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- Mon, 10 Mar 2014 14:24:00 +0000: Gold Is Seasonal: When Is the Best Month to Buy? - Casey Research - Research & Analysis
I’m just back from this year’s PDAC conference in Toronto, the biggest conference in the mineral exploration industry. The short version of what I found was that while smaller than last year’s conference, there was a great deal of positive energy present, driven, I’m sure, by the resurgence of the resource sector thus far this year.
The key takeaway is that this was a deal-making event. Companies that have made discoveries but are low on cash were out in force, looking for alternatives to keep going. I expect to see a great deal more mergers and acquisitions activity going forward, in some cases bringing possibilities for us to profit.
Meanwhile, Jeff Clark covers a more pressing opportunity, especially for those new to investing in gold.
Senior Metals Investment Strategist
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,339.47 1,262.90 1,575.10 Silver 20.86 19.94 28.81 Copper 3.09 3.23 3.52 Oil 102.58 99.88 91.56 Gold Producers (GDX) 26.18 23.91 36.91 Gold Junior Stocks (GDXJ) 42.50 38.35 63.84 Silver Stocks (SIL) 14.00 12.71 18.05 TSX (Toronto Stock Exchange) 14.299.10 13,786.50 12,826.52 TSX Venture 1,043.01 962.10 1,116.23
Gold Is Seasonal: When Is the Best Month to Buy?Jeff Clark, Senior Precious Metals Analyst
Many investors, especially those new to precious metals, don't know that gold is seasonal. For a variety of reasons, notably including the wedding season in India, the price of gold fluctuates in fairly consistent ways over the course of the year.
This pattern is borne out by decades of data, and hence has obvious implications for gold investors.
Can you guess which is the best month for buying gold?
When I first entertained this question, I guessed June, thinking it would be a summer month when the price would be at its weakest. Finding I was wrong, I immediately guessed July. Wrong again, I was sure it would be August. Nope.
Cutting to the chase, here are gold’s average monthly gain and loss figures, based on almost 40 years of data:
Since 1975—the first year gold ownership in the US was made legal again—March has been, on average, the worst-performing month for gold.
This, of course, makes March the best month for buying gold.
But: averages across such long time frames can mask all sorts of variations in the overall pattern. For instance, the price of gold behaves differently in bull markets, bear markets, flat markets… and manias.
So I took a look at the monthly averages during each of those market conditions. Here’s what I found.
The only month gold has been down in every market condition is March.
Combined with the fact that gold soared 10.2% the first two months of this year, the odds favor a pullback this month.
And as above, that can be a very good thing. Here’s what buying in March has meant to past investors. We measured how well gold performed by December in each period if you bought during the weak month of March.
Only the bear market from 1981 to 2000 provided a negligible (but still positive) return by year’s end for investors who bought in March. All other periods put gold holders nicely in the black by New Year’s Eve.
If you’re currently bullish on precious metals, you might want to consider what the data say gold bought this month will be worth by year’s end.
Regardless of whether gold follows the monthly trend in March, the point is to buy during the next downdraft, whenever it occurs, for maximum profit. And keep your eye on the big picture: gold’s fundamentals signal the price has a long climb yet ahead.
Everyone should own gold bullion as a hedge against inflation and other economic maladjustments… and gold stocks for speculation and leveraged gains.
The greatest gains, of course, come from the most volatile stocks on earth, the junior mining sector. Following our recent Upturn Millionaires video event with eight top resource experts and investment pros, my colleague Louis James released his 10-Bagger List for 2014—a timely special report on the nine stocks most likely to gain 1,000% or more this year. Click here to find out more.
Gold and Silver HEADLINES
US Mint Sales Plummeted 60% in February (Mining.com)
Sales of American Eagle gold and silver bullion coins dropped 60% in February, shows US Mint data. Only 31,000 ounces were sold in February, compared to 80,500 ounces in the same month last year. In January the Mint recorded 91,500 coin sales, down 40% from 150,000 ounces sold in January a year earlier.
A pattern has emerged with retail investors, where purchases decline when gold rises—and gold is up 11% in 2014. As Jeff shows in the article above, we may yet see a dip this month, due to both seasonality and a likely cooling off after the run up.
US Mint to Sell Platinum Coins Again on Dealer Demand (Mining Weekly)
The US Mint will resume American Eagle platinum bullion coin offerings this month after a four-year absence. The Mint stopped selling platinum coins in 2008.
The platinum price hit nearly $2,300/oz in March of that year but plummeted to $730 by October, as the financial crisis sapped demand for the metal primarily used in catalytic converters.
Platinum prices have strengthened on improving US and Asian auto demand, as well as supply fears caused by mine violence and crippling strikes in top producer South Africa. Platinum is up about 8% so far this year, compared to gold’s rise of 11% and silver’s 9%. We remain bullish on all precious metals.
India’s trade minister has raised the issue with the finance ministry of easing some curbs on gold imports. The senior officer admits that imposed restriction measures encourage smuggling and hurt the gem and jewelry industry.
When the Indian government imposed high tariffs and other curbs on gold imports to improve the country’s budget deficit, we knew there would be unintended consequences. Authorities managed to reduce gold imports dramatically since last August—but caused other problems.
One of those problems was smuggling. According to the World Gold Council, up to 200 tonnes (6.4 million oz, or Moz) was believed to have been smuggled into the country in 2013.
Another problem was the lack of available supply for the jewelry and gem industry. “We have to ensure adequate availability of gold for the gems and jewelry industry, which is a very important sector for our exports,” said Trade Minister Anand Sharma.
If India does ease gold restrictions, demand in the country will grow and provide additional support for the price.
Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our gold-focused companies has a new silvery lining, having just confirmed the presence of an extensive zone of nickel-platinum-palladium mineralization.
- This company received a major mine permit sooner than we expected—great news that will open the door for greater future production.
- Stay in touch with the best producers by accessing the latest news and comment on the BIG GOLD portfolio page.
- Fri, 07 Mar 2014 07:25:00 +0000: 10 Ways to Screw Up Your Retirement - Casey Research - Research & Analysis
My appearance in today’s missive will be brief, as I plan to pass the reins to Dennis Miller in a moment.
Dennis, of course, is the editor of Miller’s Money Forever, our newsletter built specifically to meet the investment needs of retirees and those close to retirement. Those needs being, in order of importance: (1) preserving your nest egg; and (2) generating income to live on.
Generating retirement income used to be much simpler. In 2000, a 5-year CD paid about 6%. If you had a million bucks, you could put it all into CDs and generate $60,000 per year with zero risk to your principal. Voilà, you were already at a middle-class lifestyle without having to do much at all.
And if you were willing to venture a little bit further out on the risk spectrum or draw down your principal by a couple of percentage points per year, you could clear six figures per annum without a sweat.
It’s a different story today. Now, the average CD pays 1.5%—meaning you’d need a $4,000,000 nest egg just to generate that same $60,000 in income per year. Needless to say, not many people have that kind of money. So whether retirees like it or not, they need to accept more risk to finance even a mediocre retirement.
The problem is that retirees are the last investors who can afford to lose their principal. With your earning years behind you, every dollar you lose to a bad investment decision equates to income you’ll never get back. Make a couple of major blunders, and your dream retirement of playing golf and eating out a few times per week might descend into watching Phil Mickelson on a 17-inch TV with a container of Ramen noodles in your lap.
But with interest rates so low, taking that risk is pretty much a necessity. That being the case, risk management is the most crucial aspect of investing for retirees. And that, in my opinion, is where Dennis and his team of analysts really shine.
They don’t just pick stocks—they’ve built a comprehensive investment strategy called the “Bulletproof Portfolio” that beautifully balances the two overarching needs of retirees. First, it generates sufficient current income to finance a comfortable retirement, provided you have decent-sized nest egg. Second and even more crucially, the Bulletproof Portfolio employs a series of safeguards to ensure that your portfolio is never subject to dangerous levels of risk.
