Is Value Investing Dead?

Vitaliy Katsenelson, CFA, has an excellent post on LinkedIn:  “Is Value Investing Dead?”  Katsenelson concludes that it is not, and he is right, although there might be muted returns to value investing for several more years. 

There is a parallel between commodities and value stocks because both are devalued by monetary creation in the early phases of a bubble market. Something similar occurred in the late 1990s, when gold was bottoming near two hundred, and everyone was saying that Warren Buffett had gone the way of the Brontosaurus.

In the early phases of a bubble market, low interest rates stimulate competition. Hence,  enterprises that are viable in the long term face more competition than otherwise because  the Federal Reserve banking cartel subsidizes inefficient competitors.   In the commodity sector viable mines are forced to compete with mines that the Fed artificially makes viable with low interest rates.  The results are supply gluts. 

At some point increasing competition causes bankruptcies of the less viable manufacturers, natural resource firms, and mines. Given intensifying competition, the subsidized interest rates are no longer sufficient to sustain the inefficient producers.   For value stocks, oil firms, and mines, subsidized output strains the least competitive firms, which ultimately go bankrupt. 

At this point in time, we see depressed value in the gold mining, oil, and value stocks.  The depression in those stocks has lasted a long time because the monetary creation of the 2008-2016 period was exceptionally great. The bubble period might continue for several more years.  Before it ends, I would expect higher valuations in the bubble stocks, recently known as the FAANG stocks--Facebook, Apple, Amazon, Netflix, and Google.  In the 1920s radio and automobile stocks played a similar role. In the 1960s the Nifty Fifty, including American Home Products and Xerox, did.  In the late 1990s the Internet stocks such as Drugstore.com and Beauty.com did.  

As artificially intense market competition ends because of supply gluts, the value stocks survive and enter a less competitive environment; so do the most efficient natural resource firms. In a less competitive environment, they thrive.  

Hence, oil wells, miners, and value stocks are depressed in this period, but they have a bright future.  In all bubble periods, the claim that "we have entered a new era" becomes common.  The mania is fueled by the myopic definition of risk as standard deviation, which is  favored by finance economists.  This statistical definition overlooks longitudinal patterns and the effects of crashes on individual well being and stress.

Late-stage-bubble buyers force up the stock prices of the favored, speculative stocks in what Steve Sjuggerud calls a speculative melt-up. The inevitable crash is worst for the most speculative stocks.  There is some spillover to all stocks because of panic selling, but the value stocks then outperform. 

The most important characteristic to make money is patience or persistence.  Another is focus. These are not characteristics taught or valued in American educational institutions, which function with a win-lose, socialistic mindset and emphasize scientism at the expense of common sense. 

How High Can the VIX Go?

VXX over the Past 10 Years. Chart Courtesy of Nasdaq.com

The VIX measures stock market volatility.  Over the past ten years, it has declined from over $14,000 to about $35. That is due to the masseuse skills of the Federal Reserve Bank, which is lightening its deep tissue, shiatsu, and Swedish massage.  The VXX is up 6% today according to Yahoo Finance.  Stock market declines are usually short, absent government intervention as occurred under Franklin D. Roosevelt's administration, but steep. They are, of course, difficult or impossible to time.

The Democrats' War on Rural America

 A piece by Paul Overberg in today's  Wall Street Journal shows 20 charts that indicate how badly rural Americans have fared. The election of Donald Trump, mostly by rural voters, can be interpreted to be a reaction, and the campaign to eliminate the Electoral College a counterreaction.

Inflation-adjusted household income has declined since 2000, and it has declined the most in rural areas. Much of the  decline occurred during the Obama years. That contrasts with the stock market, which has received massive public subsidization.

Those who foot the bill for "too-big-to-fail" banks are the same people who are dying at increasing rates.

Where I live, Olive, NY, New York City has long played an imperialistic role similar to that of any Roman-style power. It has done so to procure virtually free water; it chose to go the imperial route rather than purchase water ethically back in the 19th century.

In his book Empire of Water, David Soll outlines the 100-year history of theft, exploitation, and regulatory caprice that deprived the ancestors of many people I see each day of their homes and businesses, forcing many who had owned family businesses into becoming day laborers.

Environmentalists, dominant in the Democratic Party,  have learned from New York City and since the 1990s have systematically attacked rural areas. This occurred most aggressively during the Obama years.

Not satisfied with increasing death rates in rural areas,  Robert Reich, the American media, and their fellow Democrats campaign for more political power to be concentrated in urban centers by abolishing the Electoral College.

Millionaires Thank Krugman, Yellen, Obama, and the Democratic Party

As the Dow Jones industrial average nears its all-time high, those who are rich need to take a moment to praise the Democratic party and its supporters.  It is advantageous to have clever advocates, and who can be a better advocate for millionaires than those who claim that they dislike them?

The elite Democrats of academia, those who advocate taxes out of one side of their mouths and monetary expansion out of the other, are  the millionaire's best friend.  The Republicans aren't because they claim to favor the wealthy and those who work, and the public and many of the wealthy have yet to understand that the wealthy are not so because they work; they are wealthy because they own.

When Janet Yellen and the Fed reduce interest rates, the value of assets is increased, and the rich become richer.  What else can matter to the wealthy? Do gay rights, global warming, great  causes, gross income inequality, or a stagnant real wage matter?

All are distractions to the one issue that matters, the one issue about which the news will ever remain silent: the expansion of the money supply, the reduction of interest rates, the inflation of asset values, the suppression of  real wages, and the increment to the  portfolio.

