Stay Clear of Traditional Asset Classes

Washington continues to manipulate economic data, as it has for several years. The past few Establishment Survey reports confirm the deception of data, as many more jobs were lost than official numbers indicate. A better gauge of economic weakness, in my opinion, is consumer and mortgage late-payment and default rates, since this data is more difficult to manipulate. This is especially true for late credit card payments.

Washington continues this deception in order to extend the illusion of economic growth. It keeps consumer confidence high, promising excess consumption. Asia and Europe are happy to finance America’s debt because this keeps interest rates low in the U.S., which provides consumers with inexpensive credit to spend more of what they don’t have, mainly on imports. Think about it. When money is tight, households struggle just to get by. Most families end up spending so much on gas, food, healthcare and schooling that they don’t have much left over for that LCD widescreen, a new computer, or a fuel-efficient car; you know – the stuff that comes from Asia and Europe. Foreign economies feel the effects when U.S. consumers aren’t spending.

A weak economy also hurts U.S. companies. In response, they cut expenses by lowering employee benefits and sending jobs overseas. The low labor costs provides consumers with less expensive electronics, automobiles, textiles, furniture and many other items, most of which are now made overseas. Asia and Europe finance Washington’s wasteful spending because it keeps interest rates low, which makes credit inexpensive. So consumers have access to inexpensive credit which allows them to buy that BMW or plasma TV, Washington has money to waste in Iraq, and foreigners experience improved living standards via jobs created by U.S. companies. But hasn’t this helped U.S. consumers? After all, Americans can now buy a nice laptop for $400. Who cares? What matters is that they’re paying ridiculous prices for basic necessities – gasoline, food, education, and healthcare. Washington needs to rethink its economic policies. Americans should be empowered as workers first and consumers second. Only in this way will America be able sustain economic productivity.

Instead, U.S. corporations and foreign workers are benefiting at the expense of working-class Americans, who continue to lose jobs due to outsourcing. If they’re lucky, displaced workers are now underemployed, working for much less and for no benefits at jobs that fail to utilize their talents and experience. Others become the forgotten – discouraged workers, who can’t find work and are no longer counted in unemployment data. For working-class Americans, this ridiculous economic policy resembles a pyramid scheme. For the wealthy elite, large corporations, and foreign nations, it’s a gravy train. No longer can Washington hide the painful correction that lies ahead. We are now seeing the early stages of what promises be the worst recession in decades. Yet, this is only a prelude of what to expect over the next several years. Washington’s ability and commitment to manipulate data will lead to further periods of economic deception. But just as was accomplished in the 2004-2006 period by Alan “Bubblespan,” the consequences will be harsh thereafter. Throughout this challenging period, investors would be wise to consider realignment of their investment portfolios to reflect macroeconomic trends – precious metals, commodities, energy, TIPS, and foreign currencies.

I find it remarkable how so many continue to deny the problems in the economy. Just look at the data on foreclosures, home price declines, new and existing home sales, new housing permits, and consumer debt defaults. Even with a banking system bailout by the Fed of over $1 trillion of taxpayer funds (with more to come) the credit crisis continues to worsen. This was not difficult to predict in advance if one had bothered to analyze the data. Yet, many still underestimate the consequences of a bubble economy that’s run out of air. Soon, consumers will fall flat on their face. No amount of credit will ease the pain of record debt, the falling dollar, and soaring inflation. In fact, it will only worsen the blow. Bernanke is adding gasoline to the fire. Very few jobs have been created under President Bush, other than military, government-related positions and jobs with little or no benefits. Yet, all of these jobs contribute to official employment numbers. Much of the private sector jobs created over the past few years came about via courtesy of Alan Greenspan’s real estate bubble – real estate agents, loan officers, mortgage bankers, construction, appraisers, etc. Needless to say, a good portion of these jobs no longer exist. And many more will disappear over the next two years.

Instead of wage and job growth – the typical elements of economic recoveries – the economy has been fueled primarily with cash-out financings since 2003. And now reality is setting in. Since 2004, Wall Street chose to focus on corporate profits. A four year period of record profits caused the market to soar in 2007. But these gains were achieved by the cost advantages of outsourcing, excessive credit spending by consumers who used their homes as ATM machines, and inexpensive goods supplied by China (due to currency manipulation). Thus, corporate America thrived while sending jobs overseas, adding to economic expansions in Asia, Europe, and Latin America. And this was enough to send the stock market well beyond previous highs. A year ago, most investors also focused only on corporate profits because that was the approach Wall Street took. They did not consider the impact of many years of record deficits, wasteful spending in Iraq, record oil prices, rising inflation, muted real wage growth, and the declining dollar. Instead, they chose to believe the data from Washington without question – impressive unemployment, GDP, and inflation data. Despite record profits, even healthy companies froze pension plans and cut employee benefits because they can. Shareholder value is all that matters to America’s corporations. American workers are now treated as commodities that can be replaced by less costly alternatives from Asia. But now, inflation coupled with massive job losses and frozen wages have added to the real estate fallout. How can Washington, Wall Street, and the media continue to deny the truth?

