Friday, December 21, 2012

The Real Problem Ahead

The picture below describes the situation better than any words I can provide. The problem will be pushed back with a "compromise" on the cliff. Then the debt ceiling will be raised. No real solutions will be reached. No tough decisions will be made. As Kyle Bass so eloquently described in his most recent speech posted yesterday, Japan and the US live in a world today where the over half the debt is financed by interest rates at 0%. When that changes, and it will change, the world will be completely different from what you know and see today.

Thursday, December 20, 2012

Deja Vu - Gold & Silver Plunge Into The Year End

I am not a financial advisor. Please speak with one before making any investment decisions.

As precious metal investors once again prepare to dump their assets and throw themselves from very tall buildings, I can only hope that they once again come here first before deciding to so.

Can we look back in history and find a time when precious metals went into free fall and everyone went into complete panic heading into the end of the year? Yes, this same exact thing happened exactly one year ago.

Rather than essentially re-printing the entire thought process of buying low and selling high I would just re-read last year's article written on December 29, 2011: Precious Metals Fear & Panic. Good chart from Jesse's Cafe Americain showing the silver take down in December 2011.

I bought silver today for the first time since early summer as it moved back under $30. If it goes lower, I will buy more.

The Sprott Physical Silver Trust (PSLV) now has a NAV at just 1%. This means that the price you pay for all the physical silver the fund holds is now just 1% over the total value of that silver based on the share price of the fund today. You would be hard pressed to find a better premium buying price for physical silver anywhere.

I was fortunate to put the sell order on the site here (and for myself personally) when the NAV on the PSLV fund reached close to 32%. I recommended at the time that investors look at the Central Fund of Canada (CEF) as another option to buy metals when the NAV was less than 1% (the NAV for the CEF is now over 4%). For the discussion see Purchasing Precious Metals: NAV Considerations

For those interested in purchasing physical silver, the NAV on the Sprott Physical Silver Trust plus the recent price plunge makes it a doubly attractive holiday gift for your portfolio.

Rick Santelli & Peter Schiff Discuss The Fed's Exit Strategy

In a normal business cycle the Fed lowers interest rates when the economy slows to stimulate spending. When the economy begins to pick up speed they raise interest rates to slow down the over heated growth. It's been so long since we lived in a world like that people forget that it even existed.

In today's world there is no longer even discussion of an exit strategy for the Fed's recent actions, never mind actually raising interest rates. An exit strategy would be the Fed shrinking the size of its enormous balance sheet. The balance sheet grows when the Fed prints money to purchases assets (mostly mortgage and treasury bonds) and those assets then move onto the balance sheet. In exchange, the sellers of those assets (banks) receive fresh cash in return.

The plan is to "someday" reverse this process by selling all these mortgages and treasury bonds back into the economy in exchange for cash (to remove all the printed cash from the system). Peter Schiff asks the question that no one dares to even think about:

"Who would be the buyer?"

If the Fed even slowed down their purchases, never mind stopping and then reversing course by selling into the market, these artificially low bubble interest rates would launch higher and all the financial models that have priced them in to eternity would suddenly no longer be relevant. This would destroy stock, bond, real estate, and most cash portfolios.

For a longer discussion on this topic see Why Most Investors Will Lose In Every Asset Allocation.

More with Schiff and Santelli:

Kyle Bass AmeriCatalyst Presentation

The YouTube clip has its embedding disabled so I cannot put the full video directly on this page. The following is an 8 minute portion of the segment focused on Japan:

You can view the full presentation by following the link here:

Kyle Bass AmericCatalyst Presentation

For those unfamiliar with Mr. Bass, you can get a quick refresher below with his most recent newsletter and two most recent interviews:

Kyle Bass: The Global Economy, Japan, & Why He's Buying Mortgages

Kyle Bass Interview: Darden School Of Business

Sunday, December 16, 2012

Stream Of Consciousness: Stock Euphoria, Fiscal Cliff, Gold, & Japan

No piece of financial news on the week could possible take center stage over the tragedy that happened in the Newton Elementary school shooting. Events like that always make you step back and appreciate what is way more important than finance in life; health and family.

That said, let's take a quick run through some of the best charts and data points on the week in no particular order.

The first chart shows the percentage of those now bullish on stocks surging up to 77%. NBC News recently reported that "even the bears are bullish for 2013, a year in which every Wall Street expert believes the market will post a positive year." The average gain for 2013 called for by a group of 15 brokerages polled was 14%. Readers here know that the more bullish people become on an asset class the more I am ready to run for the exits or go short. When everyone is on one side of the boat, it is time for (at a least a temporary) reversal.

