-- Posted Tuesday, 31 August 2004 | Digg This Article
Rick’s Picks
Tuesday, August 31, 2004
For investors who’d rather be smart than lucky
A Guru’s Guru
Weighs in on Gold
My friend John Mackenzie, a frequent contributor to many investment Web sites, has responded to yesterday’s essay (Hyperinflation? Dream on, Debtors) with some thought-provoking questions. For the record, John is not merely one of the more astute market forecasters out there, he is also a successful investor who has never hesitated to put his money where his mouth is. Most impressive of all was his 180-degree turnaround just days before gold shares began to plunge last April. John had predicted this months in advance, but just before it happened he sent me an e-mail to say he was selling out his very substantial positions in numerous gold stocks – stocks on which he had been extremely bullish not long before. He said he planned to re-acquire many of those same stocks in August, after the worst part of the storm had blown over. This he did – presciently, it would seem – and recently reiterated to me his renewed bullishness on bullion and mining stocks. However, physical gold rather than stocks alone still comprise the core of his stake in precious metals.
How About All Those IOUs?
1. What do you suppose the effects of all those dollar-based promise
tickets returning home will have?
My thoughts continue to evolve, John, but the cynic in me is drawn to the prospect of a temporarily "strong" dollar as the ultimate display of the bear's genius. Let's give the bear his due. Why should he settle for mauling smart little pishers like you and I when he can take magnificent trophies like Buffett and Soros, both of whom, one assumes, have bet -- quite logically -- against the dollar?
So, assuming the U.S. doesn't default on its debts via hyperinflation, at least not right away, we should expect to see a spectacular inversion of the yield curve sometime within the next year or two, as creditors bailing out of long-dated maturities seek the ostensible safety of T-bills and mortgage-backeds.
Conventional Thinking
2. Why is it a conventional rationale is being applied to a rather
unconventional situation?
I doubt that even one person in a hundred thousand agrees with me that the dollar could turn strong, so my reasoning could hardly be described as conventional. But the most unconventional view of all is that expressed by Robert K. Landis in a brilliant treatise on the Fed:
http://www.goldensextant.com/SavingtheSystem.html#anchor125744
Regarding the inflation/deflation conundrum, Landis notes as follows:
"With respect to the form the denouement will take, much has been written within the gold community on the subject of whether we face hyperinflation or deflationary depression as the prelude to monetary collapse. Both sides of the debate appear to accept the premise that whatever may transpire will bear a linear relationship to what now exists. The disagreement centers on the direction the line will go. But today's markets are fully linked by derivatives and technology, and they are patrolled by wolf packs of large, leveraged speculators not noted for their patient outlook. So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident. We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system. All we can hope is that once the curtain falls on the current system, the wisdom in the gold bugs' submissions to the Gold Commission will finally find a receptive audience."
Pretty disturbing, huh? Landis makes our concerns about how we should "play" the mining stocks seem so very banal -- like putting for your par while a nuclear mushroom cloud billows on the horizon. (Credit cartoonist Gahan Wilson for that image. Caption: "Oh, go ahead and putt! It'll be at least another 30 seconds before the fireball hits us.")
Global Debasement
3. Why is gold rising in all currencies, if debasement was not on the
agenda globally?
Just because debasement is on the agenda doesn't necessarily mean the strategy will succeed. As I said, you've gotta give the bear credit. He knows what each and every one of us has been thinking. And doing -- right down to the last nickel.
4. How will the U.S. government finance its ongoing activities without debasing its debt/currency?
Because debt is so huge and the global economy so precarious, inflation is not an option, only hyperinflation. While it is theoretically conceivable that the government could choose to hyperinflate, effectively repudiating its debts as well as the dollar debts of all others, I doubt that so radical a scheme will be tried. More likely, as I've suggested above, is that the U.S. will make no decision at all (other than to continue the laughable dog-and-pony show of quarter-point rate hikes) and that the credit markets will make the decisions themselves via a spectacular widening of yield spreads.
U.S. Response ‘Predictable’
5. Short of collapse, why wouldn't government do what it has always done, which is print more money in order to sustain itself.
Read the Landis essay, which will help clarify your thinking about "printing more money." In fact, the Fed has no control over the expansion of that "money" which we might spend (i.e., M1, M2 and M3) -- only over the money base, which you might call "unactualized credit." Housing inflation has stimulated wild demand for such credit, but when the financial system starts to unravel and home prices begin to fall, I doubt that many of us will remain in a borrowing mood.
6. The surpluses in most "trusts" are long gone, we've eaten our seed corn. What do we have to lose?
Long gone, yes, but ultimately it's not a problem that can be solved politically, especially via a hyperinflation. When the truth dawns that the government cannot provide each and every taxpayer with a secure retirement, we will all become savers with a vengeance. What could be more deflationary than that?
Rates Needn’t Rise
7. Why can't the fed raise rates? The market's going to do so for them once intervention there has failed. Do you believe they'll just stop?
A catastrophic deflation can occur without a rise in nominal interest rates. All it would take is for real rates to increase relative to falling asset values. This implies that if you are paying a 6.5 percent mortgage on a $400,000 home, you are in deep s__t if the value of your home falls even slightly. I am assuming far worse, though -- that home values are about to fall as much as 70-90 percent, and that, initially, mortgage rates will rise at least somewhat in nominal terms.