If you’re anywhere near retirement age, I encourage you to check out the Bulletproof Portfolio strategy for yourself. Click here to begin your risk-free trial to Miller’s Money Forever. You’ll get a full 90 days to decide if it’s for you. If it’s not, no problem—just cancel for a full and prompt refund.
Without further ado, here’s Dennis…
10 Ways to Screw up Your RetirementDennis Miller, Senior Editor, "Miller's Money Forever"
There are many creative ways to screw up your retirement. Let me show you how it’s done.
Supporting adult children. My wife and I have friends with an unmarried, unemployed daughter who had a child. Our friends adopted their grandchild and are now in their late sixties raising a kid in grade school. The same daughter had a second child, and they adopted that one too. When she announced she was pregnant a third time, they finally said, “Enough! It’s time for a third-party adoption.”
Last time I spoke with them, their unemployed daughter and her boyfriend were living in their basement, neither contributing financially nor lifting a finger around the house. What began as a temporary bandage had become a permanent crutch. Our friends love their grandchildren; however, they’ve become bitter.
Jo and I also know of retirees who make their adult children’s car payments. I’m not talking about college-age kids; some of these “children” are close to 50. What’s their justification? “If we don’t make the payments, they won’t be able to go to work.” What I can’t grasp is how these adult children have iPads and iPhones, go on vacations, and do other cool things, but can’t seem to make their car payments.
You are not the family bank. There is generally a brief window of opportunity between children leaving the nest and retirement. Use it to stash away enough money to retire comfortably!
Ignore your health. I served on the reunion committee for my 50th high-school class reunion. We diligently tried to track down our classmates, but many had not lived long enough to RSVP to the party. The number of deaths from lung cancer and liver cancer were shocking. Many of those six feet under had been morbidly obese or simply never went to the doctor for checkups.
I know this sounds obvious, but your health choices really do affect how long and how well you live. Retiring only to become homebound because of health problems won’t be much fun.
Not keeping your retirement plan up to date. In the summer of 2013, the Employee Benefit Research Institute (EBRI) published a survey about low-interest-rate policies and their impact on both baby boomers and Generation Xers, who are following right behind. The bottom line (emphasis mine):
“Overall, 25-27 percent of baby boomers and Gen Xers who would have had adequate retirement income under return assumptions based on historical averages are simulated to end up running short of money in retirement if today’s historically low interest rates are assumed to be a permanent condition, assuming retirement income/wealth covers 100 percent of simulated retirement expense.”
It is a sad day when people who thought they’d saved enough realize they have not. Run your personal retirement projection annually to make sure you’re keeping up with the times. Otherwise you may have to work longer or step down your retirement lifestyle—drastically.
Thinking you can continue working as long as you wish. While age discrimination is illegal, you may not be able to work forever. If illness doesn’t push you out the door, your employer might downsize (we all know who goes first) or buy you out with a lucrative lump sum.
Many companies want older employees off the payroll because their healthcare costs are high; plus, they are often at the top of the salary scale. More than one employer has made the workplace so uncomfortable that an older employee felt he had to quit. Other employers will systematically build a case to terminate a senior employee with their legal team waiting in the wings to help.
Whatever the reason, you may have to stop working even if you enjoy your job, so plan for it.
Not increasing your rate of saving. A surefire way to end up short is to pay off a large-ticket item like your home mortgage and then continue spending that money every month. Start paying yourself instead! Don’t prioritize saving after it’s too late to benefit from years of compounded interest.
Continually taking equity out of your home. Too many of my friends have been duped into taking out additional equity when refinancing with a lower-interest mortgage. If you can secure a lower rate, use it to pay off your home off faster. When you have, start making those payments to your retirement account.
Retire with a substantial mortgage. The general rule of thumb is your mortgage payment should be no more than 20-25% of your income. If you retire and still have a mortgage, it might be tough to stay within those guidelines.
Taking out a reverse mortgage at a young age. Debt-laden baby boomers are taking out reverse mortgages at an increasingly younger age. Just read the HUD reports. Many have very little equity to begin with and use a reverse mortgage to stop their monthly bank payments for pennies in return.
Locking yourself into a fixed income at a young age is a great way to kiss your lifestyle goodbye. Many of these young boomers will find themselves wondering, “Why is there is so much life left at the end of my money?”
Putting your life savings into an annuity. While annuities have their place in a retirement portfolio, going all in is dangerous, particularly at a young age. After all, your monthly payment depends in part on your age.
I know folks who put their entire life savings into variable annuities. They thought they were buying a “pension plan” and would never have to worry again. The crash of 2008 slashed their monthly checks, and they have yet to recover. Retirement without worry is not that simple.
Thinking your employer’s retirement plan is all you need. The era of pensions is gasping its dying breath. We have many friends who retired from the airlines with sizable pensions. When those airlines filed for bankruptcy, their pensions shriveled. No industry is immune to this danger, so we all need a backup plan.
Government pensions are following suit. Just ask anyone who has worked for the city of Detroit! While the unions are fighting the city to preserve their pensions, an initial draft of the plan indicates underfunded pensions (estimated at $3.5 billion) may receive $0.25 on the dollar.
Don’t fall for the trap! If you work for the government, you still need to save for retirement. Contribute to your 457 plan or whatever breed of retirement account is available to you. The federal government has over $100 trillion in unfunded promises, and many state governments are woefully underfunded. That doesn’t mean your retirement has to be.
Dan again. Doug French is up next to discuss how longtime gold hater Warren Buffett has turned to bashing Bitcoin. Then, since we’re in the heart of tax season, we’ll share some of David Galland’s classic musings on the topic of tax day.
Buffett vs. BitcoinDoug French, Contributing Editor
Warren Buffett has made billions investing. For that, the financial press and most investors hang on his every word. Is he a genius of all things? Far from it. As Doug Casey describes, Buffett is merely an idiot savant.
The Oracle of Omaha famously hates gold. His father, Congressman Howard Buffett, was a great champion of sound money and the gold standard. Unfortunately, Warren continues to rebel against his father’s conservative convictions.
Gold, Warren says, “gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
The yellow metal has served as money for centuries, but Buffett doesn’t seem to understand money. A good money should be: recognizable, divisible, homogenous, portable, durable, have a fairly stable value, and be generally marketable.
Buffett’s beloved equities do not come close to possessing all of these qualities. While you could probably bribe a surly guard at any of the world’s borders with a gold coin, see how far offering him a share of Exxon gets you.
Now we can add Bitcoin to the list of things Buffett despises. He claims that Bitcoin is “not a currency,” and says, “I wouldn’t be surprised if it wasn’t around in the next 10-20 years.”
We could say the same about Buffett, although his Cherry Coke and hamburger diet is serving him well so far. It is a bit worrisome, however, that he was unable to pick out his favorite drink in a blind taste test, despite reportedly knocking back 60 ounces of the stuff daily.
Anyway, in his dissing of Bitcoin, Buffett said the cybercurrency is “not a durable means of exchange or store of value. … It’s a speculative Buck Rogers type of thing. … People buy or sell them hoping they’ll go up or down like they did with tulip bulbs a long time ago.”
That’s not exactly true. As I wrote a few weeks ago, quoting John Hathaway, “There is (as yet) no Bitcoin futures exchange, no Bitcoin derivatives, no Bitcoin hypothecation or rehypothecation.” To speculate in bitcoins, you have to actually buy bitcoins. There is no established exchange or mechanism to borrow them and sell them short, nor is there a way to purchase them on leverage, as Buffett would imply.
By comparison, the tulip bulb market in 1636 Amsterdam was designed for speculation. The bulbs were in the ground, so it was a futures market from September to June. Buyers were only required to put up a small fraction of the contract price. Very few bulbs were actually delivered, and trades settled with only a payment of the difference between the contract and settlement price.
