Investing and Financial Doomsday – Page 2

Dollar Falls Sharply as Gold Approaches It’s All Time High… Again

As my personal friends know, I’m a gamer geek. My collectible card game (CCG) of choice is Vampire: the Eternal Struggle (VTES). It’s Richard Garfield’s (the designer of Magic: the Gathering) second CCG and he designed it for multiple players. It’s a game I enjoy playing competitively.

Every year, White Wolf (the company that publishes VTES has a North American Championship. In order to play in this tournament, you first have to do well in a qualifier tournament which every region has. This weekend, Los Angeles had its qualifier tournament and I enjoyed playing in it (I didn’t qualify). Since VTES has a small but loyal player base compared to other CCGs, you get to know everyone pretty well who competes on a national level. We’ve become a pretty close knit group despite the fact that we all live in different regions; our willingness to travel and our love of the game brings us together.

Well known members of this tight-knit circle include Ben Peal, and a married couple, Robin and David Tatu. They have all purchased my book and found it a good read. Both of the Tatu’s were at the tournament this weekend, and I commented to them that my investments were up some 50% over the last six months. They recommended that I sell my gold investments before they crashed. Now, I found it a bit peculiar that two people who told me that they learned a great deal about how the economy works from the book that I wrote would then tell me to sell gold.

It does make sense in a human nature kind of way. The knee jerk response I’ve gotten when I tell people how much money I’ve made off of my gold investments is “Sell!” It’s a bit of conventional wisdom that has its roots in reality. After all, trees don’t grow to the sky and what goes up must come down. If something’s up 50%, then it must be time to sell it.

Well, yes and no. Continue reading Dollar Falls Sharply as Gold Approaches It’s All Time High… Again

Checking My Scorecard

Every now and then, I make predictions in this blog. Today seemed as good a day as any to take a look at my prior predictions and see how they faired. As a life long Cassandra, I can’t really say that I hate to say I told you so. Honestly, I love saying I told you so.

Specifically, I told you:

In November I told my readers that the bonds of Genworth Financial seemed like a good buy. I took my own advice and bought some. They paid over the weekend, realizing me an annualized 20% or so.
In January, and many times since, I have repeatedly warned that Dr. Lacy Hunt’s advice to plow money into long term US Treasury obligations was a recipe for disaster. So far this year, the 30-year US Treasury bond is down 20.9%. Ouch!
That Barrick Gold was a screaming buy in October of 2008. I loaded up on Barrick at $20.85 a share in November. Last week I sold my Barrick stock for $35.50 a share and took the money and put it straight into GLD. Extra credit: Since that date, GLD (gold bullion) has appreciated and ABX has fallen. Sometimes I just get lucky!
- That we had witnessed the end of deflation and that this year would see the start of a rampant inflation that would last for years.
Now, for the longterm prediction that’s the real clincher. Continue reading Checking My Scorecard

Barrick v. Bullion

I sold off all of my Barrick shares today. I got a price of $35.50, which is far above the $20 and change that I bought them for. They have served me well. Given how passionate I am about gold investing, some readers may take this as a bit of a surprise. It’s not that I don’t expect the price of Barrick shares to rise longterm, because I do. I expect that all of the money bring forced into the system by its would-be saviors, the Federal Government and the Fed, are going to cause run away inflation that will force the price of many things higher, particularly gold shares.

However, since this inflationary scenario has not yet unfolded, I have to make the most profitable decision I can given the information I have at hand. Currently, analysts expect Barrick to be $1.75 a share for 2009 and $1.80 a share for 2010. With the company trading at $35.50, that works out to a Price-to-Earnings ratio of 20 or so. That’s a PE ratio that’s not as bad as the stock market at large (the Dow Jones Industrials are currently trading at a PE of 43.1 and the S&P at a PE of 62!) Of course, for Barrick, a lot is going to depend on the price of gold itself. Today, gold closed at $925 an ounce. Continue reading Barrick v. Bullion

Is Obama Misplaying His Hand?