On behalf of the world's millionaires, I thank Paul Krugman; I praise Janet Yellen; I sing hallelujah to Barack Obama.

Bearish on Gold, Stocks

I have sold more than half of my gold and silver holdings. I am bearish on gold right now, and I think the recent declines can go to $1200.  I am keeping my long-term holdings in gold but selling my short-term holdings.  I will get back in if the current declines stabilize.

The reason for the current declines seems to parallel the declines in the 1980s and 1990s.  When the Fed expands the money supply, part of the credit expansion is borrowed by commodity producers, who expand production.  Because commodities are fungible, expanded production goes directly to increasing supply, hence reducing price. When price declines cause shakeouts in the market, the price stabilizes, but the producers no longer have access to easy credit. Then the cycle renews.  I learned this concept from the late Howard S. Katz.

Unlike earlier cycles, the Fed has imposed a massive monetary expansion, a fresh cycle, on top of the intermediate stages of a bull market.  It is impossible to know how far the gold price will fall, but I  doubt that the current weakness in the gold price will continue for 20 years, as it did from circa 1982 to circa 2002.

I am also gradually selling stocks.  If you have been following the stock market, we are more or less at the peak that provided resistance in 2000 and 2007.  The massive Fed stimulus might change the real values of the peaks so that the current upswing can go further.  The recent news that the Japanese are going to buy assets around the world with counterfeit yen also may help perpetuate the current rally to new highs.

Are American grandmothers going to cash in their CDs and buy stocks?  Are the Japanese going to pump up the US stock market for more than a year?  I am dubious.  I am holding my high-yield securities but gradually selling my index funds and going into cash.  If there is a market correction, I aim to get into natural gas tankers and energy MLPs. I have a number of MLPs now (about six percent of my portfolio is currently in MLPs, including Kayne Anderson, Clearbridge, and Neuberger Berman), and I want more MLPS and natural gas tankers.

Flies in the Molten Nickel: Mining Stock Prices = K / QE

After college in the 1970s,  my first job in the actuarial department of a small insurance company lasted about seven months, after which I worked in the employee benefits department of Inco Ltd., then the capitalist world's largest miner of nickel (Inco was an acronym for International Nickel Company).  Founded by JP Morgan as the nickel trust, and formerly one of the 30 Dow Jones industrials, Inco was  a sleepy, old firm on a 1950s model.  It was not a global monopoly because the Soviet Union controlled a large share of  the world's nickel, but Inco was considered a monopoly of the free world's nickel supply.  Its chief competitor, Falconbridge, was one fourth its size. The monopoly picture changed during the 1970s when third world producers received government subsidies and forced significant downsizing at Inco.  Inco suffered a strike in the late 1970s, and I recall calculating pension benefits for hundreds of miners taking early retirement rather than layoff. Also, Inco made an ill-advised acquisition of Rayovac Batteries.  Thereafter, its stock price was stagnant for two decades.  That changed in the millennial decade with the rise in commodity prices that began in 2001.  According to Wikipedia in 2006 Vale, a Brazilian natural resources behemoth, purchased Inco for $18.6 billion.  To date, that was the largest acquisition by any Brazilian firm.  Vale Inco is now the world's second largest nickel producer following Russia's Norilsk Nickel.

In this week's Kitco Commentaries Rick Mills writes about the world's nickel market. Nickel has a wide range of industrial uses, and government-funded green energy programs are likely to make use of it.  Mills notes that there are two kinds of nickel deposits:  sulphide and laterite.  He adds that there is no simple separation or mining technique for laterites: "Laterite projects require large economies of scale at higher capital cost per unit of capacity to be viable. They are also generally much higher cash-cost producers than sulphide operations."

Although 60 percent of the world's nickel is in laterite deposits, they are low grade and difficult to mine.  Mills states that cheaper-to-produce sulfide deposits, which are the source of 58% of the world's nickel, are depleting. Nickel mining, like mining in general, is capital intensive.  Mills states that the average capital input for mining is one half of total costs, while for the economy in general it is 21 per cent.  Moreover, capital costs have been increasing.  Vale's New Caledonia plant has faced repeated setbacks.  In May 2012 Vale declared force majeure, allowing it to ignore contract obligations, because of an accident at the mine's sulfuric acid plant, according to Reuters.  The Brazilian government has halted production at Onca Puma because of effects of the Onca Puma mine on the Xikrin and Kayapo tribes in northern Brazil. Vale had failed to pay damages to the tribes. Meanwhile, Mill states this:

Indonesia (the world’s top exporter of nickel ore) enacted an export tax system, effective May 6, 2012, under which a 20% export tax is levied on 14 raw ores of Indonesian origin, including nickel – the result was to drive hundreds of small miners out of business and sending Chinese laterite buyers elsewhere. This is the first step by Indonesia towards a full ban on the export of minerals that is scheduled to begin in 2014.

Mill states that 35 years of underinvestment have limited new discoveries.  China has been demanding nickel so that demand has increased  since 2000.  Mill makes the case that now is the time to invest in nickel via junior exploration firms.

Nevertheless, there are three flies in the molten nickel: QE1, QE2, and QE3.  The large capital costs of mining are reduced by sharp reductions in interest rates, and this would improve natural resource producers' stock prices were it not for hyper-low interest rates' effects on competition.  Reductions in interest rates stimulate supply and competition. Because of increased production and competition, stock prices of mining firms are reduced during the initial phases of a monetary boom. Low interest rates reduce the very capital costs that impede production. The excess competition deflates commodity-and-stock prices. It is not until monetary expansion results in inflation that commodity prices start to rise.