In reality, Bitcoin is used more for commerce than speculation. More businesses are accepting bitcoins for payment every day. Libertarian Patrick Byrne’s company, Overstock.com, now accepts bitcoins, and the number of customers using the cybercurrency is growing exponentially.
Byrne admits the company is not holding the bitcoins because it can’t pay its suppliers with them. So Overstock immediately trades any bitcoin it receives for dollars. Contrary to Buffett’s view that the Bitcoin market is some frothy bubble of speculation, the selling pressure of retailers like Overstock puts constant downward pressure on Bitcoin’s price.
A Matter of Trust
“Satoshi Nakamoto” created Bitcoin as an answer to government’s continued money creation and mismanagement. Satoshi, whoever he, she, or they is, wrote:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”
Trust has been a problem lately in the Bitcoin world. The third-largest exchange, Mt. Gox, filed bankruptcy after 850,000 bitcoins were stolen. A Bitcoin bank, Flexcoin, folded this week after 896 bitcoins were taken. This is after underground commerce site Silk Road, which only accepted Bitcoin, was shut down by the authorities, and BitInstant CEO and Bitcoin millionaire Charlie Shrem were arrested for money laundering.
Despite all of this negative news, a single bitcoin will still set you back $668. That’s about half the high of $1,280… but still over 10x the price a bitcoin went for just last summer.
The limited amount of bitcoins and the difficulty in creating new ones makes it “gold 2.0,” according to Chriss Street, writing for American Thinker:
“Since the beginning of human history, only about 5.6 billion troy ounces of gold has ever been mined. The value of gold is rooted in its medium rarity, easily handling and other qualities most other metals lack. These properties are the basis of gold serving as money. Bitcoin has a stark resemblance to gold: ‘Both are backed by no one. Both are, relative to fiat currency, inconvenient for day to day use. Since there is a limit of 21 million that may ever be “mined” by the year 2140, Bitcoins are rare units of exchange. Bitcoins will remain rare like gold.’”
When it comes right down to it, Warren Buffett doesn’t like Bitcoin for the same reason he doesn’t like gold. Inflation helps his investment business, so he hates anything that might be deflationary. Bitcoin, like a true gold standard, could bring deflation. Paul Krugman hates the idea for same reason.
Back in December, Krugman wrote a blog post at the New York Times titled “Bitcoin Is Evil.” The Keynesian Nobel laureate quoted Charlie Stross:
“Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states’ ability to collect tax and monitor their citizens financial transactions.”
If you bought a share of Berkshire Hathaway during the week of March 13, 2000, it would’ve cost you $51,300. Today, that share goes for $177,989.
If you instead invested that same $51,300 into gold, you’d now have $236,531 worth of gold. Bitcoin, of course, wasn’t even an apple in Satoshi’s eye in 2000. But since being created in 2009, it has skyrocketed from pennies per coin to over $600/coin.
In other words, both of these “unproductive” assets have handily outperformed Buffett. Maybe that’s why he hates them. The Oracle may be an investing phenomenon, but when it comes to money, he doesn’t have a clue.
When Buffett talks stocks, listen up. But when his proclamations veer into monetary matters, you’re better off covering your ears.
Casey Gems: David Galland on Tax DayDavid Galland, Managing Director
Originally Published on April 20, 2007
Congratulations on Your New Job… Working for Me!
Like many of you, I have just finished being relieved of all my spare cash by Uncle “The Vig” Sam’s annual protection payment.
As a small consolation, I was thrilled to learn that, in addition to being used for bombing various recalcitrant corners of the Middle East, my money is now being deployed keeping 52.6% of my fellow Americans in bread and flat-screen televisions.
That percentage is, according to economist Gary Shilling, how many Americans are now receiving a significant share of their income from the government. But of course, because the government doesn’t make anything, the fount of this largess is actually… oh, yeah, you and me.
With over 70 million Americans now headed for retirement, most of which have nowhere near enough money to scrape by on, the deeply dependent population is only going to grow… lockstep with the ballooning costs of Social Security and Medicare.
So, I wonder, at exactly what point does the US stop being considered a free-market economy and officially warrant the label of socialist… or, for that matter, communist? Because when you think of it, the communist motto “from each according to his ability, to each according to their need,” a motto that has always resonated in certain circles, certainly seems appropriate to the evolving nature of the “new” America.
They say you shouldn’t judge a book by its cover. You might find that bit of wisdom difficult to heed after seeing these awful real-life book covers:
Check out more ridiculous book covers here. A fair warning—some are less than wholesome.
Come for Da Bull
Two sisters, one blonde and one brunette, are trying to start a farm. The brunette sister finds a prized bull in the classifieds and leaves to check it out. She tells the blonde that she will contact her to come haul the bull back to the farm if she decides to buy it.
The brunette goes to the farm and decides to buy it. The farmer tells her that the bull will cost exactly $599, no less. So she buys the bull and heads to town to contact her sister. The only person she can find to help her is a telegraph operator.
The operator tells her, “It costs 99 cents per word; what would you like to send?”
The brunette replies, “Well, I only have $1 left.” She thinks for a while and tells the operator she wants to send the word “comfortable.”
The operator asks, “How will she know you bought the bull and want her to bring the haul from the word ‘comfortable’?”
The blonde replies, “She's a slow reader.”
Everything’s Bigger in Texas
There once was a blind man who decided to visit Texas. When he arrived on the plane, he felt the seats and said, “Wow, these seats are big!” The person next to him answered, “Everything is big in Texas.”
When he finally arrived in Texas, he decided to visit the hotel bar. Upon arriving to the bar, he ordered a beer and got a mug placed between his hands. He exclaimed, “Wow, these mugs are big!” The bartender replied, “Everything is big in Texas.”
A little later, the blind man asked the bartender where the bathroom was. The bartender replied, “Second door to the right.” The blind man headed for the bathroom, but accidentally tripped and entered the third door. This door led to the swimming pool and he fell in by accident.
Scared to death, he started shouting, “Don’t flush, don’t flush!”
That’s It for This Week
Before I sign off, I must mention that although we won’t be holding a spring Casey Research Summit this year, John Mauldin’s Strategic Investment Conference 2014 in San Diego is easily the next best thing. The faculty is truly world class: Kyle Bass, Lacy Hunt, Jeff Gundlach, David Rosenberg, and many more of the brightest investment minds will congregate to answer the billion-dollar question: How do you identify and optimize opportunity in a world that holds unprecedented potential but also significant risks?
The conference is from May 13-16. Click here to learn more about the faculty and agenda, and to register for SIC 2014.
Have a great weekend!
Managing Editor of The Casey Report
- Thu, 06 Mar 2014 06:13:00 +0000: Bitcoin’s Uncomfortable Similarity to Some Shady Episodes in Financial History - Casey Research - Research & Analysis
There is simply no way I can let this week pass and not comment on Bitcoin. It would be criminal… (though certainly not the first criminal thing associated with Bitcoin).
First of all, I have to say I applaud the movement. In fact, I even cheer for the movement. Bitcoin itself needs serious work if it is to find a place in that movement long term. It lacks community governance, certification, accountability, regulatory tension, and insurance—all of which are necessary for a currency to be successful in the long run. And precisely why the past week has seen:
- $400+ million worth of bitcoins stolen from—or by depending on how you look at it—the Japanese outfit Mt. Gox.
- Online wallet provider Flexcoin was hacked for a mere $580,000 in bitcoins, forcing it into liquidation. That anyone would trust their company with a deposit manager with such limited liquidity is beyond me, but that’s part and parcel of the way Bitcoin operates.
- Poloniex, another exchange provider, was hacked by means of an exploit in poorly written withdrawal software, and at least 12% of its coins appear to have been taken.
