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David Galland is Managing Director of Casey Research, LLC. (http://www.caseyresearch.com/), and the Executive Director of the Explorers' League. His career in the resource and financial services industry dates back to a stint working underground at the Climax mine in Colorado, following college.... More
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  • Ben Graham’S Curse On Gold

    It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold's most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object "incapable of producing anything," so any investor holding it instead of stocks is acting out of irrational fear.

    How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

    Perhaps it has something to do with his mentor, Benjamin Graham.

    Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history's most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham's work.

    According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham's theory clearly shows periods when one asset class offered a better value than the other:

    (Click on image to enlarge)

    But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives.

    It's clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham's allocation model.

    (Click on image to enlarge)

    But this missing asset class is entirely understandable: for most of Graham's adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn't re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

    All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

    We can never know.

    We can know, however, that given Graham's outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

    A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment - stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

    Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

    So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they're operating with a severe handicap in their own portfolio. Meanwhile, we'll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

    Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

    David Galland is managing director of Casey Research, which provides independent investment analysis on a subscription basis to a global network of over 180,000 self-directed investors and money managers. Recognizing the emerging bull market in gold early on, in the late 1990s, Casey Research formed a metals and mining division that has grown into a leading provider of actionable gold and resource intelligence. For investors looking to become familiar with the asset category, Casey Research offers a monthly newsletter, BIG GOLD (try it risk free for 90 days), focusing on undervalued opportunities in mid- to large-cap producers, as well as best practices in buying, holding and selling precious metals. Learn now why it's more important than ever to invest in gold and gold-related equities.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 22 11:14 AM | Link | 2 Comments
  • Obama: A One-and-Done President?

    By the Editors of The Casey Report, Casey Research

    President Obama promised to turn around the floundering economy that he inherited from his predecessor. He promised jobs. He promised transparency. Not only did he not deliver on those campaign promises, he has led the nation further into the abyss on all counts. Today we are less prosperous, deeper in debt, and enjoy fewer liberties than when Obama first stepped into the Oval Office. His own party is losing faith in the messiah.

    You can see that loss of faith in the steady downward trajectory of Obama's approval ratings. While Democrats can take heart from the fact that no truly viable candidate has emerged from the GOP, it's clear that "Hope and Change" will not be sufficient to rally the electoral troops for Obama again in 2012. Voters are hurting, and Obama's claims that the blame lies with George W. Bush no longer provide any solace.

    Not only is the president's own reelection in jeopardy, his sagging polls are dragging down other Democrat candidates as well. Republican Bob Turner handily took Anthony Weiner's seat in New York's 9th Congressional District, a district that had been a Democrat stronghold since 1923. New York's 9th District has previously been represented by such Democrat stalwarts as Chuck Schumer and Geraldine Ferraro. During the special election for Weiner's seat, Obama had only 31 percent approval in that district, although he won there with 55 percent of the vote in the 2008 presidential election.

    A Democrat pollster attributed Turner's win to "the incredible unpopularity of Barack Obama dragging his party down in the district." Similarly, Republican Scott Brown took the Massachusetts seat that had been held by Ted Kennedy for almost 46 years. Brown's win was attributed in large part to widespread discontent over Obama's policies, particularly Obamacare.

    A Democrat strategist is warning his clients not to run in 2012. He said, "I don't want to see good candidates lose by 12 to 15 points because of the president." Pete Sessions (R-TX), National Republican Congressional Campaign chairman, said, "This clear rebuke of President Obama's policies delivers a blow to Democrats' goal of making Nancy Pelosi the speaker again. An unpopular President Obama is now a liability for Democrats nationwide in a 2012 election that is a referendum on his economic policies."

    The New York Times has observed that no incumbent president since FDR has won reelection with unemployment over 7.2%. Keep in mind that unemployment is actually much higher than the officially reported 9.2%. Other presidents have recovered from low approval ratings and high unemployment and still won reelection, but that will not happen here.

