E.D. Hart

Tactical Asset Allocation Based on the Yield Curve

There is also something to be said for being long gold and commodities when real interest rates are negative (as they are now) and being long stocks and bonds when real interest rates are high, positive, and about to fall (think 1983).

From 1971 to 1983 real interest rates rose (not in a straight line) and peaked late 1983. From there on, it was about a 17 year bull markest for equities, and bonds too if you bought at the peak.

The analgous situation today is that we are in low and falling real interest rates similar to 1974. For the next 7 years real rates were negative--it paid to borrow and invest in commodity type assets that outpaced inflation.

Weve been thrown into a brutal recession from high oil, and speculative leverage in real estate, and rates will be kept low for some time. Contrary to media outlet reports, real inflation is positive (not governement bogus cpi data), and therefore real interest rates are negative, and falling as inflation picks up.

The question should be: how to invest in a negative real interest rate environment? The answer is clear--gold, silver, commodities until real rates turn positive.

Marc Faber Is Conflicted About the Price of Gold

Exactly right...good point. He has been very consistent on gold, and currency debasement.

And BTW, YES, I read this report with a thick Austrian accent in my head.


On Nov 12 02:58 PM Nathaniel C wrote:

> I have noticed that the media (especially CNBC) hype statements by
> Faber. A while back he said the dollar was looking oversold and could
> get a meaningful bounce--Cnbc ran a headline that said "Faber: Dollar's
> rise will punish all assets."
>
> I subscribe to the Gloom, Boom, Doom report and Faber said that if
> gold falls below $1000 it could quickly go to $800 because of technical
> selling.
>
> Faber has been bullish on gold since 2001 when it was trading around
> $250.

Victor Niederhoffer’s Review of My Paper: 'A Worthless Article'

Thanks Mebane for your great work--you take a common sense view to investing and work risk reduction into your models.With timed asset allocation you will never suffer gamblers ruin. Exactly the same approach I use. Loved your book, by the way. keep up the good work.

For Your Perusal: The Glory of Free Market Oil Supply

Saudi fields will likely peak in 2015. Even the Saudis have limited capacity after having pushed their filed too far too fast with saltwater injection methods.

Stimulus Nation: What Are We Getting for Our $3.27 Trillion?

The cost/benefit analysis is doubly difficult from that espoused by the author because the accounting should compare the costs of action to the benefits of action, vs costs of non action vs the benefits of non-action.

Compare the cost of responding now against the benefits of responding now. (costs are still being tallied, and the benefits are difficult to quantify--compared to what?)

Compare the costs of not responding (many many more failed banks, failed currencies--Iceland anyone?, and possible failed states, possible 20% unemployment, higher crime?, global unrest) against the benefits of not responding (saving money, avoided currency collapse, lessened moral hazard).

Benefits of not responding are virtually identical to costs of responding- except its money saved vs. money spent.

But the benefits of responding are NOT the same as the costs of not responding. The benefits of responding may seem like thin gruel, (some jobs created, some saved jobs) but compared to the COSTS of not responding--it may be a bargain.

The costs of not responding are unknowable, but were so threatening that they were deemed to be real, and potentially catastrophic to the global financial system.

In other words--we don't know, but two administrations looked into the abyss and decided that the risks of not responding were greater than the costs of responding. They erred on the side of caution if global economic and political catastrophe were to be avoided.

The Myth of Uncorrelated Return

A person holding 25% gold, 25% 30 Year Treasuries, 25% Equities, and 25% real estate would have had a positive return over the last decade, even with the 2008 carnage.

Gold was up last year. In the eye of the storm, and its passing, gold shone last year, and is in a 9 year bull market. Silver will likely outperform gold going forward and silver is up some 80% this year.

Check out the Permanent Funds holding. I used asset diversification to gain a real return last year using gold, and gold derivitives. This is a nuanced issue, not simple to put into rules of thumb. I agree that the common view portrayed in the media and the brokerage houses is incorrect at the margins.

But, asset allocation does work--and yet not in the way that they oversimplify it. Targeted retirement funds are an example of oversimplified products for the financially uneducated masses that can be a horrible idea.

What good is an portfolio of 40% bonds, and 60% equities going to do me in a highly uncertain regulatory environment, with global macro and currency realignments going forward that may last the next ten years?

Asset allocation needs to be rethought as pertaining to dynamic/adaptive systems. I see commodities as an asset to mitigate some risk of inflation going forward.