That the underlying technology was never at issue in these attacks and the many dozens of attacks that have preceded them is neither here nor there. The structure of the Bitcoin world is such that each implementation brings its own unique flaws and exploits. And when those systems are breached, your money is gone. You will. Never. See. It. Again. Because Bitcoin is a bearer instrument, once someone controls the machine that holds the bitcoins, they are free to transfer them to themselves.
Still, the idea that there could be a currency free from the whims of autocrats or bureaucrats without all the many drawbacks of using commodities like gold in this digital age is tempting. In reality a more evolved version of the currency will need come about for the dream to come true. It’d have to be one that is managed privately with input from several governments, but no authority over it from any single one. Which would be a remarkable advancement if it can be achieved.
Still, before any such real adoption can happen, we’ll have to eventually give up on this notion that the average person will own or manage bitcoins in an obvious and direct way. This is flawed logic that derives from an underlying misunderstanding of just how Bitcoin works. I can tell you this because I’ve spent hours on the phone explaining and re-explaining the concept to reporters in the past few days, the ones who are trying to quickly come up to speed on the technology in the wake of the Mt. Gox fraud. At least they’re truly trying to understand what happened, as opposed to those who blindly report back the many press releases and sound bites spouted unchallenged by the Bitcoin investor community.
What’s become obvious in those conversations is that too many more people (media and individuals alike) are all content to swallow the line, “Don’t worry—the technology ensures Bitcoin’s security.” Uh huh. The last time someone told you not to worry, your money was perfectly safe, what happened?
“These price increases largely reflect strong economic fundamentals,” Ben Bernanke observed about housing in October 2005, when working for President Bush’s housing program
“No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear,” Jim Cramer told viewers of Mad Money at the onset of the financial crisis.
Bitcoin may make it through the current turbulent times intact. It may not. Regardless, during any such crisis, it’s important to look to history. The past has taught us numerous lessons about hanging on to one’s newfound wealth. After all, examples abound of people and their paper fortunes being rapidly parted during turbulent times.
Let’s see what we can learn from a few of them.
Bitcoin Savings and Trust
I love this former company’s name. Really, I do. Basically it says, “Trust us! We’re called a savings and loan, after all.” Anyone who lived through the 1980s outside of diapers—and in the Bitcoin community I’ve come across many an “expert” who did not—knows of the S&L scandals that shook the banking industry to its core.
Bailing out Security Pacific National Bank cost taxpayers $628 million. Imperial Savings: $1.6 billion. Silverado Savings and Loan: $1.3 billion. Midwest Federal Savings & Loan: $1.2 billion. Home State Savings Bank. Old Court Savings and Loans. Lincoln Savings and Loan. You get the point.
Many safe-sounding investments have proven—not just in the S&L scandal, but over many hundreds of years—to be little more than money pits. That scenario has played out in the Bitcoin world, too. A total lack of governance—even from the community which purports to “manage” the standard—has allowed for dozens and dozens of faulty implementations that resulted in massive thefts of bitcoins.
If we learned any lesson from 1986 or 2008, it should have been that there needs to be some regulatory tension: someone whose bread is buttered by ensuring that any malfeasance or negligence is uncovered.
That doesn’t have to come from governments per se, but absent countervailing market forces they are the one-stop shop for creating it. By introducing private transaction insurers into the chain, Bitcoin could achieve the same. Instead, the system is based around trust in control, and when control fraud or negligence happens, it is the most dangerous of any type. In this case, the Bitcoin community collectively turned a blind eye to known problems, with multiple implications for the client, for going on two years now—allowing the system to operate without any real attempt to force fixes in the core code.
Further, the executives of the wallets that have been hacked presented themselves as safe and secure ways to stash valuable goods in the Cloud. That they would introduce such flawed systems to the Web with a promise like that attached will inevitably lead to civil, if not criminal, liability. But that takes a long time to happen, and will probably end just like the S&L scandal, the mortgage scandal, and all the rest, with one or two unlucky ducks in jail and most sipping Mai Tais on a beach somewhere.
So take a page from the playbook so many investors have utilized, and diversify, diversify, diversify. If you invest in bitcoins, don’t overload. If the category fails, they’ll all go together.
Even if Bitcoin makes it through—and I’m betting it will—there are other risks to consider.
The Ukrainian Riots and Italian Border Guards
Political unrest is nothing new to students of the monetary markets—currencies and gold both. Governments go through all sorts of wild swings in their attempts to hang on to power in a changing world. Some gas their own citizens; others just spend tax dollars buying their cronies’ bad investments.
The tie that binds is that they love to tax things. Everything. And they ensure they can reach everything by only allowing those things they already know how to tax… which is where Bitcoin comes in. Right now, Bitcoin is a curiosity, but as the price of the coins grows—these days it’s like $650 per coin, or $8 billion in market cap created from nowhere—that curiosity becomes a potential tax dodge.
Believe it or not, if you made part of those $8 billion in capital gains (i.e., you sold) and live in the US, Canada, the EU, Japan, et al., chances are you owe taxes. No new legislation is required for that. Just because the transactions happen off the radar of the feds doesn’t mean it’s free money. Whether or not they come knocking simply boils down to how desperate the government is this year.
Just ask the Italians who had made their money in gold, off the radar of the tax authorities. One of them tried to drive a truck across the border with a few hundred million euros in gold on board when Italy was cracking down on tax dodges at the height of its troubles. On any normal day, it would have gone unnoticed. But that time, they were looking for tax dodgers.
Of course, in order to catch you making money in most black or gray markets, the feds have to nab you red-handed with cash. But with Bitcoin, they could conceivably trace the profits right back to you.
Did you file FinCEN Form 114 for your account on BTC-E, Mt, Gox, or Bitstamp (all foreign financial accounts)? Whoops. Now you’re facing penalties of up to $10,000 for your accidental nondisclosure. You knew about it and still didn’t file? Darn. Now it’s willful, and the fine goes up to $100,000 and 50% of the assets in that account.
Right now, Bitcoin is a currency that paints a target on the back of all its users via its inherent traceability. Don’t expect it to be long before the feds see that target as juicier and juicier.
If mining, trading, or accepting Bitcoin, be sure you are taking the full legal picture into account. Otherwise, you’re likely to hold on to those bitcoins, but end up with nothing else left for your trouble.
Ponzi, Madoff, the Hunts, and Demand Outstripping Supply
This story has been told a million times, so I won’t belabor it. One man promises outsized returns. ten more believe him. And soon enough, 100 fools are parted from their money.
Well, like it or not, every bull market shares one thing in common with the work of Charles Ponzi: more demand than supply. Ponzi schemes work, again and again, for the very reason that people tend to chase after what they believe other people are already making money on. When that thing they chase after is in ample supply, then that demand is quickly sated, and things collapse quickly. But if the mastermind of a scheme has the wherewithal to limit the supply—as Bernie Madoff famously did by turning down huge investments while waiting for even huger ones—then things can go on much longer. So long as demand sufficiently outstrips supply to the extent that each new buyer is willing to pay a little more than the last one, any pyramid scheme can continue indefinitely.
This same principle applies to non-crooked schemes, as well. Stock in a company, for instance, has a relatively fixed supply. At any given time there are only so many shares outstanding, and even fewer available for purchase as many holders are content to stay just that way. In order for a market to continually rise for a long time, supply has to be kept in check. So, for a stock like Tesla, for instance, which now trades at 6x what it did a year ago, the run up will usually be supported by a commensurate increase in volume, like the one you see here:
Bitcoins share a similar dynamic with Tesla. They stayed low for a long time before beginning a steady ramp upward on rising demand. That ramp has had some spikes and dips along the way, sure, but smoothed out, it looks like a hockey stick. That’s because demand for both steadily outstrips supply.
