Saturday, April 20, 2013

Jim Rogers - Street Smarts: Adventures On The Road & In The Markets

After what seemed like a never-ending run of mediocre business books, over the past few weeks I have discovered some phenomenal ones.

This morning I finished reading "Street Smarts: Adventures On The Road And In The Markets" by Jim Rogers. Rogers co-founded the Quantum fund with George Soros in the early 1970's and in that decade, which was a secular bear market and one of the worst in history for Wall Street, returned 3,700% while the market only experienced a 42% gain (and was ravaged by inflation making the real gains negative). Rogers discusses the major events of the decade through his eyes and provides the learning lessons for investors (extremely important for today as we are in another secular bear market in stocks).

At 37, he had acquired enough money to last many lifetimes and he did what most money managers do not do - he walked away. It was the equivalent of Michael Jordan walking away from basketball at the peak of his prime in the early 1990's.

Rogers decided to take a trip around the world on his motorcycle, setting the world record for distance traveled. He discusses what he learned being a part of almost every culture in the world and how his world travels (which he has continued) relate to the financial world we find ourselves today.

If you are a parent, he spends a lot of time on the importance of education and the future of his children. He recently moved to Singapore so they could learn Mandarin and grow up in their school system. He is extremely bullish on commodities, specifically agriculture.

A few excellent quotes:

"Harvard, Princeton, and Stanford, though they may not know it yet, may be heading toward bankruptcy. Museums, hospitals, and other institutions we love and know are heading for trouble, and we are going to see a lot of them vanish in the upheaval, be it financial or economic."

"If you were smart at the start of the nineteenth century, you made your way to London. If you were smart at the start of the twentieth, you packed up and moved to New York. If you are smart at the start of the twenty-first, you will find your way to Asia."

"Throughout history there have been periods where financiers were in charge, and there have been periods where the producers of real goods - farmers, miners, energy providers, lumberjacks - were in charge. In the '50s, '60s, and '70s, before the big bull market, Wall Street and the City of London were backwaters. They will be again."

"Today, the United States, alone, graduates over two hundred thousand MBAs a year, as opposed to five thousand annually in 1958. The rest of the world produces tens of thousands more (there were none abroad in 1958). Over the next few decades, those business degrees will be worthless, a waste of both time and money."

He sees the current booms of two of the BRICs (Brazil and Russia) as heavily tied to the commodity boom, and when it busts (as all booms do), it will take those economies down with it. India, for many reasons he discusses, is not ready to become as strong an economic power as many anticipate. While he sees many short term troubles ahead for China (just as the United States had in the early 1900's), it is the one true future area of growth in the world over the decades ahead.

From his understanding of economics, discussions on health care, litigation, and his ability to provide historical examples of financial crisis and resolution in countries around the world, I could go on forever with quotes and wisdom from the book. I highly recommend picking up a copy.

Friday, April 19, 2013

The Last Debt Fueled Bubble Creates The Last Mirage

Last year, the United States government spent $3.5 trillion. The following graphic shows how that money was spent.

You'll notice there is really only 10% available for discretionary spending cuts. 90% of the spending is mandatory, unless you consider military spending discretionary. If you cut 50% of the military budget, which would obviously never happen, then you have 80% of the budget that is untouchable. The following puts some perspective on U.S. military spending (dark blue) vs. the rest of the world combined.

I believe that defense is the most important function of the federal government. In a better world, it would be one of the only functions of the federal government. This in no way defends the current bloated and obscene defense spending taking place today, which should be (and ultimately will be) drastically cut. It only puts the other ridiculous spending on social transfer payments into perspective. 

Food stamps this past month have once again crossed new record highs as 23,087,886 Americans now collect, while the monthly payout (red line) has fallen to only $274 per household. 

I discussed a few weeks ago the staggering growth of disability payments in The New America: It Is Better To Collect Disability Than Take A Job.

The US federal government today borrowes money at essentially no cost or interest allowing them to borrow an unlimited amount with no consequences. The only argument that takes place today is how much more should be spent and printed. This is of course lunacy, and it will change. This is the last debt fueled bubble. 

Watch closely what is about to take place in Japan because it will provide the blue print. Their coming melt down will revolutionize the way modern economics is taught.

United States & Japanese stocks are surging on the artificial government spending and central bank printing boost, but the rest of the world is beginning to reflect the true economic realities taking place in the data.