Now the Federal Reserve has come to the rescue – not to help consumers, but banks – passing out billions in U.S. Treasuries to the mega-banks in exchange for junk bonds. This has devalued the dollar further, which has lead to higher oil prices, which has contributed significantly to massive inflation in food prices. With continued devaluation of the dollar, there is no doubt this will be the worst recession in decades. As I predicted in 2006, we are now seeing the corrective effects of an economy propped up by the largest real estate bubble in U.S. history. And it’s only going to get worse. Commercial mortgages have already started to weaken. As the economy weakens further, millions of prime mortgages could default. The non-borrowed banking reserves are negative. This means the U.S. banking system would be insolvent without the help of the Fed's printing presses. Yet, even with so much cash from the Fed, most banks are still struggling to unwind the 20-30:1 leverage built upon mortgage-related debt, most of which is junk.

The real inflation rate is already above 10%, despite Washington's official numbers, which it continues to twist using hedonics. If inflation is not a huge problem, why did the Fed stop reporting M3 last year, just when it hit a 33-year high? Why did Washington pull the Economic Indicators website on March 1, 2008? The excuse given was due to "budgetary constraints" which makes it even more obvious Washington is trying to avoid an all-out panic. Greenspan caused this crisis, and Bernanke is finishing the job. While the EU central bank continues to emphasize monetary policies focused on inflation control to protect consumers, the Federal Reserve remains committed to the best interests of Wall Street and the banks, while U.S. consumers struggle with gas and food prices. It appears as if the Fed is willing to destroy the financial stability of consumers in order to protect the reckless and greedy behavior of the banks.

But the Fed cannot keep running away from the mistakes it has made. Applying band aids to holes in the Hoover Dam will only delay what will be a much more severe crisis at a later point. Greenspan used the same strategy after the Internet meltdown. And of course this resulted in the real estate bubble, which promises to create much harsher consequences.At this juncture Bernanke really doesn’t have much of a choice because he let things deteriorate too far before reacting. It’s difficult to imagine that he didn’t see what was happening a year earlier. If he truly didn’t, he should resign and state incompetence as his reason. It’s almost as if he intentionally ignored the obvious and waited for a crisis so he could justify destroying the dollar through excessive inflation. Why would Bernanke want to decimate the dollar even further? Given the unfair free trade policies of Washington, it looks as if the only solution to the record trade deficit is to wipe out the dollar. That might be the only way to regenerate domestic manufacturing. But this logic is flawed. No nation can have a good economy when its currency is weak. We already see how a weak dollar affects oil prices.

What purpose might inflation have? Well, for one, it would help Washington to pay off its massive debt. As well, GDP data would be boosted, creating the illusion of a recovery. America has consumed 6% more than it produced for over a decade. And it has relied on Asia and Europe to finance its spending spree. Clearly, the cumulative effects of this disparity have begun to correct. The first attempt at payback was the Internet meltdown. But Greenspan insisted on stopping a full correction. As a result, we now see a much bigger payback – the real estate and banking crisis. Continuing in the tradition of Greenspan, Ben Bernanke won’t allow a full correction. The economy needs to feel the full pain of this bubble correction. This means no bank bailouts, stop the printing presses, and provide real help to consumers instead of a $600 gift certificate to Best Buy (BBY).

Washington needs to restructure free trade so that all nations are on a level playing field, provide tax incentives for corporations that create domestic manufacturing facilities. Thereafter, the economy would be positioned to start anew, with no further surprises down the road. Of course this won’t happen as long as lobbyists continue to buy off politicians. Government bailouts create a moral hazard by rewarding irresponsibility at the expense of taxpayers. Ultimately, this ridiculous policy by the Fed reinforces the monopolistic characteristics seen in many of America’s industries, promising further devastation for consumers down the road. The boom-and-bust cycles created by the Fed’s reckless monetary policies ensures the continued decline of the U.S. Washington needs to understand that America’s excess consumption trends are becoming less advantageous to its Asian and European creditors since consumers have no more money to buy their goods.

In contrast, Asian and European consumers have double-digit savings rates. Soon, much of corporate America will relocate entire operations overseas, not only for labor cost advantages, but to serve what will soon represent its best consumers – three billion Asians with healthy household savings. This is certain to eliminate America’s edge in innovation due to the inevitable transfer of intellectual property seen under free trade economics. Finally, without the reckless spending of U.S. consumers, foreign nations will no longer have reason to hold U.S. Treasuries.