Vale, one of whose many products is nickel, is selling at a multiple of six times earnings despite its five percent dividend.  That is a Great Depression-era valuation, suggesting a buying opportunity, notwithstanding the all-thumbs management history that Mills describes.  At the same time, gold stocks have fallen precipitously over the past two years.  The initial market reaction that gold will go up because of monetary depreciation has petered out.  Along with Vale, mining-and-natural resource stocks are selling at Great Depression price-earning multiples.

The sector needs to go through a period like the 1980-2000 one. Contrary to popular belief, the Greenspan Fed consistently increased the money supply, and that was associated with depressed natural resource prices.  The Bernanke Fed is the most stimulative in history, but I suspect the metals price depression won't be that long because there had not been a Volcker Fed to raise interest rates and stabilize the economy prior to the monetary expansion.  Inflation in the coming decades will be worse than in the 1970s, and the Fed will have limited power to reverse it. However, these outcomes are at least two years away, and probably more.  Gold-and-commodity stock prices will increase once the stimulative effects of the monetary expansion are dissolved. My guess is three-to-five years or more.

At the same time, Mills is right. It is not too early to buy nickel stocks. Vale's five percent dividend is a draw.  Mills doesn't like Vale because of its diverse range of products.  The natural resource sector in general will rise with nickel, and it's nice to count some shekels from a five percent dividend while waiting for a turnaround in the commodities sector. 

Incidentally,  I have been buying gold and other stocks, and junior nickel miners are of interest.  

QE 3: Gold Bugs, Stockholders Celebrate While American Workers Starve

Joe, a retired, Kingston, NY commodities trader and Brooklyn College alum, is a drinking buddy. He predicted $1750 gold on Labor Day while he, Mike and Mark Marnell, a left wing attorney, and I were imbibing a 1.75 liter bottle of four-year-old single malt scotch called McClelland's.  I picked it up at JK's Wine and Liquor in the Kingston Plaza mall. For only $43 for a jumbo bottle, McClelland's is a good buy.

On that fateful Labor Day Joe predicted $1750 gold this month.  It just about hit $1750 the other day, but today it soared to a bid of $1769 (at 2:26 P.M.).  The reason is the Fed's announcement of quantitative easing.  My brokerage accounts, because of the recent moves in the general stock market coupled with the recovery in metals prices and real estate,  are at or near all-time highs.  According to Kitco: " Spot gold was last quoted up $37.50 an ounce at $1,769.50.  December Comex silver last traded up $1.298 at $34.60 an ounce."  The stock market is also buoyant: The Dow is up 224 points, or 1.68 percent, and the S&P 500 is up 1.76% at 1461.

Quantitative easing or QE3 is one more round of money printing. Monetary expansion boosts the stock market because increasing the quantity of money reduces the price of money, the interest rate. A lower interest rate increases the discounted future value of profits. That increases the stock market because stock prices discount future earnings. It is a mechanical relationship.  As a result, the Fed has played the Nixon card with Obama: in 1972 Nixon encouraged then-Fed Chairman Arthur Burns to ease so that the stock market would go up; now, Ben Bernanke's Fed is easing and Obama will win the election. Likewise, the Europeans are accommodating Obama.  A recent German court decision held that Germany can participate in a bailout of profligate Greece and other southern rim nations. Hardworking Germans can now sacrifice their savings to fund pensions of Greek public sector retirees who have produced little and demand much.

Joe does not have much faith in the stock market.  He is right in a fundamental sense: there is no reason to have faith in the structural reality of the underlying economy. The excesses of the Clinton and Bush years are still around, and Obama has done nothing to correct them.  Americans, for an unfathomable reason, tend to reelect presidents when the stock market is high. The monetary expansion that increases the stock market harms most of them; in other words, most Americans vote for politicians who directly harm them.

The reason is that the monetary expansion that boosts the stock market devalues wages.  As the money supply has expanded since the Reagan and Clinton years, the link between real wages and productivity has been eliminated for the first 40-year period in American history.  American workers are no better off today than they were in the early 1970s, but stockholders are much better off. In other words, the income inequality that liberals grieve over is directly due to the policies of Paul Krugman, Woodrow Wilson, Franklin Roosevelt, Richard Nixon, Ronald Reagan, Bill Clinton, George Bush, and Barack Obama. Obama has done nothing to clean up this mess.  Historically, he has contributed more to it than anyone else.

The stock market may continue up through the fall and possibly into 2013.  Eventually monetary bubbles implode as bondholders realize that their bonds are going to become worthless.  As real interest rates start to rise, Fed policy becomes irrelevant.  If the Fed continues to print money thereafter, there will be a monetary collapse.  Otherwise, there will be rising interest rates and stagflation as the expansion of the monetary base is transformed into cash money.

If real interest rates start to rise, the stock market will not do well, but commodities will because of the inflation.  If the dollar remains stable, the increasing money supply will continue to boost the stock market. 

I am easing out of the stock market.  I had sold the stocks in my pension fund (I still have real estate), which were about five percent of my total stock holdings.  I have low-beta (low-risk, high dividend) stocks like Philip Morris, Kimberly Clark, and Heniz in one brokerage account, and higher risk stocks in the other. I will sell the higher-risk stocks over the coming months, except for the gold mine stocks.  I hold both the gold index and the Van Eck juniors index.  I would like to be able to pick gold mining stocks, but I lack the expertise.