Kevin, good friend and loyal blog reader, recently posed me this question:

I was reading the May 6th issue of _Cardplayer_ magazine today, and Roy Cooke’s column, which always sports excellent advice, had this quote about Limit Hold-Em:

“The larger the pot and the greater the risk you are taking, the less you should try to obtain extra bets and the more you should focus on playing your hand in a manner to win the pot with as little risk taken as possible.”

I thought that was superb advice, since taking any large hit to your stack is actually meaningful, whereas you can afford to take several small hits and continue on your way.

Then, I suddenly got chills up my spine, and thought, what if Obama’s overplaying his hand? I know the economy *seems* like a No-Limit game when the government (especially the Feds) has your money, but it’s really closer to Limit poker than it is to NL [As an example of a No-Limit Hold-Em government game, think cold-war military spending in the ’80s, and S.D.I. as the all-in move. Thank G-d Russia folded.]

“The larger the pot and the greater the risk” — sounds like a bajillion-dollar already-failing business bailout, doesn’t it? “The less you should try to obtain extra bets” — such as Nationalized Health Care — “and the more you should focus on playing your hand in a manner to win the pot” — a healthy United States economy — “with as little risk taken as possible” — such as giving a bajillion dollars to prop-up already-failing businesses instead of giving every taxpaying adult in this country a $17,000 tax rebate? Imagine all the cars that we’d be buying from those now-failing Detroit businesses if we all had $17,000 in our pockets! Imagine all the companies now in financial distress that Bank of America wouldn’t be allowed to buy! And the $17,000 play would definitely minimize O’s risk, since it would correct the economy (at least for now), guarantee his party’s dominance in the elections a year-and-a-half from now, and almost certainly set him up for the final table (his second term as President). That’d be playing your hand, O. My advice: Don’t give up your day job.

–kevin

Just so people understand the poker principle at work, the idea is that sometimes you should play your hand differently than math would dictate to add deception as to what you have. However, as the size of the pot grows, deception loses its value in comparison to playing a strong hand in a straight forward way in order to win the pot since the value of a large pot begins to outweigh the value of additional money won through deception.

The analogy is a bit stretched here, because we’re not talking about Obama being deceptive per se. Rather Kevin is saying that saving the American economy is of tremendous importance and Obama should not waste precious time and effort trying to get pet projects approved. This is true. However, it also highlights an classic area where our elected officials have a significantly different interest than the citizenry. For citizens, political crises are caused by disruption and are to be avoided if possible. For politicians, political crises are their opportunity to pass far reaching laws that expand the scope of their purview. “Never waste a crisis,” as the saying goes. In this regard, Obama is acting like you’d expect a Socialist politician to act; he’s using the crisis to pass his agenda.

In terms of ending this recession, Obama’s actions are doomed to fail. Kevin is correct in pointing out that the bailout bill of $17,000 per adult would be far better spent as a tax rebate then as a bailout given in the form of a loan or an equity share in auto companies. Of course, it would be better still if the government did the opposite of Keynes’s advice and began to cut spending altogether rather than expand it, but austerity has fallen out of fashion in government circles. Cutting back on spending was a tried and true method for restarting a stalled economy from time immemorial, and a method that has an unparalleled level of success.

Spending our way out of a deficit, unfortunately, has very little to show for itself in terms of ending recessions. It didn’t end America’s Great Depression of the 1930s, nor did it end Japan’s ongoing depression. It really has very little in terms of economic history to suggest that it will work at all. To return to the poker analogy, this seems like the kind of self-destructive behavior you see losing players engage in all the time: they make plays they shouldn’t make, but feel they’re a good player despite never having seriously studied the game and being a consistent loser at it. Sadly, we the taxpayers have decided to stake this losing player with as much money as he needs. No one would be foolish enough to do this in the poker world, but that’s why government is such a wonderful invention- it allows us to collectively act far dumber than any one individual ever would.

Can the Fed Tighten the Money Supply in Time?

Lately I’ve been reading opinions about the market that tell their readers not to be too worried about inflation. Sure, they’ll admit that expanding the money supply correlates sharply with inflation, but they tell me that Ben Bernanke will take all that liquidity out of the system when the time is right. I have no idea where they get this idea; Alan Greenspan certainly wasn’t able to contract the money supply after he inflated it to ward off recession. Do we really believe that Ben Bernanke is going to do any better?