In the case of Bitcoin, much of that demand comes from a handful of sources.
One is the liquidity driven by day trading in Bitcoin markets. Currency arbitrage in a market not meant to fulfill any business need is an ironic child of the modern world. Today’s commodity and currency exchanges were originally invented to provide price stability and liquidity to producers and consumers. However, in modern years they have been taken over, and the majority of their volume is now dedicated solely to speculation. There’s nothing wrong with some pure speculation in commodities markets, mind you. In fact, it’s generally healthy, as it improves price discovery and liquidity when managed appropriately.
But Bitcoin trading markets are quite the opposite. They were built predominantly for the purposes of speculation, and the overwhelming majority of users have no plans to use the underlying item (not unlike commodity markets). This does not make them bad per se, but let’s just say that speculating that others will continue to speculate is one of the core underpinnings of the market, not industrial value.
If the music stopped, as they say, what would the value of a bitcoin underneath really be? If speculative trading—which many estimates peg at 90% or so of the daily volume in Bitcoin—were to be shut down tomorrow, would bitcoins still have a $650 sticker price? (There’s no way to know how accurate that 90% figure is, by the way, since the exchanges don’t all disclose data, there are dark pools, and inside most exchanges only balances change, not actual bitcoins until withdrawals are requested, as that would be too slow. So the number could be higher.)
The price of Bitcoin, simply put, is the digital embodiment of the “greater fool theory.” It’s driven by all of its predicted uses and by all the demand that has built up, but not by any underlying value. Bitcoins are just spent computer cycles, which are in ample supply and can easily be spent again and again. You can’t burn it like oil, or turn it into flatware or electronics.
In a twisted, Escheresque logic, its value lies only in the demand lopsided liquidity bestowed upon it from its perceived future value.
With speculation accounting for the bulk of the volume in the Bitcoin market, not much comes in or out of the exchanges each day. In fact, given the transaction volume—actual bitcoin transactions between various “wallets” the single most popular recipients of bitcoins today, according to tracking firm blockchain.info—these are not currency exchanges at all.
Nope, and now that the Silk Road, Sheep, and Silk Road II illicit goods marketplaces have been shut down, it’s not that either.
Second in volume to the exchanges is now gambling… as if that’s much different. In particular, one strange gambling destination named for the mythic founder of Bitcoin: SatoshiDICE.com. Its wallets, which have to be known publicly for the site to work, account for 8 of the top 10 bitcoin transfer addresses in the world today. One Bitcoin wiki lists at least 50 sites similar to it.
The “game” at SatoshiDICE is simple. Send it your bitcoin, and it sends you back more if you win. Odds and payouts are posted on the site:
Who runs this game, and are they regulated by any gaming board? Just because they publish the odds, do you believe they’re real? The site contains no physical address, no company name, no owner information—nothing of any value. They mask their domain name for the public. The one clue I could find in a cursory search is that the terms of service refers to Canada.
I wonder what Canadian authorities might think of them operating this game of chance… or countries like the US offering it to its citizens.
While the site shows only a few hundred bitcoins bet, according to blockchain data, it’s sending and receiving hundreds of thousands of bets per day (though most for small fractions of bitcoins). In theory, thanks to the public blockchain, one could deduce if the game pays out as much as it purports to—and the odds are such that the house always wins, so it is quite possible. But because of the pseudonymous nature of the system, there’s no way to be sure the wallets getting paid prize money aren’t in fact owned by the site itself.
The game could appear legitimate to the outsider who inspects it, even while being completely crooked. It could just be the classic shell game from the streets of any old city, repurposed for the digital age.
If your goal is to make money, sending your bitcoins to an unregulated gambling site with no corporate info is the quickest way I can think of to achieve the opposite.
All of this is simply to say that, yes, Bitcoin may continue to go up in value from here. But even if it does, know that what underpins that rise are long-known market dynamics which support overzealous speculation and outright scams—and eventually that runway does run out. Will you be the one stuck holding the bag when it does?
Bury Your Bitcoins in the Yard
Of course, if you made the bet on SatoshiDICE “Below 4” and won 15,990 times your bet—about $10 million at today’s rates if you bet one bitcoin—then your primary concern is probably keeping your money safe.
The most obvious and simple way to achieve that is to transfer your bitcoin wealth back to cash, and put it into an insured institution: an NCUA-insured credit union; an FDIC-insured bank; an SIPC-insured brokerage; etc. While some of these insurance programs operate with relatively thin margins of safety for a really big crash, they do work remarkably well against the everyday mismanagement that leads to literally dozens of bank failures in the US every year (the FDIC took over 25 troubled banks in 2013).
Money, no matter where you keep it, is never 100% safe. But at least avail yourself of insurance programs and the power of the civil courts by keeping it local and under regulated entities, versus in some far-flung Bulgarian currency trading platform where your recourse on failure will be exactly zilch.
If the insurance shakiness truly scares you, then consider gold and silver. Even if a little volatile in the short run, they make for ideal long-term wealth storage.
If you must keep your money in Bitcoin, your best bet is to manage it locally. Bitcoin is meant as a peer-to-peer system, so it should be used that way. Storing large amounts of bitcoins in a central repository only paints a big target on your digital wealth—all the better to rob the bank than stick up the patrons one by one.
Even when stored locally, though, don’t be complacent. Use two-factor authentication or store your private key offline. Assume your computer will be hacked, and act accordingly. It’s the only way to be safe in a world where transfer is permanent and nonreversible, where security flaws are everywhere, and where no one will insure you against the risk you are taking. Bitcoin is just like cash.
The argument that many proponents fall back on when they talk about the security of Bitcoin is that the underlying algorithm has stood up to endless attacks over the last few years, and that it’s only poorly implemented systems and moronic users who’ve been fleeced. This is sort of like the argument that someone who was carrying a lot of cash on the subway late at night deserved to be robbed.
At the end of the day, all computer systems are vulnerable to attack; and bitcoin stashes are a tempting target. Even if Bitcoin holds up against this onslaught, will the small startup trusted with your coins do so, too? At best, the answer would be “maybe.” So if you want to play this game, just be very careful.
- Wed, 05 Mar 2014 06:22:00 +0000: The Perfect Investment for When Everything Is Expensive - Casey Research - Research & Analysis
Today we get to hear from a seasoned hedge fund manager with over a decade of experience in financial planning and investment consulting. The hedge fund he runs is anything but typical—it doesn’t invest in stocks, bonds, or even commodities.
Mark Whitmore is CEO and founder of Whitmore Capital Management, a currency hedge fund. His strategy is simple yet effective: identify currencies that are out of whack with their fair values, then bet on them to return to fair value, which they usually do.
Why currencies? In the first place, the currency markets are the largest and most liquid on earth. Second, over the long term, currencies have little correlation to the performance of stocks or bonds.
That second point is critical, and here’s why: You used to be able to hide from weakness in US stocks by investing abroad. If you expected the S&P 500 to struggle, you could put some money in the Nikkei to diversify.
That doesn’t work so well anymore. Since the world’s central banks revved up the printing presses in unison after the 2008 financial crisis, correlation between developed markets has soared. When a crisis hits, pretty much all stocks fall, regardless of what market they trade on. You can “diversify” into as many stocks in as many different locales in as many different industries as your brokerage account can handle. But you still won’t be truly diversified, because you’ll still own just one asset class: stocks.
(True diversification, by the way, is one thing that will be talked about thoroughly at the Strategic Investment Conference 2014 from May 13-16 in San Diego.
“How do you identify and optimize opportunity in a world that holds unprecedented potential but also significant risks?” is the core question that the SIC 2014 will strive to answer. And chances are that you’ll hear some profound answers, since the conference is brimming with big names like Kyle Bass, Niall Ferguson, Patrick Cox, and Lacy Hunt, to mention just a few.
Back to our friend Mark Whitmore. As you’ll read below, currency investing is one of the solutions to the dilemma of how to properly diversify. Read on for Mark’s fascinating analysis of stocks’ and bonds’ dismal prospects, followed by his specific advice on which currencies to invest in now to both truly diversify your portfolio and generate uncorrelated returns.
Managing Editor of The Casey Report
How to Invest When Both Stocks and Bonds Are Overpriced
By Mark Whitmore, Whitmore Capital Management
We take certain realities for granted—like the reality that nearer events are easier to predict than ones that are further ahead.
For instance, I have been a Seattle Seahawks football fan for 37 years now, as evidenced by my ever-burgeoning amounts of gray hair. Needless to say, their Super Bowl victory was a lifetime sports highlight for me. They are a young team, and their best players are generally signed to cheap contracts for another couple of years. If you were to ask me what the odds are that they will make the play-offs next year, I would say roughly 75-80%.
However, change the time frame, and my response is quite different. If you were to ask me about those same odds for 10 seasons from now, I couldn’t say much above 40%—or just slightly above the 38% odds that any random team makes the NFL play-offs in a given year. There are simply too many unforeseeable variables—like the quality of the team’s future drafts, coaching changes, and management upheaval—that make it impossible to accurately predict the fate of the 2024 Seahawks.
This is consistent with our everyday experiences. Ask someone how likely it is that they’ll be living in the same house six months from now, and he or she will likely respond with a great deal of certainty. Extend that prediction out seven years, and the respondent will be markedly less sure. New jobs, new relationships, family issues, or a variety of other unforeseeable future events could induce someone to move.
Somewhat paradoxically, asset forecasting does not follow this reality. In fact, it’s the exact opposite. Investors who appreciate that fact can better avoid assets that generate subpar returns at best and inflict losses at worst. They’re also more likely to consider investing in currencies as an alternative asset class.
2014—Murky Waters for Stocks and Bonds?
I love watching interviews with Jim Rogers. Almost inevitably, the interviewer will pose a question like, “So Jim, where do you see the price of gold at the end of the year?” His response is almost always the same, some variant of: “how the heck should I know? All I know is that in light of current global financial circumstances, gold is cheap. I continue to hold it, and if it drops in price, I buy more.”
Rogers, with his vast investing acumen and experience, knows that animal spirits are the dominant intervening variable in the financial markets in the short term. Fundamentally cheap assets can get even cheaper as fearful investors run for the hills, while fundamentally expensive assets can become yet dearer in price as greedy investors pile into them. However, time is the great leveler, humbling the mighty (witness tech stocks in 2000, US real estate and stocks in 2008, and the yen in 2012), while elevating the exiguous (think precious metals fin de siècle, the Canadian dollar in 2002, and commodities in early 2009).
In light of this insight, what are the prospects for the biggest traditional asset pools in North America: US stocks and bonds?
Turning first to stocks, there are those who continue to pound the table for US equities, arguing that they represent good value, even as the S&P 500 reached brand-new record highs last week. Bulls point to the fact that valuations as measured by P/E ratios are much lower than at previous market peaks in 2000 and 2007. Abby Joseph Cohen and her ilk also cite the fact that long-term returns in the markets are higher than average when P/E ratios are low, which purportedly bodes well for US stocks in the future.
Their point that valuations are not as lofty today as they were during the 2000 peak is a good and valid one. I also agree that low starting P/E ratios have led to higher-than-average long-term returns. But I am almost completely agnostic as to the near-term direction of the market. We have all been witness to frothy bull markets ascending to highs that few of us believed possible. It is entirely possible that the S&P 500 could end the year higher than it stands today, particularly given a Fed with less self-restraint than my three-year-old at a chocolate factory.
Yet, an abundance of contrary indicators are flashing danger signs for the months ahead. Margin debt recently reached levels only seen in 2000 and 2007. Insiders have been selling stocks at a torrid pace. Investor optimism has been off the charts, by some measures reaching levels not seen in more than twenty-five years.
It is worth noting that neither Wall Street nor economists as a whole have an awe-inspiring track record of predictions, particularly of market peaks and troughs—which highlights the fact that focusing on the short term, particularly anything less than a year, may be a fool’s errand.
The bond market offers short-term prognosticators similar challenges.
On the one hand, you have interest rates hovering at exceedingly low historical levels. At 1.5%, five-year Treasury notes are yielding less than the CPI in 2013. Yet the CPI itself has been adjusted so much over the years, one can almost fairly say that it avoids measuring anything that actually goes up in price.
According to ShadowStats, were the CPI measured the way it was in 1990, inflation would be running at roughly 5% year-over-year, while if it were measured the way it was in 1980, the rate would be almost 9%. With ten-year Treasury bonds yielding a puny 2.75%, it is not hard to envision a situation in which interest rates rise (and bond prices thus drop) in the near future. The unprecedented money printing from central banks around the world makes that an even more likely result.
On the other hand, it is evident we are still dealing with the consequences of an unwinding credit bubble, an extremely deflationary phenomenon. The US is seeing its weakest post-recession recovery (excluding the financial sector, thanks to Bernanke allowing Wall Street virtually unfettered access to what is essentially free capital) in its history. Europe is barely growing, with systemic debt problems in Portugal, Ireland, Italy, Greece, and Spain (the PIIGS) threatening the economic solvency of the entire Eurozone. China is on the edge of a financial precipice, with its private sector borrowing as a percentage of GDP exceeding that of the US prior to our financial meltdown.
Should any one, much less two, of these legs of the global economic stool give way in the coming months, one would expect interest rates to plunge (and therefore bond prices to rise) on deflationary concerns and a flight to safety.
So where do stocks and bonds end the year? Your guess is as good as mine, and probably a lot better than the folks residing on the Upper East Side of Manhattan who are getting paid seven- and eight-figure bonuses!
A Decade Can Make for a Clearer Crystal Ball
Back when I first started investing around the turn of the millennium, I followed several excellent investing minds (including Doug Casey) who were extremely optimistic about the price of gold and other precious metals. Their case was compelling. Having endured a grinding twenty-year bear market, gold, priced at less $300/oz, was becoming uneconomical to mine. Something had to give. Either all gold miners were going to shut down and the amount of gold in the world would remain fixed, or prices had to rise. We all know the story from there.
But some may have a hazy memory about the timing of gold’s resurgence. From just below $300/oz at the start of 2000, gold actually declined more than 10% over the next 15 months before bottoming out just above $255/oz.
Further, many of those same great investment minds that were recommending gold had been warning about the hazards of the tech bubble as early as 1997. Yet in 1998, the NASDAQ rose an astonishing 38%. Surely this madness had to end there. No major equity market in the previous fifty years had seen such extremes in valuation. Yet to the shock and dismay of many (including yours truly), 1999 brought what had theretofore been the biggest blow-off stage of a bubble in modern financial history as the NASDAQ soared almost 85%.
The few prescient forecasters, struggling to be heard among the horde of lemmings chanting “This time it’s different,” looked absolutely foolish for a few years. As John Hussman recently noted, “The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak.”
So what is the point? You could have made the “investment recommendation of the decade” in the late ‘90s by going long gold and being short (or at least avoiding) US tech stocks, yet still have looked like a bloody fool for not just months, but for years. Nevertheless, had a disciplined, patient, and wise investor simply used the dips in the price of gold to dollar-cost average into his positions, he would have stood to profit handsomely over the next ten years. Similarly, if he’d had the intestinal fortitude to ignore his colleagues, neighbors, and family members boast about their gains in XYZ.com without succumbing to the siren song, his portfolio would have avoided the shellacking that most endured.
Truly, investing is perhaps the only area in which we can see the distant future much more clearly than tomorrow.