Already, every nation wants out of the dollar because they understand the worst is yet to come. In the next few years, there will most likely be a brief period whereby consumers think the worst is over. But this illusion will be due to the trickery of the Federal Reserve and Washington. There is no way to avert the payback period that has been building for over two decades. And the entry of 80 million baby boomers into entitlement programs promises to push America deeper into a depression. It would be extraordinarily difficult to find a way out of this mess. Even expected benefit cuts for Medicare won’t help, as long as the healthcare industry is free to set prices as they chose. In the best of scenarios, higher taxes and fewer medical benefits will force millions of boomers to spend what little they have on healthcare, with the rest going to food and utilities. Imagine what that will do to consumer spending.

By 2009, I expect corporate bankruptcies to soar, including several bank failures, perhaps hundreds. Already, the FDIC is beefing up its staff in anticipation of a more severe banking collapse. Most consumers won’t think much of it when these smaller banks fail because, rather than close their doors, the mega-banks with buy them using the printing presses of the Fed. A few months ago, banks began the painful process of trying to write down bad mortgage debt. But mortgage defaults continued to pile up. So they had to keep writing down the debt more and more, until finally, much of it became virtually worthless. In order to avoid a liquidity crisis, banks were forced to sell off their highest quality debt, causing more damage to the balance sheet. After the run on Bear Stearns (BSC), the Fed realized that any bank could become insolvent overnight. And that would cause a snowball effect. Therefore, Bernanke extended emergency funding options (once previously reserved for commercial banks) to investment banks – something not done since the Great Depression.

Now the Fed has increased reserves to $150 billion for May alone. Combined with another rate cut last week, the dollar will continue its downward spiral. Bernanke’s commitment to inflation will vaporize retirement savings in a few years unless radical changes are made. Bank write downs will persist throughout the year and continue through at least 2009. Even that optimistic scenario won’t signal a buy for investors. It’s likely that many years will pass before the banking system recovers from this mess. Before it’s all said and done, most banks will face a huge dilution in earnings after issuing millions of new shares to private equity, LBO and sovereign funds.

In the meantime, there will be excellent trading opportunities if one has a strong stomach. Prior to its recent financing by TPG, I viewed Washington Mutual (WM) as the bank most at risk of insolvency. With over $7 billion of new cash, I still feel it will need a lot more cash or a lot of luck to remain solvent. Even Citigroup (C) isn’t out of the woods. Until it eliminates its dividend, I would not consider entering as a long-term investor. Keeping the dividend shows that management underestimates the problems. Already, the Federal Reserve has pumped over $1 trillion into the banking system. Combined with the European Central Bank, over $1.5 trillion has been lent to banks in an attempt to restore liquidity.

In my estimates, an additional $1.5 to $2 trillion will be needed for absolute liquidity (barring a credit default swaps meltdown). If these estimates turn out to be correct, the dollar will collapse from current levels. Likewise, the real estate correction will most definitely persist for several years. But there will be select regions that will rebound much sooner. Throughout this period, oil prices will climb higher, as will commodities and inflation. Finally, interest rates will soar. All of this could combine to keep real estate prices contained for several years.

I stand by my 2006 estimates for the real estate meltdown, with a 30% to 35% decline in real estate from peak levels across the nation. Thus far, there has been about a 15-18% decline from the peak. Other estimates I made in 2006 predict a 1-3% annualized return from the Dow during the current bear market period (the period beginning in 2001 and persisting through 2012). Thus far, this has held firmly in place. On an annualized basis, the Dow is up by about 1.5% since 2001. Furthermore, if you adjust the price of the Dow to account for the declining dollar, it stands at around 8500.

In total, the effects of the real estate and banking crisis will most likely cause total losses of over $10 trillion. Even without a global meltdown of the financial system, U.S. banks will end up losing up to $1 trillion–about six times the losses from the Savings and Loan crisis in 1988. Homeowners will lose about $6 trillion on paper from the value of their homes. And job losses due to the real estate and banking crisis will account for the remainder. Municipalities are already feeling the squeeze due to declining home values and record foreclosures. Over the next two years, most cities will face huge budget deficits due to diminished sales and property tax revenues. California has already declared a state of fiscal emergency due to an estimated $20 billion budget deficit expected over the next 15 months.

Still, all of this may be minor compared to the increasing risk of a meltdown in the $40 trillion credit default swaps market. While some feel that a temporary decline in home values will not cause any damage to them, consider that the normal rate of home sales due to job changes, divorces, death, etc. will cause a substantial percentage of this devaluation to be transformed into real losses. As well, the wealth effect that was created during the bubble has now flip-flopped into the poor effect. Even homeowners with no outstanding mortgage debt will feel the pain of collapsing home values. And this alone will crush consumer spending. Plummeting home values have already caused many to walk away rather than honor their mortgage obligation. Can you blame them?