Remember that if the new stock market highs are removed, all you have remaining underneath is reality. 

I have discussed the success of Iceland in detail in the past, see Cyprus Has A Better Option: Default, Devalue, & Depression, but for more reading on countries that have decided not to spend and print as much as possible and their economic results see the following excellent article from Forbes:

h/t Zero Hedge, JS Mineset, The Big Picture

Wednesday, April 17, 2013

Why Did Gold & Silver Fall?

It has been fascinating to watch how the precious metals decline has been viewed by different groups within the financial markets. The first group, which is the largest and makes up the mainstream media, feels that the gold "bubble" has finally popped and investors should now focus fully on purchasing the best financial assets money can buy: stocks and bonds.

Financial advisors do not make money if investors purchase gold. The average person would either call a bullion dealer to buy physical metal or purchase through a Sprott like fund. In either case, the advisor and the company they work for are not receiving their mutual fund management fees for this investment. 

The other part of this group is the mainstream media financial networks. If you have spent more than 30 minutes watching these channels you will notice their advertisements are composed mainly of the financial groups I just mentioned. The guests on their shows, which advise you to purchase stocks and sell gold, work for these companies above.

Think about sitting down with a real estate agent to have a discussion on what you should do with the remaining $300,000 of your retirement money. You are deciding whether to purchase a home, or put the money into stocks and bonds. Which direction do you think the real estate agent will nudge you? What if that same conversation took place with your investment advisor?

I left the real estate industry in mid 2007 because at that time I felt (after reading tomes of information) that real estate prices were going to fall very far for a very long time. It was my job at that time to convince people to purchase a home (which I relied on to put food on the table and a house over my head), and I felt in my heart doing so would hurt them. So I quit.

This same logic applies to gold and silver. I think that when this secular bull market in precious metals ends, it will culminate in a mania. At that point you will have many people brought on the mainstream financial news networks to give you their reasons why gold is going higher. Some of those people will be bullion dealers. The more precious metals people purchase, the more money they make on every commission. So would it make sense to listen to a bullion dealer when metals enter a mania? Of course not.

If someone makes their living selling a specific commodity (stocks, bonds, real estate, gold, cars, or boats), it makes no sense to take their advice on what you should buy. Will a sales rep at a Ford dealership give you a perfectly honest comparison of his Ford vs. the Honda across the street? Of course not.

The second camp in the gold and silver markets are the conspiracy bulls (some of which sell gold and silver as I just discussed). They believe that gold and silver rise based on fundamentals and they fall because of government manipulation. They believe that the Federal Reserve was the reason why gold and silver fell this week. 

The entities that took down the gold and silver paper markets on Friday and Monday care very little about what the government or the Federal Reserve want. There is no conspiracy. They are professionals. They are cold blooded killers, sharks in the water, that care nothing about the government. These entities have the ability to dump massive amounts of paper shorts onto the market, almost always in carefully calculated illiquid periods where they know they can make the price waterfall lower. Once it begins to fall it triggers "stops" that other professionals have it place. A stop is an automatic sell order that kicks in when a price reaches a certain level. 

Large trading groups can see these stops clustered around specific points on charts based on technical analysis. They dump the paper shares with essentially an unlimited amount of force, it triggers the stops, then the prices cascade lower. 

Please understand this is not some government forced action. They short markets to make a profit and they do it extremely well. You can look at charts and see this occur. You probably notice that I have never advised "trading" here on this site. For an average person to think he or she can compete with a high frequency trader means they either do not understand how the markets work, or they are a compulsive gambler. You have a FAR better chance of winning money at a casino in Vegas than trying to "trade" the market. Anyone who tells you otherwise most likely trades for a living and would like to sell you their services (sound familiar?).

These traders just made a calculated move against gold and they made a tremendous amount of money. In addition to triggering stops in the market, many of the weak hands have panicked and sent prices even lower. Margin calls kick in when prices waterfall lower and that creates forced liquidation. These sellers only add more profits to the professionals. 

What comes next is the continuing accumulation of physical metals from enormous players in the market that will take advantage of the discount. I'm not talking about a hedge funds, I'm talking about the elephants like China and Russia. These countries have a clear understanding of how this story will ultimately end, and they step in during these panic declines and purchases enormous levels of physical metal. If prices go lower they will purchase much, much more. 