One opinion I read indicated that mopping up inflated money supply. After all, all the Fed had done was monetized the government’s debt. Since that debt is held in the form of US Treasury bonds, it should be easy to contract the money supply again by simply selling the bonds. The author of this opinion was rather misinformed, because they did not seem to understand that when the Fed monetizes bonds, it does so with money that it yanks out of thin air. The money then enters the system by way of the bank. Continue reading Can the Fed Tighten the Money Supply in Time?

Fed Sees No Recovery in 2009

Here’s a fun tidbit from our friends at the Federal Reserve, out economy is not going to be getting any better this year. When last they spoke (oh, gosh, must have been.. four weeks ago) they said that the best we could hope for would be an economic recovery in late 2009. Now they’ve since come out and said that we would see no recovery this year.

Hmmm. Well if that’s the case, why is the government spending all of this money to “stimulate” the economy and bail people out? Was that to speed us to a swift recovery? Now I understand that back before the days of the Fed, when downturns or banking panics would happen, that they might take a year or so to work themselves out. The Panic of 1907 took less than a year. The Panic of 1893 didn’t see the market bottom for more than a couple of years. But that was back in the economic dark ages. Back when our money was backed by gold and we didn’t have sage bureaucrats or wise central bankers ready to print money at the drop of a hat (roughly $13 trillion and counting according to Bloomberg) to bail everyone out. Why, wasn’t the whole reason for all of this stimulus and bailout so that we wouldn’t have to far a protracted economic downturn?

Well, that was the justification given for it anyway. Liquidation doesn’t work is what Ben Bernanke told us, it just makes things worse. So instead let’s bail out the troubled economic actors and get back on the road to a quick recovery. The Fed is now admitting that this recovery of there’s is not going to come quickly. In fact, in comparing the amount of time old style economic liquidations used to take compared to take, the post economic recoveries of the Fed era seem to take quite a bit longer. As I discuss in my book, when you compare the economic history of the pre-Federal Reserve era to what took place after the Fed, it’s pretty clear that we went from an era of frequent economic panics to infrequent economic collapses. That suggests that all the Fed is doing is to postpone an economic downturn until later, but at the cost of greatly adding to its length. Which isn’t really all that great of a service to society when you think about it? Continue reading Fed Sees No Recovery in 2009

An Inflation Survival Kit

Well, I’m beginning to get clients seeking my investment recommendations. I think a lot of the investment advisory business is driven by what advisers can profitably sell, and not necessarily what’s most lucrative or best for the client. When you’ve got your country’s central bank working hand-in-hand with your government to inflate your money supply by trillions of dollars in high-powered money (this year alone), holding physical gold and silver becomes a must.

There are many investment vehicles available for purchase that allow you to participate in the appreciation of the Comex gold price, but they also all involve some form of counter-party risk. The beauty of gold ownership? It’s a form of wealth that isn’t someone else’s liability. This is important, and lose when purchasing gold through an intermediary. Part of the reason most never bother to learn investing or money management is that it’s made artificially complicated by the profession of accounting, as well as the pseudoscience that is Economics. The average person wanting to learn about money is bombarded with terms they don’t understand and notions that make little sense; my favorite among them being that the Fed is there to protect the value of the US Dollar by making it gradually worth a bit less each year so that, as a nation, we may prosper. Such bizarre statements defy rational explanation because they just don’t make sense, which in turn confuses people who are ready to soon seek comfort in the blind belief there are experts out there who do understand this arcane esoterica, and they’re better off just placing their faith in them.

