers are expected to plant less corn in 2014 and more soybeans to take advantage of already high soybean prices. Clearly, commodity prices are telling us something about inflation moving forward. Market summary. We believe U.S. stocks will continue to move higher in 2014, thanks to healthy corporate profits, improving GDP growth, and low interest rates. While our outlook is constructive for the U.S. and Europe (and eventually for Japan), we are aware of several psychological and geopolitical trends which may create significant market volatility. The prospect of such volatility makes us bullish on gold and oil shares, especially given continued Chinese demand for both these commodities. And we still have our eyes open for overvalued stocks in the U.S. Food, energy, and precious metals prices are rising. In our opinion, the biggest surprise in 2014 and 2015 will be that inflation, not deflation will be the problem.
5. Market summary. We believe U.S. stocks will continue to move higher in 2014, thanks to healthy corporate profits, improving GDP growth, and low interest rates. While our outlook is constructive for the U.S. and Europe (and eventually for Japan), we are aware of several psychological and geopolitical trends which may create significant market volatility. The prospect of such volatility makes us bullish on gold and oil shares, especially given continued Chinese demand for both these commodities. And we still have our eyes open for overvalued stocks in the U.S. Food, energy, and precious metals prices are rising. In our opinion, the biggest surprise in 2014 and 2015 will be that inflation, not deflation will be the problem.
Two Key Themes That Are Not Widely Known
Key Theme #1:
The Affordable Care Act (ACA) is going to change healthcare delivery in the U.S. in many ways… thus far, our research indicates that most of these changes are bad for the income of doctors, hospitals, and ethical pharmaceutical companies. Most of the changes will be good for generic pharmaceutical companies and for pharmacies.
In order to prepare for the ACA, we at GIM have spoken with numerous participants in the healthcare market — doctors, hospital administrators, and healthcare consultants who work with the U.S. and other nations to implement healthcare programs.
A few key points:
(1) 40 million new people will be added to the U.S. healthcare system due to the ACA. Question: Where are the doctors to treat these 40 million people? Answer: They don’t exist, so patients will be treated by more physicians’ assistants, RNs, LVNs, and nurse assistants — and more and more healthcare delivery (such as shots and vaccinations) will take place at pharmacies. Already in California and many other states, more and more shots and vaccinations are being administered in these venues.
(2) The U.S. healthcare system is truly financially broke. When we add 40 million new people to whom healthcare will be delivered, we can expect the financial condition of the system to deteriorate further.
(3) Where will the money come from? Medicare is thought to have excess money, although it is underfunded. The requirements for those who have incomes above $200,000 per year to pay more of their own healthcare will rise. Within a few years, all who have incomes in excess of $200,000 per year will have to pay much, of their healthcare costs even if they are over 65 years of age.
(4) Our contacts predict that within a decade, a substantial percentage of all insured will be under a single-payer system, and that system will be what we now call Medicaid. The cost of private insurance is already rising, and will continue to rise for the currently insured — as it becomes obvious that offering care to 40 million previously uninsured will greatly tax U.S. finances. Care will not be as available as it has previously been to the majority of currently insured, and will cost more for the average consumer. This will force more into the Medicaid system, which will give a potentially lower quality of care than the insured currently enjoy. Over time, U.S. healthcare will come to resemble more closely the socialized medicine of western Europe and Canada.
(5) Age limitations on operations… Over the longer-term (10 years plus), operations for joint replacements and even for terminal diseases will not be available through Medicare for those over 70 years of age. This may take the form of slowness and waiting lists, or just absolute refusal because of a patient’s age. This will be necessitated
by the extremely high cost to keep people alive in the last 6 months of their