    The steps necessary to turn the economy around are antithetical to Obama and his collectivist, big-government philosophy. He will not make a 180-degree change in direction, so there is virtually no way unemployment will fall at all, not to mention substantially, before the election. Nor does he have any plans on the drawing board by which his popularity will rise. Instead, Obama berates a "do-nothing" Congress, including a Democrat majority in the Senate, for not passing his jobs bill - another dose of the same toxic medicine that has brought us to the economic doldrums where we languish today.

    Even if Obama turns out to be his party's standard bearer in 2012 and wins the election, he is likely to enter his second term having to deal with Republican majorities in both the House and Senate. Lacking the political skills of Bill Clinton, who similarly faced a Republican Congress, Obama would spend four years in a standoff with an intractable legislature - truly a do-nothing president.

    Many of those who so enthusiastically supported Obama in 2008 now have buyer's remorse. They could have had Hillary. Obama himself may be having second thoughts. He told NBC's Ann Curry that "there are days where I say that one term is enough."

    Obama told ABC News' Diane Sawyer that "I'd rather be a really good one-term president than a mediocre two-term president." It's fair to say that neither of those are realistic options. Neither really good nor mediocre remain within Obama's reach.

    Early in his presidency, he told NBC's Matt Lauer that "if I don't have this done in three years, then this is going to be a one-term proposition." Clearly, he has not and cannot "have this done" in three years or four years. Looks like one term it is.

    Stepping Down

    Obama has been compared to Harry Truman, who came from behind in 1948 to defeat Thomas Dewey for a second term in the White House. Truman ran successfully against a "do-nothing" Republican Congress. Obama is busy blaming this "do-nothing" Congress for not passing his jobs bill. Unlike Truman, who faced a GOP majority in both the House and Senate, Obama so far only has to deal with a Republican House. He still faces gridlock.

    Obama has also been compared to Truman in 1952. Truman believed that he could have the nomination simply for the asking, but he was challenged and defeated in a New Hampshire primary by Estes Kefauver, a first-term senator from Tennessee. Shortly after that defeat, Truman withdrew from the race. Ostensibly, he withdrew in the best interest of the country and because he was concerned that he could not govern effectively for four more years because of his advanced age. In fact, Truman was deeply disliked. He had been unable to bring the Korean War to an end or tame the federal deficit, and faced charges of corruption and cronyism in his administration. Sound familiar?

    Another parallel can be drawn to President Lyndon Johnson. Johnson was too much associated with the costly and unpopular Viet Nam war, and his Great Society was said to be a failure. He faced challenges from within his own party from Senators Eugene McCarthy and Bobby Kennedy, the brother of the assassinated president Johnson had replaced. On March 31, 1968, Johnson announced that "I shall not seek and will not accept the nomination of my party for another term as your president."

    Democrat pollsters Patrick Caddell and Douglas Schoen, in a November 21, 2011 opinion piece in the Wall Street Journal, note that Truman and Johnson both "took the moral high ground and decided against running for a new term as president." They conclude that "President Obama is facing a similar reality - and he must reach the same conclusion."

    Caddell and Schoen concede that…

    Mr. Obama could still win re-election in 2012. Even with his all-time low job approval ratings (and even worse ratings on handling the economy), the president could eke out a victory in November. But the kind of campaign required for the president's political survival would make it almost impossible for him to govern - not only during the campaign, but throughout a second term. Put simply, it seems that the White House has concluded that if the president cannot run on his record, he will need to wage the most negative campaign in history to stand any chance. With his job approval ratings below 45% overall and below 40% on the economy, the president cannot affirmatively make the case that voters are better off now than they were four years ago. He - like everyone else - knows that they are worse off.

    They urge the president to "abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president's accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton."

    They note, "Having unique experience in government as first lady, senator and now as Secretary of State, Mrs. Clinton is more qualified than any presidential candidate in recent memory, including her husband. Her election would arguably be as historic an event as the election of President Obama in 2008."