Despite all of the obvious signs, Washington and Wall Street remain in denial, as do the puppet TV and radio journalists. While many are clueless, the others see what’s going on. But they don’t want to reveal the truth because they’re afraid it will create a self-fulfilling prophecy. Sorry, it’s too late. Consumers already expect the worst. Accordingly, consumer confidence recently hit a 26-year low. Despite reports from much of Wall Street that the worst is over, there will be much more devastation in the coming years. Even after the real estate and banking problems subside, the problems for consumers will only get worse. The average American will struggle to pay for food, energy and healthcare. Rather than the 33% peak unemployment rate seen during the depression, America will have 50-60% underemployment rate. Inflation for basic necessities will persist for many years. Americans don’t need less expensive electronics. They need affordable prices for basic necessities – gasoline, food, and healthcare. Doesn’t it seem odd that the things Americans need most are experiencing a hyperinflation trend? When America’s inflation crisis began in the ‘70s, oil surged, gold skyrocketed and the economy was faced with a brutalizing transition. Back then, it was in much better position to weather the storm because it was the world’s leading creditor. It was also more self-sufficient in producing its oil needs.

Today, America is the world’s largest debtor, while relying on foreign nations for most of its oil demand. Even if peak oil proves to be a myth, continued conflicts in the Middle East combined with soaring oil demand from Asia promises to move oil prices higher in the coming years.

With rare exception, investors should stay clear of traditional asset classes. If you haven’t already done so, you’d be wise to invest in commodities, gold, oil trusts, and foreign currencies (Yen and Swiss Franc). In addition, investors without short investment horizons should have some exposure in China and Latin America. Keeping cash on hand is also advised. When the market sells off, you may choose to buy in. But don’t expect it to last. Buying the U.S. market after sell offs and moving to cash after rebounds is the best way to navigate this storm. A buy-and-hold strategy will crush most investors. Once rates begin to soar, Washington will no longer be able to suppress inflation data. At that point TIPS will be a good investment. Over the next decade, I expect gold, select foreign currencies, oil trusts, TIPS, Chinese and Latin American equities to significantly outperform the U.S. stock market. Watch out though, because if things get really bad, the entire world will be affected. But that will represent a buying opportunity in Chinese and Brazilian equities.

The only exception I would make for traditional U.S. equities would be an investment in select drug makers (Pfizer (PFE), Bristol Myers Squibb (BMY), GlaxoSmithKline (GSK) and Merck (MRK)) for investors with long investment horizons. Sure, each one has its fair share of problems to contend with, namely pipeline issues. But they still represent America’s only legal monopoly via drug patents. And Medicare Part D promises to boost profits for many years to come.

Currently, the market is way overbought, both for the short and intermediate-term. At this point, it has much more downside than upside so you should consider taking some money off the table. You might want to initiate or add small positions in gold (streetTracks Gold ETF (GLD), Northgate Minerals Corporation (NXG)) and oil trusts (Pengrowth Energy Trust (PGH), Penn West Energy (PWE) and Permian Basin Royalty Trust (PBT)) due to recent corrections.

Finally, I would advise investors to consider taking some type of short position in financials pretty soon, preferably with an ETF, such as UltraShort Financials ProShares (SKF).

Disclosures: As of the release of this commentary, Mike owns shares of PGH, PWE, PFE, and NXG mentioned in this article.

Comments

[Old Bull:]

Wow, this guy really is way ahead of the curve! Short SKF...after the financial crisis has been discounted, buy gold three years into a bull market? Buy oil when it's close to its all-time high? How can we possibly lose?

2008 May 05 07:56 AM

[MSmailbox:]

Although, this near-Armageddon scenario may not occur, so it may. This is the clearest and most coherant "big-picture" of the possible reaction, which I've seen (read). While I would stress that this may not occur, it appears plausible and anyone would be wise to devote a portion of their investments, to address this contingency... Many things could change to make this picture somewhat better, or, even worse. I doubt whether I will have a flat tire, over the next year or two, based on my experience, however, I devote 25% of my investment in tires to address the possibility of a failure (4 active and one spare)... I would not hesitate to devote 25% of my financial investments to a defensive strategy, addressing the issues which the author raises. Are the speciific investments that he recommends, the best? I don't know, just as I don't know what brand of tires might be best, but I sure believe in carrying a spare, even though I haven't had a flat in many years.