Next up is a longer term perspective showing the history of world GDP. It is lost on most of the current market participants, but today's "developing" nations such as China (red) and India (pink) dominated the world economy for centuries in the past. They are not an up and coming force, they are just re-taking what was previously theirs.

The following shows median household income in the 21st century. While nominal growth has risen (red), the real rate of income growth in comparison to the rise in the cost of living (Consumer Price Index - CPI) has flat lined and recently plunged, now down 9% in the new century. I will provide an entire article devoted to this chart's impact on the price of real estate in the future.

The following shows the real estate price decline (blue) vs. stock price decline (red) in America since the depression began in late 2007. The impact of the real estate decline is felt far more on the average American since close to 70% of the nation was a homeowner at the recent peak. Far more capital was bet on real estate (since most homes were bought with debt) vs. stocks. Therefore a 30% decline in real estate, assuming an average home price of $250,000 at the peak, cost a family $75,000 in paper wealth. Assuming they owned $30,000 in stocks saved through their 401k, the 10% decline from the peak has only cost them $3,000 in paper wealth. This illustrates the urgency of both the Federal Reserve and the government in blowing real estate prices back up to artificial bubble levels.

Another great look at the taxing vs. spending problem and which one is more important. The left chart shows the current unfunded spending liabilities on the left and the proposed tax hike "solution" to these problems on the right. Without using a calculator and eyeballing the situation, I hope you can quickly determine how much the increase in taxes will help. Give this to a 6th grader and see how quickly they can solve the problem. (Hint: reduce the size of the bar on the left).

If you need some help with the graph, I can provide the cliff notes version:

Far more important than the ridiculous fiscal cliff discussions is the coming debt ceiling hike. Not because any meaningful spending cuts will ever be implemented, but because the size of the next debt ceiling raise will help us determine the near term outlook for the price of gold. The following shows the two tracking each other perfectly all the way up:

Earlier this weekend I discussed how the new Evans Rule will impact future monetary policy in How Those Giving Up Looking For Work Will Impact The Gold Price. A headwind to the recent decline in the unemployment rate may come from small business hiring. The NFIB small business optimism index experienced a cliff diving plunge in the most recent survey.

In addition, small business earnings have fallen through almost all of 2012. The Obamacare tax changes, which I have discussed in the past and will focus on more moving forward, will only add another reason not to hire additional workers or cut the hours of the ones already in place.

As promised, I want to keep you abreast of the steady decline of Japan as they lurch toward their coming debt crisis, the real black swan (not the fiscal cliff) flying down the train tracks toward the global economy. Japan's GDP growth was revised down to -.1% in the second quarter and their third quarter GDP saw a decline of -.9%. These two consecutive negative quarters officially puts Japan back in recession. Buckle up, because when this baby blows it is going to make Greece look like a walk in the park. For much more on Japan see Kyle Bass: The Global Economy, Japan, & Why He's Buying Mortgages.

h/t Sober Look, JS Mineset, Dr Housing Bubble, Economist, Zero Hedge

Bill Ackman: Everything You Need To Know On Finance In 40 Minutes

I recently posted this video segment on the "Today's Video & Media" tab at the top of the page, but I thought it was a piece that deserves a space down here on the main page.

Bill Ackman has become one of my favorite people to listen to over the past few years. He has had both monumental successes (the acquisition of General Growth) and monumental failures (purchasing a major stake in Target).

He has one of the best financial minds in the industry and the ability to look forward and explain his vision of why an event should/will occur with clarity. He is also a real estate expert, something that always has a special place in my heart.

I am not an expert on determining value in stock through a company balance sheet, but it is something I study on occasion  My personal expertise, due to many years of study, is in the ability to review and analyze the balance sheet of a commercial real estate property.

Therefore, when purchasing stocks I rely on the expertise of someone who reviews balance sheets for a living in the specific sector I want to make a purchase. For example, if I want to buy shares of a gold mine I seek out the best people in the world at reviewing a gold miner's balance sheets to find value. I then pay money for their expertise before making a purchase. It is not worth my time to visit with the management of a company and learn to study their balance sheets when the cost to obtain that information from a professional who does it full time can be obtained at a reasonable price. For an example, see John Doody's Gold Stock Analyst newsletter.

That being said, having a baseline understanding of finance will help you no matter what you do for a living. The following is an excellent primer and can open the doors to additional study for subjects you'd like more information on.

Everything You Need To Know About Finance In 40 Minutes: