Bill Bonner – Preston Poulter’s Blog

Investing, According to The Bible

I gave a talk at Bethel Temple in Longview, Texas today. It was a largely black, Protestant church; as you can imagine, there was a lot of very vocal Jesus-praising going on. Maybe it was my years of parochial school, but I feel worship services should be more reserved. Of course, I’ve also had a crisis of faith since then, so I’m sure all religious services make me slightly uncomfortable. Still, I believe that the message I have for them — that an economic crisis is unfolding and these people need to make themselves ready — is one that transcends religion. At no time do I hold, or have I ever, held myself out to anyone as an authority on spiritual matters. I’m here to talk about the economy, and I’ve found that Christian audiences are very receptive.

A touchstone I return to is one borrowed from Bill Bonner: capitalism, at its core, rewards virtue and that to prosper in a such a system, we need to be industrious and thrifty. I then point to fact that we, as a nation, have been gluttonous and foolish in terms of how we’ve conducted ourselves, and the economic crisis we’re facing is merely a consequence of that conduct. When speaking to a Christian audience, I term it as we’ve violated Biblical principles, since the following can be found in the Bible:

Proverbs 23:21: “for drunkards and gluttons become poor, and drowsiness clothes then in rags.”
Proverbs 22:7: “the rich rule over the poor and the borrower is servant to the lender.”

So, just going off of these verses from the book of Proverbs, the Bible seems to pretty clearly state that being thrifty and industrious will lead to prosperity, whereas the reverse will lead to ruin. Add to that the parable of the talents from the book of Matthew, the Bible is telling us that, were we to want to acquire wealth, we need to work hard, save money, and invest it well.

It’s hard to find verses in the Bible that relate to investing much at all, because a lot of the Bible — the New Testament in particular — are about giving up worldly goods and embracing eternal life. Still, Bible verses make the rest of the message more receptive.

Coincidentally, in doing Internet searches for silver, I found Jason Hommel’s website. He has a section dedicated to “Biblical Capitalism” because “it’s what Jesus would do.” In reading the website, he seems to firmly have this conviction with the appropriate uses of “The Lord Jesus Christ” in his speech. In comparison, I feel my discussion of the Bible verses in favor of working and saving far more genuine.

I always get a strong reaction from Christian audiences. This time I talked about the structure of the US economy in terms of four major players:

the government that taxes and borrows money and spends it
the consumers who earn and borrow money and spend it
the bankers who creates the money for the other two
and foreign lenders who keep the whole system from collapsing by continuing to lend us money and honor the US Dollar

I told the congregation that the United States transformed itself from a production-based economy to a consumption-based one; that we tried to replace the real wealth acquired by producing and exporting goods with the fake semblance of wealth provided by the printing press. Furthermore, I told them, that what we were now witnessing was not a recession that would subside, but rather a death. We were witnessing the death of the financial system that we had set into motion decades ago.

All in all, I found it a receptive audience. I have been asked back and now have a line on speaking at another church. I am realizing that I need to branch out to speak to other communities, so that’s my next step. As I recently passed the Series 65 exam, and will soon pass the Series 63, I’ll be allowed to call myself a Financial Adviser, and start taking on clients seeking investment advice. I figure, this is one of the better (and cheaper) ways to start building a client base.

Props to Obama’s First Two Days

I have to say that it’s nice to have a Democrat in power again. I have some Republican readers out there (just embrace it, Kevin; talk to Taylor — he’ll help you) who I know will find it very annoying for me to be joining in the celebration of Obama’s first couple of days. But, I have to say, that I like what Obama’s done so far: moving to close Guantanamo and the CIA’s secret prisons is simply awesome. The very existence of these programs is not only Un-American, but, I believe, unconstitutional.

Where, in our Constitution, does it say that the United States can take people into custody and detain them for years at a time without bringing them up on charges? I was hoping that the justice system would actually reject Bush’s programs, but the years went on and nothing happened. It seemed that someone in the Bush Administration decided to leave the people detained in Guantanamo for the next President to sort out. (I felt this even before Bush got re-elected in 2004.)