Excellent analysis of the elements of risk, contained within our national economy! Not a very pretty picture, but "good job" on revealing the underlying pathology, of our economically-challenge... patient, indeed! I'm not sure about the treatment options, but the prognosis is sobering and ought to affect the patients lifestyle, so long as the patient still desires to live.

2008 May 05 10:41 AM

[BlueDome:]

What is "Must Read" about this "News"?

2008 May 05 11:36 AM

[Mike Stathis:]

Magman, just so there is no confusion, SKF is an Ultrashort Financial EFT. Hence, to take a short posture in financials, one would buy (not short) it.

As for the treatment options to avert this potential economic catastrophe, Washington must restructure free trade and healthcare, America's biggest problems. To enable this, voters must demand an end to lobbyists donations. As long as money flows from corporations to Washington, America will be controlled by corporate America and working-class Americans will suffer.

2008 May 05 12:29 PM

[texasgolfer:]

Because oil is at a "high" doesn't mean it can't/won't go higher. If the current cycle of reducing spending continues and asset values continue to decline (I have not see anyone saying they probably won't) then the government will not hesitate to raise taxes since their enlightenment must survive even at the expense of the taxpayers. Two defeatocratic candidates say they will raise taxes by not extending the tax cuts and possibly increase taxes in other "financial impact" areas including capital gain (we need change).
Can we grow our way out of the deficits plus cover rising expense from boomer retirement and medicad/soc security cost? Maybe but probably not with our service employment based on junk food and unskilled mom/pop business, call centers, tele marketing and landscaping contractors. High school grad rates are down and we seem to be creating a society of slightly educated and somewhat educated. I teach at a community college and rarely can my classes handle reading for comprehension and 6/7th grade basic math or understand percentages. My son's speaker at his coming college graduation is a life long criminal with a triple murder conviction that was up held by a second trial and he was ultimately released as the prosecutor did want a 3rd trial after 22 years. This is suppose to inspire learning? Drive and observe many of our favorite cities and cast a very critical eye as to what progress you see. Recent employment gains seem to be government sponsored not business generated. Many public service workers seen to work for their early retirement benefits and view labor negotiations as a type of future lottery for their benefit. While I can see the writer being called too negative, I never see anyone providing a achievable solution to the areas addressed. If seems we are giving away money to home buyers are are not capable of owning a home without massive government assistance from our tax dollars probably just to keep some money from R E taxes flowing to the
state. Most government statistics are cooked and even wall street
knows not to believe them or rely on them for accuracy. If our elected "leaders" lie and we know it, they we have no reason to believe or support government. We can not even agree to an official English language and while we are allegedly trying to stop illegal immigration we have sanctuary cities not enforcing the laws.
I am a Vietnam vet that fought on the rivers for the LBJ lie and I see many more dark clouds than beams of sunlight. Just seems like no one wants to lead or maybe they lack the capability and we as a nation may be just clearing our zenith and heading down. My favorite anecdotal example of change is being the only English speaker in the local post offices in Southern California including the employees. We need solutions, not the B S from Congress.

2008 May 05 12:59 PM

[Jason Rines...:]

You got it Mike. Also, if Washington is serious about America, it would enact an emergency energy bill of 2008. Subsidize $200 B into alternatives (coal, solar, nuke and non-corn biodiesel) from Treasury. With We the People backing the investment, investing in America again to create a viable competing market for big oil worthwile for the global investor and great for the American and global consumer. We could be such a massive exporter of energy, healthcare, education, agriculture and metals but affordable energy is key to all these things. Coincidentally, such an investment opportunity as energy would sure fix balance sheets in the banking system in a hurry. It would also create millions of jobs in the service economy rather then millions of Americans learning to dig ditches or work for $9 an hour at a final assembly plant with no benefits somewhere in east bumcluck.

2008 May 05 01:08 PM

[globalmacro:]

Wow, for a fairly typical bearish commentary similar to many others I've read in the last 9 months, this was a pretty good piece. I actually found myself reading most of it. I think I kept reading because you made a solid recommendation of Chinese and Latin American stocks which are clearly a great value at current levels. So, you're a reasonable fellow.

2008 May 05 03:55 PM

[Plantinseeds:]

I think your article is great Mike. I just don't think it went far enough as too how ugly it most likely will get. I am not defending Bernake at all but he inherited a corrupt and blantantly " I don't give a crap about ethics and morals I just wanna have all the power" economy and goverment.
To the person who stated an Armageddon style forcast by Mike, well, I can assure you that Mikes scenario as bleak as it is is not even a fraction of how bad it will be when this world gets close to tribulation times.
I too beleive that we need to go ahead and feel that pain now. Let those that are partly responsible for this mess to loose their shorts so that we can start rebuilding.
Ultimatley though you and I are responsible for the corrupt goverment and the power elite with no morals or ethics. Even us investors don't want to know how the money flows to our investments we just want our share too.
I know I'm gonna catch alot of flack for this post...thats ok. I was once greedy and didn't care bout no morals either :)

