Saturday, February 23, 2013

Bitter Pill: Why Medical Bills Are Killing US

Excellent interview with Steven Brill who recently wrote an extensive article in TIME magazine titled Bitter Pill: Why Medical Bills Are Killing Us. It shows how the ridiculous health care costs actually come about and who the entities are that benefit the most. The biggest reason for the high costs: the inability for competition in the market. Look for more government intervention to only compound this nightmare in the years ahead.

The Daily Show Interview: Steven Brill Part 1

The Daily Show Interview: Steven Brill Part 2

Gold Mining Shares Hated & Forgotten - Value Opportunity?

I like to buy assets when they are little discussed, forgotten, or best of all; hated. I spent very little time here focused on purchasing precious metals between late 2009 through late 2011. I talked a lot about holding current positions and the long term potential of the asset class. The reason why is because sentiment toward precious metals was rising, the metals were being discussed in the media, and they were generally liked. It was like the small town band that only you listened to all the sudden being on the radio.

An incredible rise in silver from late 2010 to the spring of 2011 gave the metal a 170% rocket launch in just a few short months. Silver then peaked and subsequently collapsed in price back to to the low $30 range where it has been moving sideways since. This move appeared cataclysmic to new participants in the market, but it was just standard procedure in terms of percentage moves that I have come to get used to since buying my first ounce at $7 in late 2005.

As a quick refresher on some of the violent movements since late 2005, prices ran up to $15 before collapsing back down to $9. After trending sideways for a few years prices rose up to $22 before collapsing back down to $8. Then they trended sideways for a few years before the late 2010 rocket launch.

The "trending sideways" period is the time I like to purchase, specifically when there are large downdrafts in the price and sentiment levels reach rock bottom. This occurred in late 2011, late May/early June in 2012, and it is occurring again right now. After sitting out the market close to two years, I have been very active over the past 13 months.

I find the same value dynamic and extreme pessimism, only even more so, in the gold mining sector today. Gold and gold mining shares, since the bull market began in 2000, have taken turns in terms of out-performance  Gold will out-perform the mining sector for a period of time, and then mining shares will "catch up" during which the value gap has been filled.

This process is now in its thirteenth year running, which is why I find it fascinating that the best mining analysts  today say that the mining sector is more undervalued relative to the price of physical gold than at any point in history - including the bear market bottom for gold in 1999 when the thought of owning a mining stock was truly laughable.

The following chart shows this back and forth process providing the ratio of a gold mining index relative to the price of gold. You can see the extreme undervaluation of the gold mining shares relative to gold heading into the year 2000. Then during the early 2000's they "caught up" and significantly outperformed. In late 2004 through early 2005 they lagged, then "caught up" again to fill the value gap. They fell far more during the financial crisis sell off creating a value opportunity during the peak of panic. Coming out of the crisis they outperformed gold significantly. The point here is to show you the process of taking turns as one moves out of favor while the other moves ahead, then vice-versa.

The next chart picks up where this one leaves off and takes you from September 2011 through present day. While gold has tracked sideways, the gold mining sector continues to sell off, bringing the record divergence in value.

The mining sector has already priced in a complete collapse in the price of gold. Should a price collapse come maybe they will move lower. But what if the gold price were to just stabilize around $1600 and not move up from here? The value gap would eventually be filled. Most readers know that I believe that while gold certainly has the potential to move far lower in the short term (why I always recommend an ample supply of liquid cash), I believe it will be far higher than $1600 before the conclusion of the current bull market.

The following letter comes from John Goltermann at Obermeyer Asset Management and provides his thoughts on this topic: the current gold vs. gold mining share value gap. Click on the bottom right box to bring it full screen.

h/t Zero Hedge

Friday, February 22, 2013

Stanley Druckenmiller Discusses The US Debt Disaster

When a billionaire speaks I usually take the time to listen. Unless they inherited their money, they are most likely both very intelligent and have a tremendous amount of experience in business and finance.

One of those people is Stanley Druckenmiller, whose hedge fund ran an average return of 30% annually until he recently decided to shut it down.

He speaks with CNBC regarding the ridiculous nature of the United States debt discussions as leaders spend endless hours debating an $85 billion sequester while the entire $16.6 trillion and growing Titanic moves rapidly toward the ice burg (see clock to the right for a current update).

He notes that if interest rates were to just normalize then it would add $500 billion annually to the U.S. deficit. If that were to happen the markets would realize the U.S. has a credit problem, which is exactly what is taking place in Europe, and rates would then spiral out of control.