**********************...


On Oct 30 02:45 PM mna wrote:

> E.D. - Perfect statement right there.
>
> I would disagree with the premise of the article above though. I
> think assets are uncorrelated, until when it really matters; everything
> is correlated when stuff hits the fan.
>
> In other words, asset diversification will not help you when you
> most need its help. It's not to say there's no value in diversification,
> it's just that you have to do value/risk calculations to see if it's
> worth it.
>
> Don't trust your broker to do your calculations either. Most are
> completely clueless and are just there to sell you financial products
> for commission. Don't believe me? Ask your broker next time about
> whats your value at risk for your portfolio and ask to see the math.
> You'll be met with many blank stares and attempts to sidestep the
> question. Are there good brokers that actually know there stuff?
> yes. but chances are, you don't have one.
>
> On Oct 30 12:28 PM E.D. Hart wrote:

The Myth of Uncorrelated Return

This is one of the most cogent well written short papers Ive read in awhile. You have the natural selection analogy right--markets are constantly changing, and market participants are constantly adapting, or not. Their is no single investment strategy for all markets.

I would add that there is no such thing as risk free assets. Treasuries are in a bubble, and cash erodes by the real rate of inflation (significantly above the CPI).

Every asset class has risk. The trick is finding the best risk reward tradeoff--and investing accordingly.

Here's Why Asia Must Eventually Ditch the Dollar

Sterling failed because the British Empire (two world wars and numerous skirmishes) along with numerous social programs had loaded so much debt on the balance sheet that the suspicion grew that the currency was more and more hollow.

Debt as a percentage of the British GDP ballooned in the 70's and only mitigated some because of the North Sea oil revenue. Sound familiar? Only difference is the US lacks oil revenue and is a net oil importer.
**********************...


On Oct 26 04:42 PM User 183836 wrote:

> So what was it that caused the Sterling to stop being used?
> GC

Here's Why Asia Must Eventually Ditch the Dollar

Except that they think incrementally, and 50 to 100 years out. They already are de-emphasizing the dollar as reserve currency. It took well over 3 decades for the sun to set on the British Empire (read: the Pound Sterling), and we may be looking at two or three decades to replace the dollar as the worlds primary trade currency. Its already happening.


On Oct 26 02:43 PM Mad Hedge Fund Trader wrote:

> bdc Will people pleeease stop incessantly talking about the possibility
> of China dropping the dollar as a reserve currency? What else are
> they going to use? Monopoly money? Taiwanese dollars? Collectable
> postage stamps? At nearly $2 trillion, the Middle Kingdom’s reserves
> are so enormous that no other currency in the world could accommodate
> the switch, and no other security offers the necessary depth and
> liquidity but Treasury bills. Chinese attempts to buy anything in
> size causes its price to immediately skyrocket, such as we saw in
> the relatively Lilliputian commodity markets last year. And really,
> how like is it that China embarks on policies that quickly halve
> the earnings of the country’s exporters, as well as its 30 year
> hoard of accumulated savings? The demise of the dollar has been predicted
> more often than the ditching of Microsoft’s Windows as the global
> PC operating system, and is just as likely. Hate the greenback as
> much as you like, but there just isn’t any other alternative. I have
> been hearing these arguments ever since the US went off the gold
> standard in 1973. First there was a perennial Arab threat to price
> crude in a basket of currencies. Gee, they never seem to complain
> when the buck is going up. Then there was the speculated emergence
> of the “Yen Block”, in the eighties, back when Japan was dominating
> international trade and the yen was bumping up against ¥80 to the
> dollar. Remember the book “Japan as Number One? Ha! Double Ha! Then
> we got all that European whining after the launch of the euro when
> the weak dollar was everyone’s one way trade. Let’s face it, Europeans
> hate using someone else’s currency as the primary reserve instrument.
> Before the dollar, sterling was in widespread use and was equally
> despised. So rather than waste time discussing this issue anymore,
> let’s talk about something more important, like which of those two
> flies over there will jump off the wall first.

Roubini Hates Gold: Is He Wrong Again?

The same is true about real estate--when you hear adds touting making money in real estate. But it doesn't mean Real estate or gold are bad investments--just that the person touting the trade make money regardless of what the asset does. They are usually brokers--not long or short.


On Oct 25 02:06 PM MexCom wrote:

> While driving with my wife on the car radio were hear an Advertisment
> "now is the time to buy gold!"
> "What do you think?" she asked.
> I said "If the person talking was buying it himself why is he on
> the radio asking you to buy it?"
>
> The person saying that inflation, its going up, etc. etc. is the
> reason to buy so why is he on the radio? He is SELLING it!
>
> So when you hear all the ads on CNBC, the radio and the newspaper
> to buy gold - that is probably the time to sell it.
>
> BTW - none of the people who produce gold - the miners and refiners
> are among those who are advertising to buy it.
>
> When making an investment its best to use some common sense. Don't
> make financial decisions out of fear. The person you give your money
> to is making a profit

Roubini Hates Gold: Is He Wrong Again?

Yes, this is exactly right. Nouriel has an expert opinion. And lets test his opinion over the next 4 years by watching the price of gold.

Greenspan had many expert opinions also.

One test is worth a thousand expert opinions.

Test every expert opinion you hear--write it down and watch what happens.


On Oct 25 07:34 AM manya05 wrote:

> Roubini gives two scenarios in which gold can move up and discounts
> them both, and maybe he is right. But he forgot a third possible
> reason giving force to a move up in gold. Most central banks around
> the world (big and small) are trying to figure out how to "de-dollarize"
> their reserves. They are diversifying as best they can, I am sure
> they are converting dollars to other currencies, but ultimately they
> realize that holding reserves on the currency of another government
> is not a wise idea...whatever the currency. So, what are they going
> to keep as reserves? amphorae of olive oil and bags of grain like
> in the old days? I don't think so, if gold worked as a good store
> of value for 1000s of years, for the short term, it is the obvious
> route for central banks to take. So I think Roubini is wrong, gold
> is disappearing from the streets and going back to the vaults, and
> that will keep the price supported, and possibly even drive it higher.
> Until central banks regain confidence in a currency, any currency,
> gold is not going down.

Nouriel Roubini, One on One: More Doom and Gloom

The fact that the Chinese Government has an official policy of encouraging gold ownership may be that some day the government would like the option to confiscate their gold, as Roosevelt did.


On Oct 24 12:30 PM kaszub wrote:

> People in China are told to buy gold.
> People in China can buy gold from only one legal source, which is:
> government of China.
> So if China belives in gold why do they want to sell it?
> Why do they target small investors? Is this because they are not
> smart enough? Or is their government stupid to let go this yellow
> metal. Out side of China there are no more gold buyers since all
> the gold bulls are in, exept 3% of bears that will never buy any
> gold at this juncture. Rubini is with in this 3% of inteligent smart
> people.

Nouriel Roubini, One on One: More Doom and Gloom

Not conspiracy, but official policy. Greenspan has gone on the record in his memoir admitting as much.


On Oct 24 04:59 PM searcher wrote:

> As I read the gold puffs, apparently gold is good for the coming
> inflation and good for the coming deflation and if it's both, never
> mind the order. It's good as gold. Hell, there's gotta be an incredible
> conspiracy that restrains gold from trading at $5k.

Nouriel Roubini, One on One: More Doom and Gloom

Stimulus is demand.


On Oct 24 03:47 PM Plan B Economics wrote:

> There is no demand. It's all supply-driven, which is stimulus-driven.
>
>
> Steven Roach made some interesting comments on China today:
> www.planbeconomics.com.../

Nouriel Roubini, One on One: More Doom and Gloom

In response to:

"The problem with debating the future price of gold as an inflation hedge is that it has a very poor historical record, in fact, based on its inflation-adjusted price. Even the lowly dollar has been a better investment than gold if one tracks relative values and purchasing power for the last 50 years."

Reply:
Gold does poorly when interest rates are positive, and can do quite well when interest rates are negative. Interest rates are currently negative if you look at honest accounting of inflation. I don't believe the US governments inflation data.

Therefore the carry trade is out of dollars and into commodities. Pick you time period--gold is lousy or great depending on the macro environment. Equity bugs have had a 25% fleecing if one was holding the SP500 from 1999-2009--after accounting for the loss of the dollars purchasing power. Hold the Dow Bugs have lost 25% after inflation (more if you use honest accounting of inflation).

Gold has appreciated at 11.3% annually in nominal terms, and 8.5% annually in real terms over the last decade. I don't care about the last 50--I care about the future going forward and how gold has performed in analogous time periods with similar macroeconomics.