2008 May 05 06:39 PM

[relmor:]

Magman, your wrong, and he is completely right. He said oil would continue to go up, and gold and gold stocks are perfect to buy soon, if not now, if the Comex raiders are going to use the sell in may and go away as a chance to skyrocket gold while everyone isnt looking, putting the 850 price buying opportunity at a very quick chance. Everything he lists is a winner. The stock market is a shell game, and its based on very little reality in most cases. For example, $45 a share for Merril Lynch? Why would I give $45 of my hard earned dollars for one share of a company that cant make money. KB Homes went up today. LOL LOL People actually think that their going to be building homes and selling them this year? That stock should be $1. All bank stocks should be priced between $.10 cents and $2, if everyone was informed correctly.

2008 May 05 10:42 PM

[relmor:]

Mike, you are very naive to think healthcare can be solved by eliminating lobbyists. They go go behind closed doors then, big deal. You have to root out the problem in healthcare. The problem is, we need it too much. Heres a thinker. If you attacked the problem from the reason we all spend too much money at the doctor, we can keep the current system, and just use it 50-80 percent less. I know, you cant make people eat healthy, but you can make companies responsible for the crap they feed us. If they want high frutose corn sryup to be legal, hydrogentated oils, artifical sweeteners, etc... then they need to convince me that it is food. Food gives life, and energy. If its not food, then its taxed, like crazy. That money goes to health care. You would see a huge shift to real products made with actual food. Problem solved. Educate people on why they are given pills, what antibiodics really are, and that doctors now are nothing more than salesmen for drug companies. If you break your arm, fine. O, and cancer, curable by eating apple and peach seeds. Vitamin b17 is why we get cancer. We dont get it anymore. The lowest rate of cancer on the planet is in an area of Nepal where they actually use peach seeds as there system of currency. Through making companies responsible for the products they produce, and educating americans on the realities of health, will improve things way more than eliminating lobbyists ever will. Everything you wrote in your article I agree with. Your right on, but your a little too opptimistic, i know, you opptomistic, lol.

2008 May 05 10:51 PM

[relmor:]

O, and how dare you write an article like that an not recommend physical gold or silver. Its the only way to insure your product when you need it. You can always sell it if you want too. If you want to play with GLD, then your limiting your profits. Same with SLV, waste of money. And plus, by buying physical you actually take a limited resource out of the market. If everyoen bought gold and silver, instead of jerked off on the etfs, gold would be im guessing at least 1-10 percent higher? That would compound over time, plus if we buy it, it would force all the central banks to buy it, driving up the price even more, and ever time gold adds a dollar, it sticks a knife in every elitist wallet, and im not talking Rupert Murdock and Warren Buffet, those guys arent rich, trust me. Im talking about the real elite, the ones that have invisible income. I wont name names, but go through the worlds richest people list, and you will notice an alarming lack of who you would think would be there. They are nowhere, because they dont want you to know how much of your money(its trillions folks, yes there are trillionarie familes out there).

2008 May 05 10:59 PM

[steve west:]

wow that was a lot of hot air

2008 May 05 11:31 PM

[Mike Stathis:]

In response to fredlee....I appreciate your comments, and I agree with most of what you said - in all 3 of your comments...Except the part about me being naive about the effect of lobbyists on the healthcare industry. My core technological expertise is healthcare. Understand that I was limited to what I could mention about it without distracting too much. As you can see, my article was quite long as it is.

The problems with healthcare are numerous; so much in fact that most people think they realize what the problems are, yet they overlook so many others. Without addressing all of the core problems, can't possibly understand potential solutions. But certainly, the healthcare lobbyists - the largest most powerful lobbyists groups in Washington - have a big role in the healthcare crisis; namely, making sure that Washington stays away from price controls. And cost containment is perhaps the biggest problem in healthcare because high costs limit access which prevents more from having coverage, which increases the number of medical bankruptcies. You point about eating healthy is well taken and I completely agree. The food industry must be held more accountable for poisoning the food supply.

That said, I feel that I do understand the full complexity of the problems that have created a healthcare crisis. And am currently working on what I hope to be a groundbreaking book, geared for investors that introduces telemedicine as part of the solution. Perhaps in the future I will address healthcare as it relates to investments.

As far as investing in physical gold, while I do see value in that approach, I did not feel it was relevant to most readers of Seeking Alpha since the site appears to be geared for stock market investors. I guess I was wrong!

buying and holding the physical gold has both advantages and disadvantages. First, you have to worry about storing it in a safe place or else you will have to pay to have it stored. Second, you won't be able to take advantage of the tremendous volatility swings. If you are a good trader you can make alot of money trading it. Finally, it is not nearly as liquid as gold ETFs and you have to pay a spread to buy and sell it.