    That Schoen and Caddell are Democrat pollsters who worked, respectively, for Bill Clinton and Jimmy Carter is all the more telling of the mood in the party. They claim to "write as patriots and Democrats - concerned about the fate of our party and, most of all, our country. We do not write as people who have been in contact with Mrs. Clinton or her political operation. Nor would we expect to be directly involved in any Clinton campaign." They conclude that "not only is Mrs. Clinton better positioned to win in 2012 than Mr. Obama, but she is better positioned to govern if she does."

    Hillary, however, will supposedly have none of it. She told CBS' White House correspondent Norah O'Donnell she would not consider running for president. She said, "I had a great run, I was very grateful that I could do that. I felt just really good about the experience, but that was then and this is now, and I'm looking forward."

    Caddell and Schoen will not be swayed, however. "If President Obama is not willing to seize the moral high ground and step aside, then the two Democratic leaders in Congress, Sen. Harry Reid and Rep. Nancy Pelosi, must urge the president not to seek re-election - for the good of the party and most of all for the good of the country. And they must present the only clear alternative - Hillary Clinton."

    Will Obama seize the high moral ground and step aside? Not likely. He is probably incapable of blaming himself for his predicament. He could be forced aside, perhaps by the threat of a scandal (Solyndra, MF Global, and illegal actions by his attorney general and Department of Justice). He seems even now to have trouble understanding what went wrong. He has apparently not yet considered the possibility that the luminaries with whom he has surrounded himself, including Fed Chairman Ben Bernanke, could simply be mistaken about how the world works.

    Laissez Faire

    Oddly, a do-nothing president is just what we need, but of a different sort than Obama. The answer to most of the difficult questions about government is that government has no business doing whatever it is in the first place. Of the crop of Republican contenders, only Congressman Ron Paul and New Mexico Governor Gary Johnson acknowledge that reining in the lumbering, overreaching behemoth that our government has become is the real challenge facing the next president. Other Republican hopefuls pay lip service to whittling government down to size but not by the drastic steps that are now not only necessary but overdue.

    Indeed, our government has now become so hostile and damaging to its citizens that one could fairly argue that we would be better off with almost no government at all. As Grover Norquist famously stated: "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

    Both Ron Paul and Gary Johnson are seen as not being presidential material because they are unwilling to perpetuate longstanding scams. They are thought not to be presidential material because they don't understand how the game is played or, if they do, because they are unwilling to play it. Admittedly, presidential politics has been such an extremely complex and convoluted affair that it seems only sophisticated players can handle it, but that is exactly what is wrong here.

    [Obama's policies are clear on one point: he seeks to continue slyly draining investors' assets through inflation. There are ways to circumvent it - if you're willing to learn how to make friends with shifting trends.]

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 16 4:26 PM | Link | 1 Comment
  • About Those US Jobs

    US politicians make a great show of concerning themselves with the level of unemployment. And so they bluster about the need for this new program or that new program - in fact, about any new idea except for the one that will actually be effective. Namely, stop the meddling.

    Recently there have been some interesting developments that merely confirm the government's intentions are to continue doing exactly the opposite of what they should be doing.

    For starters, we had the news that President Obama announced his administration was going to block the Keystone XL pipeline, blaming the decision on the Republicans and foisting responsibility for the call onto the back of Hillary Clinton's State Department.

    The story has received quite a bit of coverage, so I won't repeat it here. However, I will mention a Reuters column by John Kemp, titled Keystone symbolizes what is wrong with US policy. As he points out, the initial permit application for Keystone XL was filed in 2008 - and yet here we are, going on four years later, and the president is complaining about the "rushed and arbitrary deadline" imposed by the Republicans as part of the latest round of budget theatrics.

    The actual fact of the matter is that the United States is becoming increasingly unfriendly toward businesses that actually produce anything tangible, despite our politicians constantly carping about the evil capitalists sending American jobs overseas.

    On that front, there's a great series that Bloomberg has just kicked off, titled America's Dirty War Against Manufacturing, on why US manufacturing is expatriating itself. Here's a relevant quote:

    Those industries left the U.S. in search not of cheaper workers, but of more supportive governments. If the U.S. lost manufacturing due to high wages (or unions, labor laws, regulation - the other commonly cited villains), how do you explain the manufacturing success of Germany and Japan? Germany, the world's pre-eminent high-end manufacturing economy, has higher wages, stronger unions and stricter labor laws than the U.S. Japan, too, is a high-wage competitor, yet Toyota Motor Corp. still makes 60 percent of its vehicles there. General Motors Co. makes only about 30 percent in North America.

    So if wages aren't to blame, what is?

    Policy. But is US government policy really hostile to manufacturing?

    Sadly, yes.

    While the government may make life hard for the manufacturing sector, it positively detests the extractive industries - the Keystone XL pipeline being just one of many recent examples. This week, for instance, the outlook for new mineral exploration and mining in the geological treasure-chest state of Nevada was cast into doubt by new regulations related to protecting the habitat of the sage grouse.

    I have nothing against the sage grouse personally, or any other bird, for that matter. I am simply trying to make the point that if you are trying to attract capital investment, create jobs and reduce dependence on foreign producers of the tangibles our economy relies on, surprising businesses with ever more regulations is not helpful.

    But the story my friend Porter Stansberry sent me takes the cake - it is a proposal to establish a "Reasonable Profits Board" whose sole purpose will be to control how much companies in the oil and gas business will be able to earn going forward.

    A relevant quote from the article:

    The Democrats, worried about higher gas prices, want to set up a board that would apply a "windfall profit tax" as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

    The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding "a reasonable profit." It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress.

    The bill would also seem to exclude industry representatives from the board, as it says members "shall have no financial interests in any of the businesses for which reasonable profits are determined by the Board."

    Dan Ferris, the editor of Stansberry's Extreme Value newsletter, was on the same email string and on reading the article wrote back the following note, which I thought worth sharing.

    So... just to recap, then...

    Selling gasoline is a crap, low (if any) margin business. If you don't attach a convenience store to it, you make nothing. Refining gasoline has a margin between something like 1% and negative infinity, except every now and then when it almost looks like it's not another crappy business.

    And Congress says they make too much money. If they could guarantee a reasonable profit, they'd be subsidizing it, not taxing it.

    People who lend out your deposits (ten times over) and forbid Walmart from entering their business because Walmart's model would only benefit customers, not cronies, aren't making too much money.

    People who get money from the government to keep the price of sugar double the global price aren't making too much money.

    People who get money from government to grow corn so they can do the most expensive possible thing with it - turn it into ethanol - aren't making too much money.

    Al Gore's carbon credit trading operation isn't making too much money.

    College professors who don't teach, who drink fine wine, live in Tudor McMansions and drive Volvos while writing papers on the oppression of women in the workforce aren't making too much money.

    But people who sell gasoline... one of the skinniest margins on Earth... a product without which life as we know it comes to a grinding halt... they're making too much money.

    This is what you get when you vote, people trying to make good sound bites for ignoramuses who vote, as if the political process had all the depth and meaning of a Disney movie trailer. "Coming soon: Hope, Change and Reasonable Profits!"

    And, finally, to put this all in perspective, the following is a quote that Reason magazine ran from Eric Schmidt of Google.

    Q: You recently testified before Congress in an antitrust hearing about Google. What are your reflections on the experience? Were the leaders there asking the right questions?

    Eric Schmidt: So we get hauled in front of the Congress for developing a product that's free, that serves a billion people. Okay? I mean, I don't know how to say it any clearer. I mean, it's fine. It's their job. But it's not like we raised prices. We could lower prices from free to… lower than free? You see what I'm saying?

    I've said it before, I'll say it again here - if you want to fix the economy, stop government meddling!

    [Persistently high unemployment is just one thread in the American debt crisis tapestry. Yet there are ways you can protect yourself - and even profit - during these troubling times.]

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 31 1:49 PM | Link | Comment!
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