Over the years I have laid out a very clear argument of how I believe the story will ultimately end. If you are a longer term reader you should hopefully understand that all currencies around the world are fiat, paper money. Their worth is derived only through confidence in that paper. Confidence has the ability to evaporate overnight. I believe that one night it will. If you can put the larger picture into context and take short term emotion away then gold at $1,900 vs. $850 has very little relevance.

If you believed that gold was going to be $3,000 in 2016, would you rather have it be $1,300 or $1,900 in 2013? You would of course rather have the price be $1,300 so you could accumulate more metal today to sell at $3,000 in the future.

I remember seeing endless headlines about Apple, the media's new financial darling, just a few months ago. After crossing 700 it has collapsed down to 426 as of this morning. Is anyone talking about Apple today? No, they are focused on blue chip stocks that will lead a portfolio to the promise land. Why? Because blue chip stocks are the hot investment, the flavor of the week.

For an understanding of where we are today and how this story will ultimately play out I recommend reading the complete 2013 Outlook.

Monday, April 15, 2013

Silver Corrections During Current Bull Market

I have been a part of three gut wrenching silver price drops since I began investing in the asset class in 2005. I remember thinking that it would never again cross the $15.70 mark after it fell from that level to about $11 in early 2006. The following chart from Investment Score shows the last few price corrections in relation to the current pull back. This chart was put together as of Friday, and the drop reached about 53% this morning (bringing it around the range we saw during the panic of 2008) from the highs in April 2011. As I discussed earlier regarding gold, everyone who was interested in purchasing silver in the high $40's two years ago is only interested in selling today.

Gold & Silver Markets Enter Free Fall: Panic Selling Around The World

I spent the weekend in Key West for the wedding of one of my good friends. On Sunday night flying home I was following the Asian markets where precious metals continued their most violent sell-off in history. Dennis Gartman told CNBC that he has been trading gold for four decades and he has never seen anything like it.

Precious metals at the time of this writing are the most hated asset on the planet. Investors are dumping their positions or liquidating whatever possible as they can only see the market going lower from here.When gold was the most beloved asset in the world in August of 2011, moving up $100's of dollars in just a few weeks investors could only see the market moving higher. At that moment, I posted the following article and the following comments:

$1,900 Gold

Gold crossed its next $100 milestone in after hours trading on Monday.  I remember having to wait months to years for gold to make a $100 move a few years ago, but its recent rise from $1,800 to $1,900 took only a few weeks.

It is for this reason that I would like readers to take caution at the present time in the gold market.  Back in 2007, over $1,000 lower in price, people still felt uniformly across the board that it was insane to hold gold in your portfolio.

Today, while the public has still yet to enter the market, major investment vehicles such as hedge funds have entered in force.  Daily sentiment readings show traders at 98% bullish for gold, and the GLD just became the largest ETF in the marketplace in terms of size.

While I believe gold is going much, much, higher over the next few years, its current rise has been parabolic over the recent weeks.  As I discussed with silver a few months ago, investors should hold their current positions and wait for an attractive pull back to enter the market.

Back at $500 and $600 an ounce a few years ago, investors could throw caution to the wind entering the market, but today you have to take the temperature of the market around you.

I re-post that now not to say that I am some sort of good market timer because that is certainly not true. I re-post that now to show that we are in exactly the opposite situation at this moment than we were during the moment I was writing that article. Gold is $500 less expensive today and no one on the planet wants to own it.

I have been discussing the importance of raising cash for years to be ready for panic selling opportunities in asset classes you believe to be in long term bull markets. Gold just crossed under $1,400 an ounce. Will it stop falling now?  I have no idea.  Just as I had no idea back in August 2011 if the panic buying would push gold above $2,000, $2,100, or $2,200 an ounce. Markets that are in free fall have the ability to fall much further than what seems possible due to technical stops being triggered, algorithm trading, and panicked weak hands.

The Central Fund of Canada is an entity that buys physical gold and silver and stores it. As of this writing the fund's assets are selling at -6% NAV. That means that you can buy shares in the fund for 6% less than the spot price of gold and silver. Just a few months ago it was a positive 5%. I am guessing that after the blood shed in the overnight markets in Asia the premium could move further into negative territory today.

I am not telling you that today is a good day to purchase gold and silver just as I was not telling you that it was a bad time to purchase gold and silver in August of 2011. I would take a moment, a deep breath during all this panic selling, and think about how this global currency war is going to end. If you felt that gold was fundamentally a good long term buy in the summer of 2011, what has changed to make you reconsider?