HOWEVER, the great thing about holding physical gold is that it prevents one from trading it. Even the best traders can get shut out after failing to get back in right before a huge rally. And it could soar from there. In addition, trading it will create a big tax liability which some won't be prepared to meet without hardship.

Finally, you should understand that the gold ETFs are supposed to be buying the physical gold in accordance with demand for the ETF. So buying the physical gold yourself won't increase the price due to a supply-demand imbalance.

HOWVER, no one really knows for certain whether or not the ETFs really hold all the gold they claim since the audits only check for paperwork.

In conclusion, for some, holding physical gold is the best way to go. For others, managing a gold position in ETFs is preferred. As for silver, I actually think it has more upside at current levels than gold. But I think it will heat up later. Right now, gold is on fire due to the banking crisis.

For those of you who feel I've understated the potential disaster, you should know that I try to make conservative forecasts. For everyone else, I appreciate your comments and feedback, especially the generous compliments.

2008 May 06 01:15 AM

[relmor:]

Thank you for your response Mike, I will withdraw the naive comment, and replace it with hopefull, I apologize. You are very informed about the details, true. As for the ETF, I mean its bad for , hey I need my gold, like NOW, situation. And if you buy and hold, over time, you will not lose. So its a win win. And yes, every once held by citizens, is one less ounce the central banks control you. Agree with it or not, thats up to you. If everyone bought 1000 worth of gold in the world who could afford it, you do the math on supply. Every person in the world should hold at least 20% of their savings in physical gold or silver. Its a no brainer these days.

2008 May 06 08:53 PM

[Prof. Walsh:]

Mike well-written piece thank you. Interesting how I stumbled upon your work noting I recently entered into a modest position in PFE last week via my taxable account. Since I recently inherited physical P.M.'s via my fathers passing I dont invest in miners even though I have traded MRB recently for a quick double. Long-positions per my IRA include XTO and it's "quasi-trust HGT;" tha latter breaking through a key resistance area of $ 30.60 on strong volume last week.
I also own soverign debt in this account (e.g. C.E.F.'s like AWF and lower beta M.F.'s like TEGBX for the wife).
As for other currencies like the Swiss Franc, would like to see if the greenback can regain a 74 handle before establishing a position.

2008 May 11 01:43 PM

[Prof. Walsh:]

Mike as a former elected-official in Silicon Valley and executive of a large biotech firm in Palo Alto I agree with your health-care related comments via first-hand experience; please let us know when your book comes-out thanks again.

2008 May 11 01:51 PM

[Diegojames:]

Great job fellow travelers. Write Congress for a new energy policy. This would enclude off shore drilling (USA BOTH COASTS) , crash building of nuclear energy complexes near population centers for electrical cars. And legislation forcing GM, FORD to build electric(lithum battery) cars with diesel hybrid arrangements and electric motors.

Nissan and Renault will make them in 2011. And the rest of the world does not care about the USA...GET IT STUPID??...it is about financial strength and power and we are about to be enslaved and sold out.
GET READY TO BE FINANCIAL, POLITICAL MINUTE MEN just like 1775.Remember our ancestors.DUMP CONGRESS like KING GEORGE and the RED Coats and the deals they made with OIL Produers in MIDDLE EAST.

When we STOP SENDING TRILLIONS OF USA DOLLARS TO OTHER COUNTRIES AND INVEST IN OURSELVES the US$$$$ will have value again.
Also dump government give aways.

Waiting for some solar/wind power in sunny, safe, cheap
Northridge, California;

2008 May 11 02:54 PM

[Middle:]

Mike -

Healthcare is going up because there are more older people, and less working people, and we all want to live longer. If we, as a society, choose to accept death when nature says its time, and if we start having larger families again, then our health care costs would shrink.

I bet you would chose to fight cancer if you had it, and I bet you dont have many kids. So you are part of the problem. Stop calling the kettle black.

2008 May 14 01:31 PM

[Mike Stathis:]

Wrong Middle. Healthcare is NOT going up due to boomer demographics. Boomers have not even turned 65 yet. Boomer demographics over the next 20 years WILL make the problems worse, namely due to the crisis in chronic disease management, which already constitutes over 70% of all healthcare expenses. But right now the costs are due to the excessive profiteering by the healthcare mafia – HMOs, drug companies, device makers, etc. This is a fact.