For that matter, Iraq seemed little more than a talking point in the “War on Terror” in Bush’s second term; other than sending some additional troops into Iraq, what really changed there? For that matter, what did the additional troops accomplish other than to give John McCain something to ramble on about during his campaign for President? I love what The Daily Reckoning’s Bill Bonner said about the Iraqi journalist throwing a shoe at Bush: “What’s wrong with our American journalists? Have they no shoes?”

Indeed, I wondered the same thing about a lot of people. How could we allow the Bush administration to rewrite the power of the executive branch before our very eyes and have so little outrage? So, I am pleased to see Obama’s first acts being so definitive to curtail the obvious abuses of the prior administration. Although, Wall Street doesn’t seem quite so happy about it.

As Taylor pointed out in his last comment,

“The percentage decline is the worst ever for the Dow on a president’s first day in office. That would break the old record, 2.9%, set on Nov. 22, 1963, when Lyndon Johnson took over after John F. Kennedy’s assassination.”

Of course, there’s a maxim on Wall Street that the first two years of a new Presidency will be down years and the last two will be good ones.

Still, that was a particularly violent reaction to Obama’s first day.

Although, I made money. As you can see in the chart below, Barrick Gold has been doing just fine over the 3 months since Obama was elected President. On that fateful day of which Taylor spoke, when the Dow was down 4%, Barrick was up some 5.8%. What can I say? Gold’s been treating me well.

That’s not to say that I think this stock isn’t going to see some rocky times ahead. I do think the forces of liquidation are taking a breather — for now. The volatility of this week is more the Wall Street traders showing their displeasure at the forces of Socialism that Obama represents. But I expect it to stabilize over the next few weeks. In fact, I’m expecting a bit of a rally. It’s going to be a sucker’s rally, though; but I still expect it’s going to trap a lot of people who are thinking that the worst is behind us.

Barrick will probably be taken down a peg or two in the upcoming collapse, but it’ll come back. I can’t say the same for the rest of the stock market. We’re making the bitter transition from a consumer-driven economy to a producing one. The first stage is that the businesses that catered to consumer spending need to leave the scene to clear the field for the new companies. That means you can expect a lot of companies going bankrupt this year.

As for me, I’m doing a bit of trading. As you can see from that chart of Barrick, it seems to be hovering between a range of $31 and $36. That’s a pretty healthy trading range to buy in at the bottom and sell at the top, and that’s what I’ve started doing. I’ve turned some extra profit from it so far. I expect that all my profits will be taken out by the upcoming collapse, but those profits should help to cushion the blow. It’s the buying at the bottom where you can expect to make some real money.

I can only hope that these easing up on the powers of the executive branch may indicate that, perhaps, my fears of him being the next FDR and implementing a lot of BS controls — such as gold confiscation — may prove false.

Mercifully, false.

Gold reaches for the crown of Emperor

The saying goes that, in a recession, “Cash is king.” That saying has a lot of merit. If you look across all of the asset prices of everything over the past year or so, cash seems to have outperformed them all. All save one. A year ago gold closed at $792.50 an ounce. Today it was $838.70. Investors often figure that gold and oil will perform similarly, but oil is a roughly half of where it was a year ago while gold is still ahead. The dollar rose in value during the crush of the recession, but have a look at where it is today.

The dollar has fallen on hard times recently as the chairman has stepped forward and offered to run the printing presses until banks could afford to loan money to each other at zero percent. Still, even with the fall in the USDX, the dollar is still above where it was a year ago. Investors often say that gold performs inversely to the dollar, but here we see that both have strengthened over the last year. What does that tell us?

To me it says that people want to stay liquid during this downturn, but where to store the liquid assets? Cash is the traditional safe haven to wait out he downturn, but with the central bankers of the world acting in concert to see who can make their currency the more worthless, it does seem a rather precarious place to park your assets. The market data seems pretty clear from all of this. In this downturn, people are demanding gold. As I’ve said in previous blog posts, the demand for physical gold has outstripped the dealers ability to supply it. And despite the fact that the price for gold seems to be set by the COMEX where paper claims to gold are bandied back and forth, you just can’t keep a good commodity down. Cash may be king in economic downturns, but when cash is as suspect as it is today, gold is emperor.

As Bill Bonner said in today’s Daily Reckoning, gold may be the main, or even ONLY, beneficiary of the massive amounts of fiat money that is being forced into the system. And this just brings us back to fundamentals. It is said that Vince Lombardi would start every year’s training camp by presenting a football to his team and saying “Gentleman, this is a football.” He hoped to make his team brilliant on the basics.

In this blog, I’ve talked about the gold standard a number of times. I’ve gotten numerous questions from people asking, “But why gold. It has little intrinsic worth.” To them I now have to say, “Oh really? Well then why is it one of the only asset classes (and the ONLY commodity) that is up over the last twelve months?” No other commodity has survived the past twelve months: not oil, not platinum, not silver. Even at a time when all of the major financial forces of the world continually seek to demonetize it, gold stands alone as the protector of value. The only other safe haven in these times has been US Treasury bonds, but given the meager yields offered on them and how the dollar has performed over the last couple of weeks (see above graph) I think it’s safe to say that government bonds are no longer a safe haven. Gold is where people need to invest, and they need to invest in it now.

Gold may vacillate in its value on that goofy COMEX market from one day to the next. Sometimes it can vacillate wildly, but that’s just because two opposed forces are in conflict. There is the force of people seeking to maintain their liquidity in a safe asset which is driving the price up, and there are the central banks of the world trying to drive the price down. In the end, I feel confident that we will have a clear winner, and I’m prepared to bet on it.

A Sign of the Times

“Billboard improvement” is a colorful way to describe vandalizing a billboard in order to give the advertisement a totally different meaning. I recently ran across one such billboard improvement that I found rather hilarious.

Improved Wachovia Billboard — "Improved" Wachovia Billboard

The thing is, I’ve always thought that when I saw these Wachovia billboards ever since they were sold to Citigroup with the “assistance” of the FDIC. At the time I thought this was the classic case of the FDIC guiding a weak bank on the verge of failing into a merger with a stronger bank, but not less than a month or so later and Citigroup was begging for a bailout less they would fail.

In order to ensure the survival of our banking system, literally trillions of dollars has been injected into the American financial system. The ultimate effect of all this money creation will be to cause inflation, just as Ben Bernanke told us it would back in his speech on how to fight deflation. The other, somewhat temporary, side effect of all this money creation will be to drive down interest rates; anyone who wants to borrow money can get some of the newly created money that was just pumped into the banking system on the cheap. Lower interest rates will also offer people less reason to save, and that’s why I find that Wachovia billboard so hysterical.

In essence, Wachovia was a part of the banking system that reaped profits by engaging in making mortgage loans to people who couldn’t afford them and them repackaging the loans and selling them to Wall Street. We are now having to pay the price for the sins of the banking system and the Fed has decided the form that this price shall take: inflation and low interest rates. Yet they advertise that they will help “your little ones grow.” I have to say that this billboard was indeed improved. Now the billboard plainly says what Wachovia (and the entire banking system) will do to your money… And they say that there’s no truth in advertising.

Of course, these lower interest rates won’t last forever. Eventually people will come to understand how precarious the value of their money really is, and then they’ll start demanding higher interest rates. Not to mention, we’re going to see a much higher value of gold- the canary in the cole mine of the monetary system. Which is just what we’re starting to see. Gold moved from $764 at the start of the week to close the week at $808. Similarly, Barrick Gold has gone from $27.44 to $31.32.

As an investor in Barrick Gold, I had a nice week, and I think we’re going to start seeing some nice moves in the gold sector over the next few months are markets realize that all of these deflationary fears are overblown. Bill Bonner is predicting that the system has one final bubble to blow and that will be government debt; that the price on government securities will go from overblown to in the tank as interest rates have to rise as inflation worries persist. I would have to agree. Going forward, gold is a very exciting place to be. As we goldbugs sit back and watch the financial system collapse, we will get to do as that old song by Everclear goes “Watch the World Die.”

Update: Genworth Financial Bonds

Previously, I wrote that the bonds of Genworth Financial were a tempting buy. Looks like some of you took my advice, because that bond is now trading at $.975 on the dollar rather than the $.86 it had been when I wrote about it.

That’s a tidy 13% profit on your money in less than two weeks.

I know my brother took my advice. Whether he’s going to get me a decent Christmas gift, though, remains a mystery.

What this is a greater sign of is that the money that the central banks are pumping into the financial system is bringing yields down across the board. In fact, the yield on T-bills (that’s a four-week note) has reached zero. That some of that money is finding its way into bonds that yield significantly better than zero, suggests that we may be seeing an end to the credit crisis that reared its ugly head in October.