The stock market is likely to continue up into the coming year; thereafter, all bets are off.  If you look at a picture of the S&P 500 since 1950 there are two massive peaks in 2000 and 2007; we are approaching the height of those two peaks now.  Because of the massive monetary stimulus, the peak could get higher in nominal terms.  As the monetary expansion translates into a depreciating dollar the reverse can and will occur.

   

Obama's Stock Market Weakness

The Dow fell 391 points today while the S&P 500 fell 37 points, 3%, to 1129.  The immediate reason was that yesterday the Fed announced a lukewarm as opposed to a hot easing whereby it is exchanging long term for short term securities.  Take this into account: Federal Reserve Bank Credit has increased over 300% in the past three years. That's the largest money supply increase in American history except when the Continental Congress destroyed the Continental, America's first currency, back in Revolutionary War days.  Given the massive easing, including QE2 earlier this year, one would think that Wall Street would be satisfied. But it isn't.  Dollar inflation isn't enough, and when the Fed announced a lukewarm response to the implosion of European socialism, the American markets crashed.  I've lost a chunk of change because I wasn't expecting QE2 to have had such a weak effect. Plus gold, following a record high within the past few weeks, is in a correction or consolidation mode.  But the strengthening dollar due to the Fed's relative conservatism means that cash has gone up in value, which reduces the losses in riskier assets.

The Obama administration deserves responsibility for recent stock market weakness.  The massive quantitative easing should have had more of an effect on the markets.  It still might. What's holding it back is that the left-wing Obama Democrats have sledge hammered America's economy--the health care bill, environmental regulation, and proposed tax increases frighten investors.  Perhaps Obama and Congressman Maurice Hinchey believe that subsidies to corrupt "green" businesses that quickly fail will somehow stimulate the economy.  Such are Democrats' and America's economics profession's superstitions.  Throwing away money will not stimulate the economy.  We are in for a generation of economic decline because of Obama, Bush and The New York Times.

The Stock Market's Curious Decline

The Wall Street Journal reports that stocks fell dramatically today. The S&P 500, an index of large stocks, fell by 2.56%, or $32.89. In the same issue, The Journal reports Obama's signing of the bill to increase the already massively distended debt ceiling.  The Journal writes:

President Barack Obama on Tuesday signed into law a bill raising the nation's debt ceiling, capping what he called an "unsettling" debate for the economy and helping the U.S. avoid default just 10 hours before the government would have run out of money to pay its bills.The move came after the Senate voted 74-26 to approve the legislation to raise the country's $14.29 trillion debt ceiling and cut the budget deficit by at least $2.1 trillion over the next decade, a major victory for Republicans who have long battled to shrink the size of the U.S. government.

The market had fallen last week and yesterday. Now, after the signing, the market fell even further.  This presents an interesting hypothesis:  The stock market does not reflect the well being of the economy. Rather, it reflects the short-term profitability of listed firms, many of whose existence harm the economy by keeping out smaller, more entrepreneurial firms that can outperform them. They do this through big government and regulation.  In other words, the market fell because the debt ceiling bill reduced the amount of government waste and overspending that goes to big business. An increasing stock market and America's welfare are at odds.

Americans need to rethink their love affair with Wall Street.  The average American's wage has been stagnant for 40 years while Wall Street has dramatically expanded. Might this latest evidence of a conflict between the nation's economic health and the stock market give one pause about the confusion between the two?

Obama's Birth Certificate Causes Stock Market Crash

Those who follow the stock market know that it has gone down for the past four days. I had sold my silver on Monday and so suffered a 6% loss, but the white metal has since fallen significantly. SLV, the silver index ETF, fell nearly 12% today alone.  I had been holding AGQ, the 50%  leveraged silver ETF, but since I sold early on  Monday I did not suffer too much. The AGQ is down 23.4% today alone.  Overall, the declines (except for silver) are nothing compared to '08's.

I was expecting a silver shakeout but did not expect the declines in oil prices and the stock market that have occurred this week. The Comex's raising of margins on silver partially explain the sharp declines. In truth,  the silver market had gone parabolic and had to correct. 

Is this the end of silver as the crash in 2000 and 2001 was for tech stocks? No. Commodities do this. Inflation will overwhelm market psychology until the Fed decides to raise interest rates and the market overcomes the long term upward trend, which won't be for a few years at least. Silver has fallen below its 50 day moving average but it is still above its 200 day moving average. When it tests the latter I will get back in.


The S&P 500 index of large companies was down nearly 1% today, and the Dow was down more than 1%.  I am still holding the gold ETF,  GLD, and the Deutsche Bank commodity index, DBC, and these are down (DBC by 6% today).  Overall, my portfolio has fallen about 2% this week. That does not include my Australian dollar account, which is down.

What is causing the week-long declines in the stock market? The unemployment numbers have been bleak, once again confirming the utter failure of President Barack H. Obama's economic policies. But the decline in the Dow is steeper than one would have expected.  This is especially so given the good news about Osama bin Laden on Sunday night.

It seems obvious that the market is reacting to President Obama's recent release of his birth certificate.  It isn't that the certificate is bogus; the problem is that Obama evidently has played a ridiculous, three-year game of cat and mouse. What kind of psychotic would be motivated to play such a game?  Why did he insist that there was no vault copy, then release the vault copy? America is in the hands of a mental case, and the stock market knows it.

Update: It dawned on me that the stock market crash in tandem with declining commodity prices suggests that some sellers are afraid of deflation.  It would seem that falling oil prices would be a boon to the economy, but the view that all prices will simultaneously fall  in tandem with increasing unemployment is one of the Keynesian myths to which many in the financial community adhere. Hence, it would seem that this fall is something of a short term buying opportunity.