He notes that everything was okay for Greece up until mid February 2010 and then in two weeks it was over. Coming soon to the United States and Japan.

Thursday, February 21, 2013

94% Believe That Precious Metals Are Going Lower

The Daily Sentiment Index showed a reading today of 6% bullish for gold and 6% bullish for silver. This means that 94% of traders believe that gold and silver are going lower.

The main headline running across CNBC today:

"Gold's Death Cross Isn't All Investors Are Worried About"

I had the pleasure of coming across a similar article written back in June of 2008 from CNN. Here was the title:

"Gold: Don't count on $1,000"

From the article:

"Most financial planners and market strategists say that people should only have a very small percentage of their portfolio dedicated to gold. It is, after all, an incredibly volatile investment. And betting on gold often means that you're taking a leap of faith about currency and interest-rate fluctuations as opposed to looking at fundamentals like sales and earnings growth."

8 months later the share prices of stocks based on those fundamentals like sales and earnings growth would be down about 60%, just as gold was touching $1,000.

An intelligent (non-mainstream media) argument against the price of gold would be based on how it may perform if we re-entered a deflationary type scenario seen in late 2008. I have discussed my thoughts on this scenario in the following article:

Why Precious Metals Could Surge During A Deflationary Bank Run

Wednesday, February 20, 2013

Commodities & Resource Stocks Go On A Fire Sale

Some of the best commodities and resource stocks are going on a fire sale. This is the time to start layering in a position from your shopping list we discussed in the 2013 Outlook: How To Invest. What from my personal list looks attractive today?

Gold Mining Shares
Rare Earth Stocks
Canadian Currency
Short US Stock Funds

It should never feel good when you are buying because there is panic everywhere. Take a deep breath. This is why you steadily raise cash during optimistic periods and buy during panic selling.

Remember from a view 30,000 feet above that while it is important to maintain liquidity to have the ability to purchase assets when they go on sale, the actual value of that paper liquidity is zero.

Currencies have no intrinsic value. They are backed by nothing. Bonds are worse - they are a promise to pay back a currency in the future.

Take a deep breath. Buy. And hope for prices to fall lower so you can rid yourself of more cash.

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

Sunday, February 17, 2013

Present Day Eurozone GDP Collapse & Sovereign Defaults Of The Past

This week we received data out of Europe and the picture is not pretty. The Euro area, now including Germany, saw its economy contract in the fourth quarter. The following chart shows the Euro area as a whole -.6% (black line), Germany (after three quarters of positive growth) printing at -.6%, plus Spain and Italy's accelerated decline.

The recent rise in the Euro currency has only provided pressure on the wound as the rest of the world, specifically the U.S. and Japan, continue to up the stakes in the global currency war and the race to debase. A stronger Euro hurts exports (exports add to GDP).

Certain economists have told us that the main reason for this economic malaise is the intense austerity (spending cuts) that have been put into place around Europe. Let's take a brief moment to review just how much spending was cut in 2012 in Spain. Government debt grew by 146 billion euros in 2012, rising to 882 billion in total. Debt has risen by 500 billion euros over the last 5 years. I'm not a math professor but those numbers do not appear very "austere" to me. Imagine if real, market driven, spending cuts were implemented in Spain. The following chart shows their surging debt growth as part of their "austerity program."

Germany is feeling double the pain as their trading partners within the Eurozone, the area that is not impacted by trade due to currency fluctuations, are seeing their economies and subsequent demand collapse.

Look for Germany to continue to "ease" the pressure they bring to the European Central Bank to hold back with full throttle QE programs.

The process is fascinating to watch as all the leaders of every developed economy (U.S., Europe, UK, Japan) do everything in their power to self mutilate their own currency in the attempt to sell goods to each other.

They must tell the markets they want to destroy their currencies while at the same time promising "safe returns" to all those who invest in the bond markets within their shores. At some point the bonds markets will say enough, but when will that be?

The following excellent chart shows a history of sovereign defaults for specific countries going back to 1827 (blue lines). It shows the total amount of debt the country took on in comparison to their revenue before the bond market said "enough" and forced them into default.

You can see that Japan today (red line) currently has a larger debt to income ratio (18 times) than any country in history before entering default. To say they are a powder keg waiting for a match (or as John Mauldin says "a bug in search of a windshield")  would be an understatement. The chart also shows that the United States, which many assume is years if not decades away from a bond crisis, is already past the point where most of these countries defaulted in the past. Click for larger image:

The definitive work on the historical study of sovereign debt defaults is This Time Is Different, a book I always recommend for those that believe studying the past is the best way to determine the future.