"The problem with gold as a store of value is that it is purchased more out of fear and other capricious reasons than from any true supply/demand equation. The industrial uses of gold are well supplied and most can be serviced, increasingly, by alternate materials, so that leaves gold's price to be driven principally by speculation."

Reply:
Fear and greed drives markets. Treasuries are also purchased out of fear and we will see the next great Fed bubble pop--Treasuries in the next year or two.

Dollar bugs don't see the bond bubble because it has very little precedent in US history.

Speculation and supply /demand are interrelated and not exclusive. When the 1.3 Billion Chinese are encouraged to buy gold weekly over the counter from their banks, and the government declares a campaign to increase gold as a percentage of reserves to rise from 2% to be more in line with Western Governments--you have long term locked in demand. And it is speculation.

When the Chinese and Saudi, and Brazilian, and Kuwaiti, and Yemeni Governments call for dollar divestiture and possible pricing of oil in Euros or IMF drawing rights--that is dollar bearish.

Dollar bugs will say that their is no possible way for the countries that hold the majority of their reserves in dollars to divest without hurting their position by decreasing the value. The answer to that is--they are already doing it and have been for the last three years at least.

"That fear drives gold is amply demonstrated by the fact that when people fear deflation or inflation, the price rises equally. Of course, common sense should dictate that gold's price declines in a deflationary environment, but common sense is usually in short supply when it comes to gold trading."

Actually, supply/demand drives gold prices, as well as government manipulation by banks dumping gold to drives prices lower as they please. As these Government reserve bank gold holding have become exhausted--gold is starting to shine again as a legitimate investment driven by the unencumbered supply/demand fundamentals.

Its not conspiracy, its public record, and official policy of Western central banks. Maintaining the value of the dollar in the past has meant central banks after Bretton Woods have systematically sold gold and bought dollars.

This trend is now reversing, as Western Central banks have become exhausted from losing money on the short gold/long dollar trade. Eastern Central Banks see the writing on the wall and are increasing their gold reserves in response.

Yes there is emotion involved, but it is predictable emotion that when people no longer trust their governments ability to maintain stable currency, the people turn to gold, silver, and other commodities.

"In the real world, nobody eats or has a genuine increasing basic need for gold, but people do have an unavoidable requirement for food, clothing, shelter, energy and various goods. It's here that we will see inflation do its dirty work ."

Reply;
I never understood this argument.

Over the last ten years that I have been a serious commodity investor. No body eats copper or palladium, or treasuries, or shares of Google either, but it can be rational to invest in them.

Moreover, shelter may be in a deflation trend for another 5-6 years, and food may be in a year deflation, followed by a decade or two of inflation. Energy will fluctuate but the long term trend is up.

"We seem to live in a world where people avoid simple truths, as a way of not having to make decisions or take sides, preferring instead to claim everything is riddled with complexity. Well, the simple truth is that if the supply of currency is multiplied many fold while the amount of necessities (food, clothing, shelter, energy) remains relatively unchanged, then, you're going to have inflation. Simple as that."

Reply:

Supply of gold is similarly constrained, and the demand (albeit jewelry demand has slacked) has increased every year since 2001 from investor demand (both private and government). You seem to be saying that demand for gold is not the same as demand for other commodities. This simply isnt the case.

Demand for gold is partly investor demand due to golds currency status, and partly for jewelry. It has been entirely predictable.

What has been utterly unpredictable and completely irrational (from a long term perspective) is that the last 25 years has been a period of central bank dumping of gold to unsustainably support the value of the worlds trade currency--the dollar.

"Fiat currencies always, relentlessly decline in value. They always grow in quantity faster than goods and services. Their are momentary periods of price stagnation, maybe even a decline for a year or two, but, that prices will return to escalation can barely be debated."

Reply:
Agreed. As mistrust of the US dollar grows, a portion of those disaffected former dollar holders with turn to commodities to preserve their wealth.

"This is the history of the economic world, and so it remains. "

Reply: I agree with the author of the main article and the author of the post I'm rebutting on many points---but the simple fact is that it is possible to have inflation in some assets whilst at the same time having deflation in other assets.

Gold is a small market compared to oil or treasuries or global equities. Consequently, it would take only a small percentage of global capital to continue to make a stealth move into gold for gold to continue rising another decade.

No one was predicting gold quadrupling from 2000--but near quadruple it has. And every year the financial press warns of the irrational gold fever.