With that perspective, what can be said about the longer-term prospects for US stocks and bonds, and what might that mean for alternative assets like foreign currencies?
US Stocks and Bonds: The Bell Tolls for Thee?
First, looking at US stocks, let me address the issue of their supposed reasonable valuations. Returning to perma-bull Abby Joseph Cohen (apologies for picking such an easy target), she loves to prattle on that at around 16 times projected 2014 earnings, US stocks are attractively priced. In this year’s Barron’s Roundtable, she noted that with inflation under control, P/E expansion to near 18 is possible, which would take the S&P 500’s fair value up another 12% to nearly 2,100.
What Ms. Cohen fails to recognize is that the denominator in the P/E ratio is at a record—and unsustainable—level. If you substitute a more realistic number for earnings going forward, the P/E ratio rises considerably. Presently, corporate profits after tax (CPATAX) as a percentage of GDP are just over 10%. The previous post-WWII high in CPATAX? Just 8.5%, which interestingly occurred in 2007, right before the last bubble burst. The historic norm for CPATAX is only 6%.
This is a huge issue, as Jeremy Grantham of GMO notes:
“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.”
If you look at a chart of subsequent four-year annual profit growth following peaks in CPATAX, you’ll find that in every instance, it declined between 10% and 20%. If you adjust expected corporate earnings downward to reflect this likely reversion to the mean, the “forward” P/E will be 25 to 30. Which would be a very expensive market indeed, and would suggest subpar returns for the S&P 500 for the next many years, through at least 2020.
This more realistic P/E range is consistent with the Shiller P/E ratio, which is widely regarded as one of best, if not the very best, predictor of ten-year equity market returns. It smoothes valuations by calculating the P/E ratio using average earnings over the last ten years.
It is thus both noteworthy and alarming that while the historical median Shiller P/E ratio is less than 16, the current ratio is over 25. The only time prior to the late ‘90s that it was ever higher than 25 was on the eve of Black Tuesday in October 1929. That doesn’t bode well for US equity investors. Indeed, should the Shiller P/E ratio revert to its historic average in the next ten years, annualized stock returns will be less than 1%!
As for bonds: It’s a wonder that any pension fund manager in the US can get a good night’s sleep. In today’s era of explosive worldwide monetary expansion, holding a ten-year T-bond to maturity looks like a guaranteed way to lose purchasing power. Literally, the only situation in which such an instrument would be attractive for a long-term investor is if we have a ten-year global depression. Such a possibility cannot be ruled out, but it’s far more likely that central bankers will meet any severe global economic weakness by printing more money than ever before; QE ad infinitum, if you will.
Perhaps ominously, the last time US ten-year bonds yielded so little was during the Eisenhower administration, with rates rising steadily through the ‘60s (guns and butter) and ‘70s (stagflation), inflicting massive losses on longer-duration bonds. Paul Volcker managed to stem the hemorrhaging by raising rates decisively and rapidly.
Unfortunately, if an award were given for a central banker least likely to emulate Volcker, Janet Yellen, a.k.a. The Dove’s Dove, would win. And while the bond vigilantes have apparently been taking an indefinite siesta since the Greenspan era, I would not be surprised if they awake from their slumber on Yellen’s watch, leading to a bloodbath for bond prices and a backup in interest rates.
The behavior of “smart money” is another sign of bad tidings for US equity and bond investors. Over the last eighteen years, the composition of Harvard’s endowment portfolio has changed dramatically. Back in 1995, before the tech bubble, Harvard had fully 53% of its assets in US stocks and bonds. Today, only 15% of its assets are in domestic equities and bonds, a reduction of more than 71%.
Not surprisingly, Harvard is not trying to time the markets. According to Jane Mendillo, CEO of Harvard Management, “We’re looking at investments over a five- to ten-year time frame.” Apparently, Harvard is also not impressed with the longer-term prospects of US stocks and bonds. In the last ten years, Harvard Management has outperformed the S&P 500 by 30%, obtaining annualized returns of nearly 10%.
Why would a currency manager spend the bulk of an essay discussing non-currency assets? Because if domestic equity and bond markets are fairly valued at best and significantly overvalued at worst, investors may need to look elsewhere for hope of obtaining decent returns.
Indeed, many non-traditional assets have superior risk-reward profiles to equities and fixed-income instruments. Harvard Management has increased its exposure to real and alternative assets by more than 200% in the last twenty years, and they now comprise 40% of Harvard’s total portfolio.
As with any asset, I encourage those interested in currency investing to keep a longer-term horizon. Mendillo’s five- to ten-year time frame is a good one. The good news is that in a world where most central bankers are acting like frat boys spiking the punch at a toga party (note to self—expunge image of Mario Draghi wearing nothing but a bed sheet), it’s not too hard to separate sound currencies from the dross.
One of the more interesting currency pairs is the Norwegian krone (NOK) versus the Israeli shekel (ILS). Both are generally “risk-on” currencies, in that they tend to appreciate when global risk appetite is moderate to high. They have historically been moderately correlated. This is helpful in mitigating macroeconomic risk in one’s currency portfolio, since no matter which direction the global economy may break, they tend to appreciate or depreciate against the dollar in the same direction.
Norway is a paragon of fiscal and monetary responsibility in a world in which such old-fashioned macroeconomic virtues have been all but forgotten. The country is running a fiscal surplus of 13% of its entire GDP. At that rate, Norway will be able to pay off its already minuscule national debt in a few years. Norway’s central bank has also been circumspect regarding money printing. M3 money supply is up a scant 3.6%, year-over-year. Contrast that with the typically judicious Swiss, whose M3 money supply escalated at more than twice that rate last year.
Norway’s current account surplus is nearly as impressive as its fiscal surplus, also approaching 13% of GDP. The only traded currency backed by a larger current account balance is the Singapore dollar. The recent run-up in oil prices should only increase Norway’s fiscal and current account surpluses, strengthening the already solid Norwegian economy. Further oil price increases will make the krone even more attractive. Of course, that means lower oil is a risk factor for Norway, and if crude prices collapse, it would be a large negative for the NOK.
My pick of the shekel as the short currency in the pairing is based upon valuation and the heightened level of both geopolitical and terrorist risk confronting Israel. The ILS has appreciated against not just the NOK, but against the USD and most other currencies in the last eighteen months. Talking to people who live in or frequently visit Israel, most find prices there quite high, implying that the shekel is overvalued on a purchase power parity basis.
The NOK/ILS has declined by more than 15% since September 2012, and it’s trading 13% below its average over the last ten years. And while Norway faces a fairly significant risk of oil prices collapsing, I think that Israel faces much greater overall risks given the prospects for conflagration in the Middle East or a major terrorist event.
Speaking of risk, some may recall my recommendation from November concerning the Russian ruble (RUB) and the Turkish lira (TRY). I certainly could not have picked two currencies subject to more event risk and volatility over the last few months. Even as emerging-market currencies, their price action has been wild. In the two months after my first essay, the RUB/TRY appreciated almost 11% as investors worried that Turkey’s acute current account imbalance would cause a currency collapse.
Then Turkey’s central bank raised its overnight lending rate by more than 400 basis points. The TRY soared as investors took heart in the Turkish central bank’s assertion that it would not need to intervene in the markets to support the lira. Simultaneously, the ruble has plummeted, as Putin’s shenanigans in the Ukraine have made investors very nervous. Remarkably, after all these gyrations, the RUB/TRY sits within 1% of the level it was at when I wrote the first essay back in November.
So the question is, what now? Clearly, the risks for both currencies have increased. I believe that the Turkish central bank decided not to support the lira because its foreign reserves were already so paltry that it knew it couldn’t do much anyway, and it didn’t want to fire what little ammunition it had for naught. Turkey’s overall economic fragility remains extremely high, not to mention the fact that its raising interest rates 400+ basis points will cause a serious headwind to future economic growth.