Will this time be different? Do the laws of gravity no longer apply to the government bond markets of the modern world. I think we will soon know the answer to this very important question.

h/t Zero Hedge, MISH

Uh Oh: Mortgage Rates Are Rising?

There must be some sort of mistake in the chart below because it shows a......rise? in the monthly interest rate on mortgages. What would happen if rates were to actually.......gulp....... rise, instead of fall?

We'll see how the Fed responds to this unpleasant (and inevitable) development. They could always just up their monthly mortgage purchases from $45 billion per month to $450 billion per month. Or maybe the bond market finally overwhelms the Fed's ability to artificially push interest rates lower (this is coming). For more on what this would mean for real estate prices see:

2013 Outlook: Real Estate Prices Have Not Bottomed

h/t Sober Look

Japan's Current Account Moves Negative & GDP Continues To Contract

This week we received word that the fourth quarter GDP out of Japan was once again negative, coming in at -.4% on expectations of positive growth. Japan has now been in contraction for 3 straight quarters.

Perhaps their new stimulus and QE programs can bring a temporary surge in the GDP levels for the first quarter of 2013, we will know when the data is released.

Of even more concern, are the actual capital flows as the country moves toward its government debt implosion. The entire current account has now run negative for two straight months. This essentially means that total capital flow is now exiting Japan's borders at a time they need capital more than ever. The following graph shows the monthly current account declines in November and December.

Kyle Bass said a few months back that he did not anticipate the current account moving completely negative until the third quarter of 2013. A complete collapse in Japan's exports has pushed this important capital shift of total capital flow out of Japan to present day.

The stage is now set perfectly for the first tremor to arrive in their bond market. This comes at a time when the government is running and creating new spending programs to artificially boost the economy. It comes at a time when their central bank is now running and creating new QE programs to artificially boost the economy.

For a further discussion on Japan, the following is a recent interview with Bass at the GAIM conference where he sees the Japanese Yen rising to 200 against the dollar and most Japanese citizens losing the majority of their wealth.

"We think their rates will move uncontrollably once the yen really starts to move."

"The social fabric of the country will be torn."

For much more on this topic see:

2013 Outlook: Japan's Government Debt Bomb Goes Off

How A Minimum Wage Wage Increase Hurts Workers

During the excitement of Obama's State Of The Union this week, where he promised unlimited prosperity financed by the government, he mentioned one of the new strategies he plans to put in place to "help" our economy grow: raising the minimum wage.

Raising the minimum wage is a topic I have discussed on the past, but it is good to review again this week with it back in the spotlight. A quick discussion involving basic, real world, economics will show that raising the minimum wage only hurts the workforce as a whole.

The current minimum wage structure pays $14,500 per year. An employer has costs above and beyond that to pay taxes and insurance (there may additional costs if they offer benefits). These costs can vary widely depending on where you live but we'll say an estimated total cost for this minimum wage employee is $18,125 per year.

An increase in the minimum wage to $9 per hour would bring the employee's total pay up to $18,000 per year and bring the total cost to the employer up to $22,500.

Most of the jobs that will be impacted by this decision are in small business (where the majority of the jobs in the United States are created). An owner of a small business may perhaps have the ability, based on current sales and expenses, to staff 4 full time minimum wage workers for a total cost of $72,500 per year. What if the total cost of these 4 workers were to rise to $90,000 with the increased minimum wage?

One option would be to move all 4 workers down to part time (the most likely strategy based on the devastating costs Obamacare will heap on to businesses employing full time workers), or it will lead to 1 of the 4 workers losing their job completely. That worker will now make $0 per hour.

Obama thinks that all the ruthless large corporations that are sitting on large piles of cash can afford to pay a little more for the hard working people of America, and he is right, they can. The problem is that is not where those jobs are created. In the real world, a world the President has never worked or lived, a rise in the minimum wage will be devastating.

Why not just raise the minimum wage to $12 an hour, or $15, or $20? Under Obama's economic views, would that not just help the economy even more?

The truth is that the best way to help the working class is to make it more desirable for businesses to hire them: lower taxes and less regulation, but it is far easier to try and "punish" those greedy companies that actually put people to work.

For more on the important impact of Obamacare see:

Looking Ahead To 2014: The Coming Obamacare Nightmare

The following provides another example of the negative impact of a minimum wage increase: