Trading Skyrockets My Retirement Account to New High

I had gotten out of the market in the weeks before election day.  During the week following the election, the market plummeted by six or seven percent.  There was one day of a huge drop and a few days of big but smaller drops.  I got back in the day before the final drop.  Since then the market has come back.  My retirement account is at an all-time high, while my two stock accounts are near their highs.  My high-dividend stocks, which have low beta or risk, were badly socked in my bokerage account, but they have come back dramatically in the past few days.  I'm hoping for a 20 percent increase in the stock market in the coming year.  If it reaches something in that area I will pull out again.  As I blogged earlier this evening, the mining stocks will probably be sluggish for a while longer, but they are good buys now.

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.  

A people who allow a tyrant to tell them how much they can eat and drink are beneath contempt.

A people who allow a tyrant to tell them how much they can eat and drink are beneath contempt.

The Democratic versus the Republican Future

The American future will materialize in one, five, 10, or 20 years, once the federal government's 14- or 15-digit indebtedness becomes unsustainable. When private and foreign financing sources disappear, money printing will fund the federal deficit.  That will increase domestic money supply, and a currency collapse coupled with hyperinflation will follow, depending on the sustainability of the debt market and the willingness of foreign governments to purchase treasury debt that yields less than two percent while American inflation is above four percent.  The Fed may already be directly purchasing federal debt. When direct monetization of federal debt becomes routine, hyperinflation and a dollar collapse will not be far behind.  The reason is that the total money supply is a small fraction of total US indebtedness.  In 1995 the total US money supply was under $1.2 trillion; today it is about $2.4 trillion, with virtually all of the increase having occurred since 2009.  In contrast, the federal deficit is $1.1 trillion for 2012 alone.

During the Bush years, the federal deficit, which President Clinton had eliminated for four years between 1998 and 2001, rose from $171 billion to $422 billion.  His final budget, which Obama inherited, included a $1.3 trillion deficit. The spin masters at The New York Times and Obama's publicity site, Factcheck.org, now crow that Obama has "reduced" the deficit to $1.1 trillion, but when you get your news from liars like The New York Times and Factcheck.org you get a distorted view of the world. Obama made no effort to rescind the 2009 budget, a power that the Democrats took away from the president during the Nixon years. Moreover, Obama's subsequent budgets have been as bloated as the final Bush budget.  According to the US Treasury outstanding federal debt in 2010 was $10.6 trillion, and in November 2012 it was $16.2 trillion.  Obama has added trillions to federal debt; George W. Bush invented a policy that Barack Obama perfected.  Mitt Romney, a bailout supporter and a military hawk, was likely to maintain Obama-and-Bush levels of spending.

Looking more closely at the publicly held-versus-total debt numbers from TreasuryDirect.com, the Fed may have directly monetized as much as $300 billion of federal debt since Obama took office:

Publicly held federal debt, January 2009:  $6.3 trillion
Publicly held federal debt, August 2012:  $10.6 trillion
Difference: $4.3 trillion

Total federal debt January 2009: $10.0 trillion
Total federal debt August 2012: $14.6 trillion
 Difference: $ 4.6 trillion

The $4.6 trillion growth in total debt during the Obama years, a 46% growth in the total debt outstanding from all prior presidents in just four years, is $300 billion more than the $4.3 trillion growth in publicly held debt. That $0.3 trillion difference  is one eighth of the total money supply. 
 
If interest rates rise, then the federal government's deficit and borrowing costs will also rise, and it will need to de-fund programs.  The political results of de-funding welfare programs like Social Security will be similar to hyperinflation. There may be intense pressure on the Federal Reserve Bank to simply monetize the federal debt.

The results will differ between Republicans and Democrats.  With Democrats in office, there will be a decline in American standards of living as money printing reduces the ability of the federal government to borrow further and as legitimate sources of capital flee a socialistic America bent on stealing to subsidize the Democrats' key beneficiaries: Wall Street, welfare cheats, and do-nothing government employees.  However, you will not be allowed to drink soft drinks in excess of eight ounces.  With Republicans in office there will be a similar economic scenario, but you will not be allowed to use birth control pills.  The Republicans will subsidize Wall Street, defense contractors, pharmaceutical firms, agribusiness, and defense contractors.

Both parties offer a totalitarian future run by ego-maniacal ignoramuses.The only thing more embarrassing than America's two-party system is the American people.