So long as Putin does not directly intervene militarily in the Ukraine (which, granted, is anything but a certainty), I suspect the long-term impact upon the RUB should be negligible. Much of the concern over Putin’s authoritarian proclivities appears to be priced into the ruble, which is down approximately 25% against the dollar in the last several years. Overall, while far from a widows and orphans investment, I would still rather be long the RUB and short the TRY.
One last thing: For those of you interested in my thoughts on what gains to expect in the NOK/ILS and RUB/TRY this year, let me defer to the wisdom of Jim Rogers and say, “How the heck should I know?!?” Suffice it to say that I like each pair’s prospects for the next five to ten years.
After six years of practicing law in the Seattle area, Mark left in 2002 to pursue investing full-time for the next nine years, focusing primarily upon currency markets. In June 2012, Mark launched Whitmore Capital, a hedge fund that solely invests in currencies. In its first twenty-one months, Whitmore Capital is up over 50%, net of fees, while the Barkley’s Currency Traders Index (BCTI) is up a total of 2.7% since January 2012. Investors should be reminded that past performance is not necessarily indicative of future results. Whitmore Capital is open to accredited investors both domestically and abroad. Interested accredited investors can email Mark at firstname.lastname@example.org, call (206) 227-0644, or visit whitmorecapitalmanagement.com.
This article has been prepared by the author, and all views expressed are those of the author and not Casey Research, LLC. Casey Research, LLC does not endorse and has not vetted the author’s investment strategy or experience and makes no recommendation regarding any investment promoted by the author. You are solely responsible to review and evaluate any investment promoted by the author and its suitability for your own individual circumstances.
- Tue, 04 Mar 2014 06:23:00 +0000: A Quarter of Europe’s Natural-Gas Supply Is About to Disappear - Casey Research - Research & Analysis
You may think this title is an exaggeration—not so. It’s completely true, and personally, I plan on making a fortune from Europe’s predicament. So can you, by the way.
As I write this missive, I just wrapped up the first day of the PDAC, Canada’s biggest resource convention held the first week of March in Toronto. Among the resource experts here, the big buzz on everyone’s lips is Russia—which just tells me that I am spot on about the European Energy Renaissance. I guess my predictions have made the rounds in resource circles, because I noticed that all day industry people have been swarming around me, asking questions and wanting to know my thoughts about what will happen next. Since many of them seem to read the Daily Dispatch, I’ll conveniently answer here.
One thing I do know for sure is that the EU-27 (the 27 countries that make up the member countries in the European Union) does not want to see Russia shut down the pipelines in Ukraine. 40% of the total natural-gas imports to the EU comes from Russia, and half of that imported gas flows through Ukraine’s pipelines.
In other words, the EU is addicted to Russian natural gas. How addicted? Below are the four largest economies (by GDP) in the EU-27 and how much of their natural-gas imports is from Russia:
1. Germany—36% from Russia
2. United Kingdom—25% from Russia
3. France—15% from Russia
4. Italy—27% from Russia
France imports less natural gas than the other three because a majority of France’s electricity is generated by nuclear reactors. Germany is Russia’s largest customer in Europe for natural gas, and that percentage above will continue to rise as the country turns its back on nuclear energy.
Germany also has the most to lose if Putin decides to play “musical pipelines”—turning off the faucet to teach the UN, United States, and the European Union that Russia will not be threatened or forced to act against its own interests. Higher natural-gas prices are a certainty all across Europe unless a resolution to the Ukraine crisis appears very soon.
Because Europe depends on Russia for so much of its natural gas, it’s quite clear why the EU countries pay a more than 100% premium to US-priced natural gas.
Those energy companies that can create an alternative to the Russian oil and gas supplies for Germany and the UK will make windfall profits—and I believe investors who pick the right companies run by the right management teams will reap spectacular rewards exceeding those of the early Bakken.
President Obama can threaten Putin with sanctions, but the Russians won’t be bullied any longer by the US and United Nations, and it’s not America but the EU that faces a painful shortage if Russia does decide to flex its muscle and shut down the flow of natural gas. Putin will do what’s best for Russia, and higher prices for oil, gas, and uranium are great for Russia.
We’re in the very early stages of the European Energy Renaissance, which is nothing more than bringing modern North American technology, innovation, and equipment to the oil and gas basins in Europe.
As a fellow investor, let me emphasize to you that the time to act is now. This is not an investment opportunity that may or may not happen. This is happening—now. We’re in the early stages of one of the greatest opportunities of all time for investors.
How Rich Will the Next Bakken Make You?
One of my favorite plays in the “Next Bakken” is a small-cap oil and gas explorer and producer that is currently drill-testing wells and owns over 2 million acres in Central Europe. The field it’s sitting on has produced almost 100 million barrels in the past, so the question is not whether the oil is there, but how much of it can be extracted economically—with cutting-edge American technology.
We’re awaiting the initial well results of our “Next Bakken” play by the time we’ll publish the next issue of the Casey Energy Report—and I’m convinced that this is the greatest speculation since the newsletter’s inception. It’s not a one-hole company, and it will take many years to fully penetrate the basin. The area has been de-risked because we know the oil is there; the past-producing area simply has never seen modern equipment and drilling methods.
Once the flow rate results for the initial well—which is just one well of dozens yet to come—are made public, we’ll be ready to feed those results into our financial models, and within 24 hours of the announcement, Casey Energy Report readers will get a full analysis.
If the initial production numbers are at or above 500 barrels of oil per day (bopd), we know that we may be on to something as big as (or bigger than) the original Bakken… and it’s anyone’s guess how far the share price will rise at that news.
The current well in the “Next Bakken” is the longest horizontal oil well ever drilled in this European country, and we think this is just the beginning of the probably hottest energy play of 2014-2015. It’s really that great.
This is sort of a déjà vu experience for me. People laughed at me when I said the same thing about Lukas Lundin’s company, Africa Oil, in 2010. By 2013, Africa Oil had become the hottest exploration play in the world, finding world-class, elephant-sized oil deposits in the East African Rift in Kenya.
I believe our “Next Bakken” pick will give Africa Oil a run for its money. My friend Lukas Lundin made his billions of dollars by discovering monster oil plays and holding on for the ride—and I’ve learned a lot from him.
It’s not too late to get into this amazing oil company, but you want to hurry, before the good news goes public and drives up the share price. Is there any risk? Of course. It’s still a speculation, so please don’t bet the farm on it. While positive flow rate results are not a given, however, I’ve rarely been more convinced that we may be looking at something very, very big here.
Fortune Favors the Informed
The best way to dip your toes in the water is to give the Casey Energy Report a risk-free try today. Test my newsletter for the next 3 months, and if you don’t like it or don’t make any money, just cancel within that time for a full and courteous refund. Upon signing up, you’ll receive a subscribers-only special report with in-depth analysis on the “Next Bakken” and the small-cap company ready to profit from its riches. You’ll also receive a timely email alert as soon as the flow rate results are out.
So if you want to get behind the real winner from the European Energy Renaissance and make some serious money from the inevitable bull market in oil, click here to get started now.
Additional Links and Reads
Putin Leaves the West with Few Options (Bloomberg)
Russia clearly has the upper hand in the European energy matrix; this is a great Bloomberg article about how much control it really has. We find it exciting that the mainstream financial media are now just starting to talk about what we’ve been writing about for years. This is good news for us—the investors looking to profit from the inevitable energy bottleneck Europe faces. It’s just a matter of time before the smart money recognizes the opportunity we have positioned ourselves for.
Marin took a lot of heat for stating earlier this year that Taseko’s Prosperity copper mine would not get permitted by Canada’s federal government. The project was approved by the provincial government, and usually, that should be enough. But Marin’s reasoning got to the bottom of the situation, and he called it correctly. This past week, the project was denied its permit.