How is it that the U.S. spends 18% of GDP on healthcare and has the highest rate of medical errors, 50 million without coverage, nearly 1 million medically-related bankruptcies each year, and a ranking of 37th by the WHO – yet, most of the rest of the world has healthcare expenditures ranging from 6-8% of GDP, with virtually no fraud, less waste, much fewer medical errors, and much better rankings? Answer: a healthcare "free-for-all" among the providers who focus on profits and often sacrafice quality care.

In fact, according to studies from John’s Hopkins (Dr. Starfield--google it), due to medical errors, physicians are now the #3 cause of death in America.

2008 May 15 01:45 AM

[Middle:]

Mike - I love it. Apparently I really got under your collar with my post. And, now I realize that you are just another pie-in-the-sky socialist.

Frst, if I may be so bold - Physicians dont kill people. Physicians sometimes fail to pull off a miracle and save a life - and then its called murder. What the heck kind of country do you think this is? My family had a medical issue, and we resorted to the online community for support, we realized that everybody in "socialized medicine" nations were dying to get into the US for medical care. Yes, HMOs are nasty organizations filled with wasted overhead, I am with you. But government health care will be HMO squared.

Listen, there are dozens of other socialist nations out there. There is only one superpower non-socialist nation left. Us people who dont like socialism are running out of choices on where to live. Kindly take you and your commie thoughts to one of those many other countries and leave mine alone. I dont tell commies how to live their lives, and I dont appreciate commies that my health care system is out to kill people.

2008 May 15 12:12 PM

[Dogtownsurfer:]

MIke -

Fantastic article. For those reading this anew, like I just did, the Dow was off 400 today, oil spiked $13 in the last two days to an all time high of $138 and SKF was up 10% TODAY ALONE to $122.

My only comment is to say that Mike you are, indeed, conservative. This "credit crisis" (and why do we call it that? That's like the drunk saying I have a stopping, not a drinking, problem) has already derailed the US economy and we are only beginning to feel its effects.

Remember the good old days - you know, February -when you could buy gas for $3.00? And when a loaf of bread cost $2.00 instead of its current $4.00? Well, remember them fondly, because until the Fed keeps propping up the illiquid banking system and Congress keeps propping up the insolvent housing market regular guys like you and me are going to take it in the shorts at the pump and the register.

But you know what? Nobody cares. At least nobody in any position to do anything about it, at least not that I can see. The entire inflation problem could be solved overnight if Bernenke would grow some stones and say "OK - enough. Sorry, bankers, sorry 2% of Americans with an underwater ARM, sorry Wall St.; inflation is killing this country and we are raising rates 100 BPs every month for the foreseeable future until I get my 2% PCE which I have talked about so often."

What are the chances? Zero.

Where is Paul Volcker when you need him?

Gonna be a wild ride.

2008 Jun 06 11:09 PM

[Mike Stathis:]

Dogtownsurf, I tried to warn investors the market was going to sell off. Since the article was posted a month ago, the Dow is down by nearly 900 points. Yet, as you can see, rather than take my advice and sell, many of these people would rather take cheap shots at me. This gives you an idea about the general audience on Seeking Alpha and it is one reason why I don't even bother to waste my time posting here anymore. The other reason is due to the fact that SA censors articles. They will only post material that has daily trading implications, which prevents any commentary about bigger picture events or things expected down the road. In short, I have come to realize that SA caters to the same people who waste time watching Cramer and other trash on CNBC, and I want to distance myself as far from that trash as possible.

You are right on both accounts - I try to be conservative so as not to disappoint. I find my success rate on predictions is extremely high when I am conservative. Yet, to many I seem extreme. remarkable isn't it? And yes indeed - no one in the position to fix things is. Indeed, I am sure Volcker is puking in disgust as he watches Bernanke intentionally destroy the dollar, along with the opportunities Americans once claimed made this nation filled with hope. At least you have the California coast to enjoy - something the Fed cannot easily destroy.

2008 Jun 09 06:55 PM

[borisb:]

Chindia's 3 Billion are buying up all the commodities they can get their paws on and there is nothing we can do about it.

2008 Jul 04 07:00 PM

[heymrbill:]

"and I want to distance myself as far from that trash as possible. "

Mike.. I'm a newcomer to SA and after reading your articles here for the past few days I have already decided to "hook my (financial) wagon up to your horse" by continuing to listen to everything you have to say and acting upon your investment advice, at least in the areas that I am familiar with.

Now you are suggesting that you may bolt from SA and vanish?

Say it isn't so, or better yet give to those of us who are listening to you (but never comment) and who, like myself are actually putting money down on the guidance you give to us, a way we can continue listening to what you have to say.
Do you have a subscription newsletter?

(Bill in Washington, DC)

2008 Jul 05 10:29 PM

[brokerbila:]

This link seems to be working fine. Was it off the web momentarily on March 1,2008? economicindicators.gov/

2008 Sep 15 12:02 AM