8. My thesis for gold has always been value in terms of purchasing power, and while I suggest that my readers buy the metal rather than the shares, I don't see you doing the same, Rick. If you believe Kennedy, why not come out in support of it and state why. It's fairly obvious at this point, and you have a mountain of evidence to support your position.
Okay, let me say it more clearly: If you want to own gold, buying the metal is the best way to do it. This will spare you worrying about the political uncertainties that govern the mining industry in such places as Africa, China and Russia. If you want to dabble in stocks, lean toward Canadian and American issues. Incidentally, irrespective of the market's ups and downs, I have been buying gold and platinum coins since the early 1980s, mostly for my children and nieces.
My Hedge Fund
9. You mentioned alternatives for investing in your hedge fund. Given your expectations, is it truly wise to begin accumulating capital for investors within that framework?
My new hedge fund, formed with two partners, is geared toward exploiting bull and bear markets across a wide spectrum of asset classes. However, a salient feature of the fund is that it will hold a significant precious metals position as part of a diverse portfolio.
10. Kevlar bikes? Hmmm, I suppose they might be on the long list, but what comprises the tiered barter economy in systemic failure? In other words, why do you assume gold will have "value" to the average sheeple? I do not. I think the market will dictate this.
I mentioned Kevlar bikes only to suggest how absurd the Second Great Depression is likely to seem at times. Will some people have the chutzpah to show up at the soup kitchen astride $5,000 mountain bikes? For sure, we Americans are not going to be able to hide the sumptuous material trappings of America's extraordinary 50-year economic boom. At any rate, I agree with you: gold is, and will be, too valuable to use as money. Hard to believe there was a time when we carried gold coins in our pockets to pay for beer and such. You might have thought back then that, a hundred years hence, we would all be sleeping on silk and feasting on hummingbirds' tongues.
Noland Says, Any Time Now…
11. You read Doug [Noland's] latest, I assume. Did you notice how he has backed away from his prior stance? I pressed him on a number of points he made several weeks back and he appears to be waffling a wee bit, or at least he was far more cautious as to what can and will happen in between a debt collapse and failure of the machine to grind on.
I would not underestimate the powers that be, or "unconventional" forms of hyperinflation, given the all-or-nothing nature of this environment. But that is me, what do I know.
As always, Noland's latest scared the hell out of me. A true bear's bear, that guy -- one who uses real numbers, not some loose-cannon, nut-ward escapee like me. Someone sent me an excerpt from Doug's August 27 report but it evidently did not contain the material to which you've alluded, so I don't know how he may have started waffling. But he's certainly not waffling on the Big Picture, not with a the headline, "Bubble at the Fringe". He seems to think the economy could begin its death spiral any time now. For Rick's Picks readers who haven't yet seen the report, the following excerpt will give you the flavor of it:
"Data from the ports of Long Beach and Los Angeles do not bode well for U.S. economic prospects (or July's trade deficit). Inbound containers into the Port of Long Beach jumped to 281,817, surpassing the previous record set in June by more than 21,000 containers. The Port of Los Angeles also set a new record for inbound containers, with July's 361,584 slightly ahead of May's record. Total Inbound containers were up 15% from one year ago to 643,401, while total loaded outbound containers were about unchanged at 178,382. Containers leaving the two ports empty surged 24% from July 2003 to 384,279, more than double those leaving loaded. Wow.
"I recall reading articles highlighting noteworthy examples of spending extravagance that preceded by only months the respective crises in Mexico, Thailand, Russia, Brazil, and Argentina. But, then again, lavish purchases and ballooning trade deficits are a hallmark of
Monetary Disorder. And while profligate spending is not a fresh development here in the U.S., I couldn't help but to think that almost 400,000 empty cargo containers leaving the Los Angeles and Long Beach ports during July is a signal along the same lines as booming Mercedes
sales were in Russia during 1998's first half.
"And I cannot also help but believe that "strong vs. weak U.S. economy" debates have basically become moot. What should be clear at this point is that even huge fiscal stimulus and unprecedented financial excess are incapable of fostering a sound and self-sustaining economic
expansion. The paramount issue, today and going forward, is the deeply maladjusted U.S. economy and its increasing unresponsiveness to even enormous yet misdirected financial stimulus. Both the Financial Sphere and Economic Sphere are severely maladjusted. Two years of Fed-orchestrated "reflation" have only added to the U.S. economy's inflated cost structure and further weighed on global competitiveness. Meanwhile, the Global Credit Bubble (and China and Asian booms, in particular) has worked to strengthen the capabilities (financial and economic) of our determined competitors.
"But we should have expected nothing less. Today's Bubble at the Fringe is but a further manifestation of historic Credit Bubble excesses that have inflated asset prices, bolstered consumption and imports, and inflated the general economy's cost structure, while
having limited impact on sound business investment. And I will stick with the analysis that today's predicament of Monetary Disorder and Deep Structural Economic Imbalances is on course to precipitate some type of financial crisis. But, appreciating the extraordinary nature
of current global financial systems and markets, it is anyone's guess as to how long market "ebb and flow" can hold tumult at bay. We do know that the U.S. economy and markets require $2 to $3 Trillion of total annual Credit growth. Succinctly, there remain two overarching issues: First, how long can this amount of Credit creation be maintained? Second, what will be the nature of Inflationary Manifestations while the Credit Bubble is sustained?"
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 31 August 2004 | Digg This Article