Of course, they would be mistaken. The foundation of the modern American financial system rests securely upon this ill-placed faith in experts being able to manage what we as individuals cannot begin to fathom, and soon don’t even want to try. Knowledgeable central bankers manage the currency so as to allow smart, capable CEOs to grow the bottom line while accountants and regulators ensure that everyone’s playing by the rules. Every era has a mythology that holds it firmly together; this view of our financial system seems to be ours. The trouble (for those in power, that is) seems to be that in recent times, these myths are being exposed for being just that: myths. Continue reading An Inflation Survival Kit

Bonds Outperform Stocks Over Last 40 Years

According to Rob Arnott’s recent article to be published in the Journal of Indexes, bonds outperformed stocks as an asset class from 1968 through today. (You can read a condensed version of the article here.) That’s interesting news for those of us who have always been skeptical of the stock hounds. Dr. Jeremy Siegel said in his book Stocks for the Long Run that stocks reliably outperform bonds over a sufficiently long time horizon and so, Siegel argues, you really shouldn’t bother with bonds at all.

I was critical of Dr. Siegel’s advice in my book because, along with bonds, he has a long history of being critical of gold investors. For Siegel, and most conventional investment professionals, they have but one tool in their tool box; for them, it’s always a good time to invest in stocks and never a good time to be invested in bonds or gold. I’m always pleased to see when my criticism of an idea was well placed, and I so I find Rob Arnott’s article rather vindicating. Bonds outperformed stocks over the last fourty years, which begs the question of exactly how long a time horizon you need to be invested for Dr. Siegel’s advice to be holding true. For most people, fourty years is longer than their investment time horizon.

This forty year time span wasn’t actually the longest time period where bonds outperformed stocks. Going back all the way to 1802, there was a 68 year period (from 1803 to to 1871) where bonds also outperformed stocks. What’s even worse news for the stock hounds is that the news is just going to get worse from here. Continue reading Bonds Outperform Stocks Over Last 40 Years

Attention Dr. Lacy Hunt: Your Plan’s Not Going So Hot

The United States and the United Kingdom are both pursuing similar strategies to deal with this global recession: print more money. France and Germany are taking a rather different track and talking about reducing government spending. Germany went so far as to argue before the last G-20 meeting that if it were to reduce itself to “stimulus” spending, then it would become a burden on the rest of Europe; their reasoning being that they would eventually have to raise taxes to pay off their increased debt load and that that would cause a drag on the rest of the European economy.

It looks like Keynesianism isn’t a huge hit in France or Germany, as they are managing to avoid the peer pressure of their deficit spending neighbors. I’m sure Helicopter Ben is calling them up saying, “Come on! Everybody’s doing it.” But no dice. In fact, the President of the European Union Mirek Topolanek recently came out and called Obama’s plan to get us out of the recession a “road to hell“.

Ouch. Continue reading Attention Dr. Lacy Hunt: Your Plan’s Not Going So Hot

“The Dollar Sucks!” Says China’s Central Bank

Increasingly various Chinese sources have been going on about their dollar woes. A year ago it was just an academic. Freedom of expression is a limited commodity in totalitarian China, so if you see an academic coming out making statements critical of China’s trading partner you can probably surmise that that message is coming from higher up’s in China’s chain of command. Having a lesser known academic figure make the statement was a way to distance the criticism from the official channels.

But that kind of subtle criticism didn’t seem to have made much of an impact. In fact, we spent the next year attempting to solve every round of bad news by borrowing or printing more money. Last month, the Premier himself said that he was concerned about the value of his country’s investment in the US Dollar. No longer relying in mere academic to hurl criticism, the Chinese wanted us to know on no uncertain terms that they were starting to get a little peeved. We responded to that proclamation by having Helicopter Ben print up $200 Billion or so and start buying US Treasuries- the highest form of inflationary money printing there is.

Now, China’s pissed. “How pissed?” you ask. So pissed that their central bank just came out and called for a new reserve currency. Having the central bank of your major trading partner and holder of close to $2 trillion in your country’s debt come out and call for a new currency to replace yours is not usually considered a good sign. It’s a bit like taking a woman out on a date and having her say that she would very much like to have children someday… with someone who is almost completely unlike you. Rocky times are clearly ahead for this relationship.

But you wouldn’t know that by looking at the US Stock market. Both the Dow and the NASDAQ were up 6.8% today. Continue reading “The Dollar Sucks!” Says China’s Central Bank