Bill Bonner of the Daily Reckoning has described it as the start of the next great bubble: government debt. He predicts that this one will burst as all the others have, and with far worse results for Americans, since it’s likely to take our currency down with it.

Meanwhile, those Genworth bonds were a good buy. I’d suggest people take the profits from them, once matured, and invest in something that will survive the collapsing of the dollar — like gold.

Jeremy Siegel Defrauds Investors by Calling Stocks “Dirt Cheap”

Dr. Jeremy Siegel wants you to know that know is a great time to buy stocks. In fact, he says he’d be surprised if you didn’t get a 20% return on your investment in the next twelve months. Of course, Dr. Siegel’s crystal ball is proving to not be all that great. In 2007 he predicted that 2008 would be a great year for stocks and that financial stocks should do particularly well. So much for that prediction.

To understand his latest argument, Siegel is putting a fair market value on the S&P at 1380. Since the S&P closed today at 930, you can see why’d he think now was a great bargain, but how did he arrive at that 1380 number? Well he says that the long term fair market value for stocks is to trade at a PE of 15 and he then conjures up a figure for what the next 15 years of earnings for the S&P should be based on the past 15 or so- which is equal to $92 a share. $92 x 15 = 1380. Voila. I could almost hear Dr. Siegel add, “Wil-E Coyote. Super Genius!”

This article struck me as a bit fishy, and not just because I’m a bear. For one, having been a avid read of Bill Bonner, I knew from books such as Financial Reckoning Day: Surviving the Soft Depression of the 21st Century that the long term PE for stocks is to trade at 11, not 15. So I was curious as to how Dr. Siegel came up with such figure. It turns out, he made a mistake. Bonner and the bears are correct in saying that the average long term trailing PE for stocks is 11, 15 is the average PE for earnings from four years ago, not next year’s projected. Currently, stocks are trading at a PE of 18 compared to trailing earnings, as Dr. Siegel himself pointed out in the article where he calls stocks “dirt cheap”, and a PE of 18 is not cheap when the long term average is 11. The upshot is that Dr. Siegel made an error and that stocks are actually expensive on the order of 40% compared to their long term PE ratios, not 40% the cheaper as he claims they are.

The other thing that Dr. Siegel doesn’t seem to understand is that the long term average of stock PE is just that- a LONG term average. There are many bull market years where the PE is trading above 11 and many bear market years where it is trading below 11. Furthermore, these periods of over and under valuation tend to be grouped together in the time line: we see stocks priced well over the long term average through the 1920s and then under during the Great Depression of the 1930s. So if we are continuing the bear market slide that started in 2000, then we should expect stocks to be trading BELOW their long term average. Which means, if the trailing average is 11, we should expect to start seeing stocks trading at PE levels of 8 to 10 as they did in the 1970s. You’d have thought that the author of Stocks for the Long Run might have studied up on the market a bit to see just how long the “long run” can really be.

Of course, all of this bull market analysis is based on the notion that the next 50 years of American history should be more or less akin to the last 50 years or so, and that’s a claim I take issue with. American has dominated the last 50 years of world events as a titan with unmatched military, industrial and economic power. Looking forward 50 years into the future, do we really expect to see that continue? Which brings us back to Dr. Siegel; clearly he is wrong in his analysis, but it he simply mistaken or did he aim to reach for a conclusion that would make other parties happy.

Don’t get me wrong, we all make mistakes. Perhaps Dr. Siegel put less time and effort into his Yahoo columns that I put into this blog and just doesn’t get a chance to double check his math, but I don’t think so. I think Dr. Sigel fudged the numbers to arrive at a rosy outcome. If so, it wouldn’t be the first time a Macroeconomist has gone through a rather dubious trick of logic and math to reach the politically desirable conclusion. Indeed, John Maynard Keynes’s The General Theory of Employment, Interest and Money is nothing but a intellectual fraud filled with straw man arguments, shifting definitions, and math based on dubious assumptions, but it is heralded as a classic largely because it came to the desired conclusion of the day: the free market was inherently unstable unless assisted by the power of government. Macroeconomists are task masters at fudging their numbers to support the conclusions that they feel are popular. Why should we think Dr. Siegel is doing any different here?