Morgan Stanley Smith Barney's On The Markets: A Forecast from The Belly of the Beast

Back during the late 1990s' tech-and-Internet stock bubble my wife noticed that whenever television broadcasters or their Wall Street puppet masters predicted that a stock would go up, it would go down, and vice versa.  Therefore, if an announcer said that a stock was going to go up, it might be a useful strategy to sell short.   If she had followed that idea over the ensuring few years she would have made a bundle. But in investing timing is everything.  (Incidentally, if you followed the advice of people who told you to invest for the long term rather than try to time the market, how have you been doing since 2001, a ten year period?)

That said, to quote a cliche, even a stopped watch is right twice a day.  My stock broker recently forwarded Morgan Stanley Smith Barney's (MSSB) "On the Markets", its monthly market commentary.  The pamphlet makes a few points.  The headline on its cover is "Getting Ready for Higher Inflation" and, seven years after I first became interested in gold they are advocating a 5 percent position in commodities.  That suggests that gold is into the supposed third leg of its bull market, the first being the period of limited awareness and the second being the period of smart money awareness.  Now, the retail investor is being told to invest in commodities. The last leg is the bubble leg.

Smith Barney recommends emerging markets stocks and consumer staples stocks.  They also recommend REITs and TIPS, inflation backed bonds.  All of these recommendations key off the Federal Reserve monetary policy.  The early November quantitative easing will inject $600 billion into the monetary base, which likely will over time have a bigger effect on the money supply.  I have been receiving numerous credit offers in recent weeks, much like the early part of the last decade.  That means to me that credit offerings are expanding.  The stock market in general also looks good as the quantity of money drives interest rates hence the stock market. Because of the insane credit easing consumer stocks seem like a reasonable idea.  I recently purchased the US Philip Morris (MO) and am thinking of the international Philip Morris (PM).  Also, a few liquor stocks might be a good idea.  As the Democrats and Republicans squeeze the public to subsidize the stock market, there will be plenty of drinking and smoking.  MO pays a six percent dividend right now, and my stock broker recommended it as an alternative to cash or bonds.

I don't necessarily like the idea of REITs because of the real estate problems but emerging market stock markets like the BRICs (Brazil, Russia, India and China) seem like a good idea.  I disagree with MSSB's recommendation for long term bonds.  That is, unless you are planning to trade.  Incidentally, the same caveat holds true for stocks and commodities.  When inflation starts to counteract the economic value of the freshly printed money (the Fed has more than tripled the money supply since 2008 and the ultimate effects might be greater) the stock market will fall because real interest rates will start to rise.  So markets are increasingly treacherous and you need to invest for the short or intermediate term, not for the long term.  I don't believe in day trading or anything like that.  Rather, invest when something is low or likely to increase and pull out when it is in bubble mode.  I don't think we're seeing any bubbles now, although commodities are heating up and I think the stock market will too this year.

Happy New Year.

Is the Ride to $3,000 Gold Going to Hit Air Pockets?

The graphs above are of the Power Shares DB Commodity Index (DBC) which tracks sweet crude oil, heating oil, RBOB Gasoline, natural gas, brent crude, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar; the Power Shares DB Agricultural Index, (DBA) which tracks corn, wheat, soy beans and sugar; and GLD, the SPDR gold trust, which tracks gold.  On May 28 Smart Trend.com reported that the agricultural index is in a bearish trend.  

As you can see in the charts above, the DBC and DBA peaked in 2008 and have stayed off their peaks, while GLD, the third graph, has risen consistently.

Personally, I have no more faith in the word of the US Congress than I do in the word of a three card Monty dealer on 42nd Street.  Given the massive increases in deficits under President Obama and the even more massive increase in the monetary base in 2008 (and consistent increases in the US money supply ) there is no reason to think that gold and commodities will do anything but increase over many years. Ultimately, speculation and replacement of the dollar with gold by frenzied Americans trying to escape the government's legal tender law will push up the gold price further. 


But gold has increased almost five-fold since 2001, while other commodities have not kept place and have significantly fallen since 2008.  A general rule is to buy low and sell high.  It is possible that the gold market is more rational than other commodities because industrial demand is greater for oil, food and other metals than for gold. But it is just as possible that it is less rational because gold is subject to romance and speculation. The other commodities tell a story different from gold.

Gold is going up because of speculation in anticipation of inflation, and if there is inflation then the other commodities will go up as well.  Also, hyper-inflation might mean a two-fold increase in prices, but gold has already gone up five-fold.

I do not doubt that gold will continue to go up.  But if there were shortages in gold due to insufficient production in the 1990s, there ought to have been shortages in other commodities as well.  Hence, in the long run I wager that there will be continued speculation in gold and that when inflation takes off there will be a gold bubble. But I would think that other commodities where there is less speculation, romance and publicity are more reliable investments at this time.  When inflation starts, many will flock to gold, but the ride can be bumpy because there is speculation in the gold market. 

Let's say the Fed decides to increase interest rates.  There will likely be declines in the stock market, but gold could be even harder hit.  Over time the price will come back, but I find it hard to believe that without a concomitant increase in other commodities' prices the gold price will continue a secular increase. The reasoning for buying gold is that gold is a hedge against inflation, but so are the DBC and the DBA, and they haven't increased for two years. So if I were buying commodities now I would buy those and hold off on the gold.

According to Thoughts.com the dollar ought to be worth .7734 ounces of silver.  Today silver sells for $17.95 and gold sells for $1,207 per ounce.  Thus, the dollar is worth .0557 ounces of silver, 0.3% of the level at which the Coinage Act of 1792 defined it. If you think the decline in value was directed into the hands of the middle class, which William Greider claims in his book Secrets of the Temple, you're on drugs.  The money is created by banks who collect interest and they lend it to speculators, hedge funds, corporations and most of all, Wall Street. As well, it boosts stock prices because low interest rates increase the present value of future earnings.  Left wingers like Greider, who advocate Keynsianism, like to avoid discussing how their ideas support Wall Street and the banking lobby.

The additional money causes inflation, raising prices for everyone. Hence, it harms those who do not own stocks and real estate and are not bankers and helps those whose entire livelihood comes from stocks and real estate.  The middle class gets something back through increasing house prices, but those who save and work hard are penalized in favor of those who borrow.  Hence, it makes everyone poorer as the public learns that invention, innovation, hard work and creativity are for suckers, and borrowing to buy a condo is how to make a living.

The inflationary economy and the triumph of the left in terms of three card Monty government means that America's prospects are much worse than they've been.  A collapse of the financial and monetary system would seem to be a possibility. Hence, gold and silver are good bets. But I'm going to buy when they fall.

Money Matters: Wall Street in Turmoil

Several pundits had been predicting a correction in the market averages and they seem to have been right.  According to Morgan Stanley Smith Barney the Dow fell a hefty 376.36 points today and the S&P 500 fell an equally hefty 43. 46.  After some more decline the market could well recover, and if you want to time this correction there still might be some life left in the post-2008 Fed bank credit expansion rally.  Recall that the Fed tripled its bank credit on reserve with the nation's commercial banks in 2008.   It is unclear how far the potential liquidity will expand the stock market or how inflationary it will ultimately be. I would be wary of playing the short term market decline and getting in in a big way, although a small bet should the Dow hit 9500 and stay there for a few days might be interesting. 

The fact is that interest rates are now zero, and the Fed has no further slack to stimulate the markets. If it does, there could be a serious reaction from China and other overseas bond holders, who are seeing the value of their dollar-denominated assets decimated. 

The Australian and Canadian dollars  and a number of other currencies continue to fall. Chuck Butler of Everbank, which markets foreign currency denominated CDs, has an explanation.  Writing on Kitco Butler writes that there have been rumors of China's economy crashing.  A China crash would hurt commodity exporters like Australia and Canada.  Thus, commodities may decline along with various currencies.  This could well be a significant buying opportunity, say if gold falls below $900.

The current situation is a kind of self-contradiction  The Fed has been printing, expanding the supply, of dollars. Yet demand has exceeded supply because of a "flight to safety."  But the demand is short term, or else it relies on the assumption that Congress, the Fed and the President are reliable when it comes to economic self discipline.  If you believe that then you feel comfortable with cash as a long term holding, but I don't. Nevertheless, for the short term the markets are keeping me in dollars. I am currently about 70% in dollars. My other asset holdings, stocks (14%), commodities (10%) and currency (6%), have all been falling this week.

Butler argues that rumors of a China crash have come and gone before, so the currency declines might be good plays as well.  It is certainly nice to have a large share of cash right now, but I would not be optimistic about the future of the US dollar.  Butler puts it well:

"Speaking of deficits... I was thinking last night that I've been blind to something that I should have seen a long time ago, since I talk about both of them all the time! The National Debt in the U.S. is nearing $13 Trillion dollars... But... It's really $19 Trillion... Where did the $6 Trillion come from? Ahhh, grasshopper, it even too me this long to figure this one out... You see... The debts of Fannie and Freddie total over $6 Trillion... And since these two were nationalized their debts are our debts now... And just because the Gov't doesn't count their debts with ours, from now on, I will...

"How are we ever going to pay back $19 Trillion? (Oh and that's not counting the unfunded liabilities of Social Sec., Medicare, and Medicaid) Higher taxes? That won't work folks... Gov't spending cuts? That would help, but going forward with all the baby boomers like me nearing retirement, the unfunded liabilities become "funded" and those alone will be more than tax receipts and spending cuts can cover!"

If there is a sizable market decline and then some stabilization, I'm going to move money into the markets. I don't think the final crash with capitulation that will end the secular bear market is near.

Ron Holland on the Coming Currency Crisis and Economic Viagra

Ron Holland has an excellent blog on the Lew Rockwell site about the coming currency crisis.  Holland makes four excellent points:

1. The Greek crisis may lead to a shrinking of the Euro zone as more socialist nations like Greece pull out in order to have the flexibility to inflate further.

2. Eurocrats would like increasing centralization of Europe, just as Republicrats here in the US favor increases in Washington's power.  But, Ron rightly notes, Europe "would be far better off as a confederation of sovereign states that allows competition among individual national currencies." The same is true here in the U.S.  The U.S. would be better off if the states were sovereign and were to spin off from Washington, which ought to become a loose coordinative hub like Brussels is today.

3. There will be continuing periods of dollar strength as the mania of  "dollar safety" continues to motivate investors.  Eventually, though, massive increases in the monetary base and China's and Japan's ending of their subsidization of a devaluing dollar will cause currency depreciation here.

4.  Holland concludes:  "Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared."

That means be ready to purchase gold when the price of gold falls.  I have about 5% of my total assets in gold right now and I'm planning to increase it over time, buying in the dips.  Other commodities such as agriculture (DBA) and general commodities (DBC) as well as silver (SLV) and other metals should be included in a balanced portfolio.  Gold stocks (for instance, Eldorado, EGO or GDF) and leveraged gold ETFs (e.g., DGP) are higher risk/higher return ways of investing in gold.  Similar ETFs exist for silver and other commodities.

