My columns emphasize the dominance of manipulation in economic-financial matters and government policy. When you add the role and results of mass media channeling to these games, we inhabit a carnival of dazzling disinformation and distraction. This column examines a recent overview and suggests protective and growth strategies for an unsound economy and funky markets.
In a recent interview with The Gold Report, John Williams discusses economic stats that reinforce points I have stressed and offers guidance. The facts he brings support reports by Daniel Amerman and Tyler Durden noted in my recent article.
After reviewing trends, fundamentals and aspects of manipulation in governance and reporting, I suggest the best three choices for primary asset allocation: Gold and/or silver; a basket or U.S. and international equities and currency; multi-use farmland.
Williams is a Dartmouth trained and honored economist whose writings were lauded by major media until his facts became incompatible with government fictions. Among the striking points he made in the above-noted interview was that "there never was a recovery and no economic data shows the type of recovery that the official GDP report is showing." He explains his point with a sobering analogy between markets since 2008 and the path "a fellow would take going off a ski jump. A plunge and then moving forward, maybe up a little bit and then plunging anew." Bringing abundant statistics and knowledge of current and former econometrics, he adds that "the economy officially will be recognized as a double-dip recession at some point, but in reality it's part of the ongoing economic crisis that we've seen for the last five or six years" [emphasis added].
Williams also discussed data supporting his view that the genuine out-of-work rate is about 23% although the talking heads relentlessly cite the "U-3" guesstimate that is the least troubling measure of unemployment. He also stresses that the major problem in America is declining real net worth, wages and spending power. These declines, plus new 'credit regulations' that make it easier for corporations and high net worth individuals to borrow while tightening credit for everyone else lead to decreased consumer liquidity in an economy 70% reliant on consumer spending. He shows that inflation accounts for the rise in retail sales. Similarly a -16 margin of error in the "Confidence" measure on housing starts indicates that December's year-over-year official rate of +12 might truly have been a -4 contraction or anything in between. We are mesmerized and enmeshed in a stupefying shell game while the consumer confidence index shouts of a nation in danger. There is growing "depletion of savings, job loss, salary cuts and declining home values."
Given that the economy is "plunging anew" while its disconnect from the markets grows and manipulation becomes the fissionable uncertainty principle of Cosmopolis, Williams marshals data to prove a point I have urged readers to note, that "the market has no appearance of being rational. There are other factors at work here with the result of some very unusual trading activity. What will happen, eventually, is that underlying economic reality will become undeniable and even official reporting will be revised to show contraction, an official double-dip recession. That likely will not be good news for stocks." Let the buyer beware and let him or her choose wisely.
So what will it be fellow field beast; which is the best asset class or allocation? The mining sector, particularly precious metals miners and particularly junior gold miners as measured by their ETF (GDXJ) have performed badly for three years. Production costs rise and a cap is kept on their major bogey, the price of gold despite currency wars and global devaluation.
But Williams sees the economy's fundamental problems as so grave that he anticipates gold reaching $100,000 / oz. Moreover, he asserts that even at that price, "don't get excited and take profits, because the gain there just reflects maintenance of your purchasing power. It suggests the magnitude of the purchasing power you've lost in the dollars you did not put into hard assets." Like increasing numbers of economists and market analysts he urges increasing one's allocation of gold as a hedge and way of remaining liquid during an ensuing hyperinflation and collapse of equities markets. He believes the period of sustained collapse will be "years not months" and that "if you preserve your wealth and you are liquid, you will have some of the most interesting investment opportunities that anyone has ever seen." Williams likes the Canadian and Australian dollar and Swiss franc as well as gold as the best ways to preserve capital and remain liquid. Everbank has currency baskets one could explore.
This writer agrees with Williams about the merits of the currencies he mentions relative to the dollar, which clearly is being set up for a hard-landing. Peter Lee of UBS sees the dollar index sinking soon to 70. So gold is an essential part of a portfolio but it also is subject to manipulation that will not end until small fry have been shaken from the market by one of many bombs currently ticking. For this reason, those with moderate disposable funds should limit their gold position to 10% of assets. While it's difficult to see how "ordinary people" will be able to cash in without getting fleeced when things get interesting, if Williams is right about valuations even getting 80% back on a gold investment would open a world of opportunities. With gold mining shares nearing 40 month lows it's plausible to see them as value-and-growth plays but many variables from environmental regulations to resource nationalism urge a limited position.
Silver should do better both as bullion and as a metal. It is more exchangeable and its industrial uses span many sectors and are steadily expanding. The silver miners ETF (SIL) has done better than major gold miners (GDX) as well as juniors and the bullion seems to have made a new base between $30 -32/oz. Avi Giburt who is hardly a silver promoter believes we will see $60/oz within a year. In his February 10 report, Bob Rinear of Financial Intelligence Report expects $70. Considering how Williams explains the metrics of inflation, silver actually is priced far below its 1980 high (the dollar has deteriorated 75% since then). So a position of silver at least equal to gold and balanced between bullion and miners is a good play. Increasing technological, industrial and steady consumer uses urge silver as an asset. One gets a multiplier effect by investing in Silver Wheaton Corp (SLW) whose recent deal with VALE adds gold to its limited-risk streaming model (up-front investment for ore).
The comments of Williams and others I've cited about fundamental economic weakness and pending stagflation add to wariness about overbought markets untethered from underlying realities. Yet Peter Lee shows that the indices are still within the parameters of the "1942 trend line," which includes the bottoms of March 2009 and all significant corrections dating back at least to 1931.
In sum: Unless your need to generate and spend monthly income is urgent, an allocation of 40% American equities; 20% foreign; 10% each gold (GLD) and gold miners and silver (SLV) and miners ; 10% bonds which are due for significant share price deflation, which may take years to recover if you can afford to hold them that long; and 10 % cash (including Canadian dollars). Be ready to trim equities at the next multi-week rise. Consumer Staples (XSJ) look increasingly good and can be entered gently via Vanguard's ETF (VDC). In a related area, McDonald's (MCD) has recovered strongly from its first monthly sales decline in a decade. It is increasingly adroit at adapting to local tastes world wide.
Best of all, as I have suggested previously buy a productive farm and lease its timber, fishing, mineral and farming rights. The model for this is Ceres Partners: its track record is sound, its thesis increasingly apt. If rural living is not for you, use them to play cultural and demographic trends that will boost basic commodities relative to cash. Also consider Sprott Resource Corp (SCPZF.PK) for preserving value. Like Williams, investing legend and billionaire Jim Rogers believes energy is good going forward and, as I do, stresses the value of the most basic commodities: "stock brokers should learn to drive tractors" to paraphrase his point about fundamental trends and social transformation. Our economy is enmeshed in manipulation of the system and touting unproductive digital devices that serve information gathering and identity theft. Thoreau's dictum, "simplify, simplify" is compelling.
Disclosure: I am long SLW.