I am currently 68% in cash and about 10% in commodities, including silver and agriculture as well as gold, and about 6% in two foreign currencies, the Canadian dollar and the Australian dollar. The rest is in a few stocks, including a Singapore ETF (EWS).

My worst positions are the Australian and Canadian currencies which have plummeted, apparently because of the Euro crisis (I don't understand why, but I also don't understand why the dollar is rising).  A buying opportunity in the making?

Do not buy and hold.  The mammoth increase in monetary reserves two years ago has motivated the past year's run-up in the stock market, and it may be that this injection is running out of steam. It is possible that the massive increase in potential liquidity (tripling of the monetary base) will continue to boost the stock market for some time, but ultimately the viagra will wear off.  Then, Bernanke, Obama and their supervisors at 85 Broad Street will need to decide whether to inject nine times the monetary base to try to "get the stock market up" another 50%. If they do, hyper-inflation will be a certainty. If not, then expect some major disappoints in the American stock market.

Bernanke's use of monetary reserves somehow reminds me of viagra.  The older the rally gets, the more viagra is needed.

Stock Market Rises in Response to Obamacare

The stock market continues to move up the day after Obamacare passed. However, gold went down. This is revealing. Stocks might go up if the market expects more monetary stimulus in response to additional deficit spending. But in that case gold would also go up. Gold's going down (as of 1:00 pm about .75% as per Kitco) suggests that the stock market is responding to cost shifting in Obamacare. In particular, the law shifts costs from corporate benefit plans to poor people. The poor are now compelled to purchase health care rather than rely on emergency care for which they do not pay and whose costs then fall on the corporate plans. In addition, doctors are now constrained from performing a range of procedures. This will make life worse for Americans but will save corporate plans money. Although Obamacare is presented as a way to assist the poor, this is at most partially true. It is a way to help the very poor who are added to Medicaid and for which the public will pay. But it is also a way to help corporate plans, which will benefit so long as corporate income taxes are not raised.

Blood in the Streets

Kitco reports that gold prices have fallen 4 percent today to 1066, nearing the 1030 mark that Jon Nadler mentioned as a near term support several days ago. Morgan Stanley Smith Barney's ticker says that the Dow is down nearly 200 points and the S&P 500 is about 1074, a 23 point drop. These declines are related to a strengthening dollar.

How far will the Fed allow markets to fall before it prints more money? Like an obsese food addict, the Fed reaches into its candy bag at the slightest impulse. Bernanke and his associates like to see gold fall. But the effects of a stronger dollar and weaker gold include bankruptcies and unemployment. More importantly to the Fed, hedge funds' carry trade and the hundreds of billions loaned to Wall Street each week will be threatened by higher interest rates.

Based on my coin flip test, I am betting $950 gold. Unless the Fed decides to change its philosophy, I doubt the S&P will go below 850. But when inflation kicks in, then the Fed will need to tighten. At that point we could see more dramatic stock market declines. Gold would continue to be fueled by speculation for a while, until raising interest rates mutes the price increase trend. Then gold will fall again.

Thirty Year Bear Market

An economic forecaster once told a class I attended that he loved to make thirty year forecasts because no one would remember his forecast when the events actually occurred. So he could collect his fee without fear of request for a refund. I will make a thirty year forecast, nonetheless. We are in for soft and declining markets for the rest of my life.

The unfolding of the banking problems in the past two years and the ongoing subsidization of the housing and stock markets via low-to-negative real interest rates will have predictable effects. The current situation is complicated by the de facto pegging of the dollar by international central banks. The real effects of the subsidization are wealth transfers from productive to unproductive factors of production. The chief beneficiaries of the transfers are beneficiaries of government (both employees and welfare recipients), investors and speculators in assets, including stocks, currency, bonds, commodities and real estate. The chief losers are savers in cash and productive workers.

The debt of the US government is growing in absolute numbers to an extent unparalleled in history. Generally, large government debt increases have been associated with monetary expansion and inflation. This time, central bank dollar pegging has limited inflation in the US. The pegging is a form of international inflation. That is, the nations that are supporting the dollar are making their citizens poorer in order to keep them working.

Ultimately, the complex deception becomes untenable. The public starts to question why harder work is met with ever lower rewards. Larger and larger transfers to asset holders are required to keep markets steady, and workers will become poorer and poorer, driving increasing numbers out of the labor market. Democrats and collectivist altruists will say that the deprivation of the productive is in the public interest.

It has become apparent that the US government will not allow the stock and real estate markets to fall. As well, it cannot afford to pay off its massive, ever-increasing debts. So it will depreciate the dollar.

The alternative to stock markets that are soft and retain value only because of government subsidy and dollar holdings that are vulnerable to hyper inflation is commodities. But there is no reason to trust the stability of commodity markets. The pegging system coupled with carry trade and hedge fund activity ensures support for the dollar when it weakens.

The forces for inflation and dollar (and international currency) depreciation are far more powerful than the forces for stability, for the debt is growing too quickly to ever be repaid; the Fed is creating a bubble in US Treasury debt; and the Fed has shown that it will not permit real estate or stock markets to fall. So in the long run, over thirty years, commodities will be better than dollars. But it will be a bumpy road.

Given the uncertainty, firms cannot think long term in the new world socialist order and so sustainable economic growth is out of the question for the foreseeable future. Likewise, the growth absorbing power of government will ensure a declining economy. Innovation in the US once powered the world's advancement, but unless the Asian nations more aggressively permit entrepreneurship, there is no longer a growth engine. It certainly is not the United Socialist States of America. As George Soros pushes for an American society ever more closed and totalitarian, opportunities for shorting and going long on commodities and currency become greater.

Do not expect the highs of the early 2000s to be significantly surpassed in real dollars. But there will be plenty of inflation to confuse everyone.

Whither Gold?

Gold went up today just four days after I blogged that I was mostly in cash. I just wrote a column for a popular local newspaper called the Lincoln Eagle that should come out in a few days and I suggested that there are four scenarios that might evolve: (1) bank failures/inflation; (2) deflation/inflation; (3) inflation/stagflation and (4) steady course. Jon Nadler of Kitco had suggested that we were in for a higher interest rate regime like we saw in the late 1970s and early 1980s, but I do not believe that it will be possible for the Fed to successfully execute a deflation or regime of high interest rates followed by a moderate (by 2010 standards, not by 1950 standards) re-inflation as was done under the Carter and Reagan administrations. It is likely that interest rate hikes will lead to stress on banks and additional unemployment. I do not believe that Obama is naive as was Carter to appoint a Fed chairman with the discipline to raise rates. Paul Volcker was exceptional and has not been equaled in the Fed's history. Even there, he reversed his monetarist policy by the early 1980s.

This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.

So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.

The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.

Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.

Democrats' and Republicans' Impoverishment Plans

The Democrats have this impoverishment plan:

1. Teach children that production of wealth is immoral while taxation is moral.

2. Tax output of productive Americans and redistribute it to the wealthy-–George Soros, Long Term Capital Management, Bear Stearns, the Washington nomenclatura, university professors and Keynesian economists.

3. Tell the poor that you are acting in their interest because of your “conscience”. Develop a social security and medicare plan that redistributes wealth inter-generationally from low wage earner to low wage earner. When it fails, institute a rationing scheme, call it “national health insurance” and raise the social security retirement age.

4. Convince Americans that receiving $180,000 in social security benefits for $200,000 in out-of-pocket contributions is a good deal. Convince Americans that health care in Cuba at $250 per year is better than in America.

5. Set interest rates at zero so that middle income people cannot save and induce them to invest in the stock market at inflated prices. Further ensure that middle income people cannot save by taxing incomes, property, inheritance, capital gains and sales.

6. Allocate freshly printed money (created to reduce interest rates to zero) to unproductive Wall Street, banking, hedge fund and corporate executives, insuring that wage earners will pay higher prices for milk while hedge fund managers buy $30 million houses in Greenwich, Connecticut and the Dakotas. Facilitate this process through subsidization of the stock and real estate markets, repeatedly inducing long term “sucker rallies”.

7. Convince Americans that taxation of 50% of your income is too little for the same level of services that used to be provided at 10% of your income.

8. Increase tax rates most on innovative and harder working Americans and transfer their money to Democratic contributors.

But the Republicans also have an impoverishment plan.

1. Read and parrot all Democratic Party information sources such as the New York Times and CNN.

2. Never repeal the Democrats’ impoverishment plan.

3. Do not educate Americans as to the effects of the Democrats’ impoverishment plan.

4. When elected, spend more than Democrats.

5. Declare a national emergency and emphasize the need to transfer even more printed money to unproductive, wealthy interests six weeks before the presidential election.

Why Is CNN Telling the Truth?

I was working out today and someone had turned on CNN. I was stunned that CNN was warning of an attack on the dollar and a dollar crash. This has been true for some time (I have been blogging about this for several years) but I was stunned that CNN is openly discussing this. China, Russia, the EU and other countries have denounced the Bush-Obama bailout and the massive stock market subsidy that the Bush-Obama administrations have effected. Moreover, CNN allowed a speaker to say that Obama would be a one-term president.

But why is CNN willing to cover this? CNN reflects establishment, and it is certainly in the establishment's interest to lie about the very shaky ground on which the American monetary and financial system rests.

I am back in the stock and gold markets. I got into the stock market at S&P 760 or so a few days before the 500 point run up about 8 days ago. I got into gold stocks and gold over the past few days.

Howard S. Katz's "conservative" portfolio is now only a few percent below its October 2007 level. I have fared worse on my own. My total accounts are down about 15% since October 2007. Katz is very bullish on gold stocks right now. He is also bullish on the stock market. I am close to 100% invested for the first time since 2005.

In the 1930s Franklin D. Roosevelt created an economic system based on virtually unlimited power on the part of financial interests, especially Wall Street and commercial banks. He did this by ending the gold standard and permitting an unrestricted fractional reserve approach whereby the Fed has unlimited power to expand the money supply. The Republicans jumped on board with this system in 1971 when Richard M. Nixon abolished the international gold standard that had been reintroduced in 1944.

In 2008 George W. Bush and in 2009 Barack H. Obama intensified the approach. Instead of government by banks, they introduced government by Goldman Sachs. The
Secretary of Treasury under President Bush, Henry Paulson, was a former Goldman executive. Barack Obama received heavy contributions from Goldman. The Bush-Obama administration ensured that all of Goldman's debtors would receive considerable bailout money. Goldman Sachs is the nexus around which all the recipients of the bailouts revolve.

I am trying to figure out whether the US government is worth seriously discussing any more. I am also having trouble deciding whether the Republicans and Democrats have a grain of difference between them. American conservatives and American progressives have one allegiance: the corporate charter of Goldman Sachs.