E.D. Hart

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.

Nouriel Roubini, One on One: More Doom and Gloom

Doesn't believe in Gold? What does this mean exactly? Gold has been in a 9 year bull market. Gold is an international currency. Its like saying, I don't believe in the Yen. Gold is not fiat, it is the only currency that has steadily appreciated over 9 years. How is that risky?

When China's reserves are at 70% (Like France or Germany) and people are selling stocks and putting gold on margin, and people are saying, "gold can never go down", and you see advertisements for courses in "How to make your first Million in the gold market", and News Week and Time have pictures of gold coins or bullion on their front cover, and your neighbors are giving you gold stock tips (when they never spoke to you about investments before), and you or someone you know are planning on setting up your college saving plan for your youngest on 100% gold investments, because thats the only investment that makes sense.

Well, then we will be in a bubble.

Barron's' 'Miller Time' Completely Misses the Math - and the Mark

To be a great investor, you must be consistent. Bill Miller took his investment philosophy too far, and as a result, couldnt see the changing landscape.

I cant understand the Barron's article because I seriously doubt that financials are out of the woods--for a long time.

The reason I dont invest with Miller is the same as the reason that I dont invest in Citigroup--lousy fundamentals, and the track record of capital destroyer over time. Want to bet that horse?

Readers Pick the Top 20 5-Year Horizon Stocks

I would consider adding POT, and SLW to the mix to be considered on the list. POT is an extremely well run and dominant company with excellent fundamentals, and low valuation, with superior ROE .

POT has an estimated forward 2010 PE of 12. It has shown 32% earnings growth the last 5 years, and is estimated to show 40% growth earnings going forward.

I like AAPL, but I don't like the valuation. An estimated 28-32 forward.
Earnings growth last five years 75%, next five an estimated 20%.

In five years, SLW is a potential 4 bagger, and it is still at an attractive valuation--forward 19 estimated.
Growth the last 5 years-79%, next five years --estimated 19%.

BubbleOmics: Oil's Fair Price Won't Go Down

The largest customer is the USA, but the largest increase in demand is from China, and they pay in dollars too. Chinese tend to be very forward looking and they see the train wreck coming. The train wreck is incremental supply not keeping up with incremental demand. This results in increased prices.

The US will be forced to pay what the Chinese are willing to pay because the Chinese have extra dollar reserves, and they are buying oil companies, oil rights, and oil futures. We look at current fundamentals, and they are looking at supply demand imbalances in 5 years, and planning for the next 50 years.

They can keep their dollar/yuan peg a while longer and slow the purchase of treasuries for dollar recycling. Where to put all those excess dollars? Commodities---food, potash, silver, gold reserves, uranium, and oil. Its not the decisions of three people, but about 3 billion Asians--including about 1.3 billion Chinese.

Portfolio Building with TIPS ETFs: Is Now the Time?

For more yield, consider emerging markets debt ETF PCY--yield is 6%

Portfolio Building with TIPS ETFs: Is Now the Time?

Past Tense:
True Dat, and agrreed completely. Tips for mild inflation, and gold for more pronounced inflation. Overall the name of the game is INFLATION--but if the CPI is bogus (it is) then you are guranteed to lose capital after inflation and dollar debasement.


Consider WIP instead.

Gold: Is Now the Time to Buy?

" Just one of the trillions of dollars being thrown around by the U.S. government could buy-up every ounce of gold and silver on the planet – with enough left over to buy most or all of the miners, as well."
I dont beleive this is a true statement.

The Value Of All The Gold In The World


$5,119,829,224,091

Yep - That's trillions
Based on current spot gold price of $1,061.00
Taken from onlygold.com website as of 10-14-09.
Add in silver and you get another 20 Billion $$$$.
Additionally, silverseek .com claims that all the gold bullion would total 4-5 trillion dollars.

You make a good point, but the facts matter.

3 Promising Gold Stocks

I dunno, Citigroup and Bank Of America are under new management too...not so sure about them when I have proven racehorses in the stall. Why do I want to bet on a wildcard (horse)? Excuse the mixed metaphor.

To paraphrase uncle Warren, "Id rather be sure of a good thing than hopeful of a great thing". True, Barrick may outperform, but its a little too much hope and not enough evidence for me.

I'll stick with capital creators, and not capital destroyers. I might be wrong, and Barrick may shoot the lights out--but I'll sleep better. Isnt that what gold is supposed to do?

3 Promising Gold Stocks

Barrick has been an absolutely horrible investment over the last decade compared to the other gold miners because they have lost a ton of money. Going forward with hedges is good, but I'm not enamored of their management.

Goldcorp does a much better job, and has a higher growth profile. NG as holdings in Alaska which may or may not be developed. They have gone nowhere in ten and five years, and lose money every year. Good lottery ticket, but that's not why people usually buy gold. For security, consider consistently profitable miners in politically safer jurisdictions: GG, AUY, and consider RBY.

The last company Rubicon Minerals is worth owning, because, unlike NG, it is surrounded by existing mining infrastructure that makes it almost inevitable they will either be bought out by their large mining neighbor Goldcorp, or they will develop a mine with highgrade ores next to existing roads and processors. Also, Rob McEwan owns something like 23% of RBY--he is the former CEO of GoldCorp.

Long GG, AUY, RBY.

Asset Allocation Doesn't Do the Job

I agree with the comment that we all are asset allocators, its just a question of if you have the right mix. If you own a house, stocks, cash, and are near social security then you have stock, bond, real estate, and currency exposure. Commodities would round out the mix.

Falling Dollar: Finally Front-Page News

Lets blame the Democrats and the Liberal Republicans equally for the fiscal morass. A 3 Trillion dollar Iraq war doesn't help our nations budget. 43 also instituted new medicare coverage that will cost new trillions. Lets blame both parties equally. Only the libertarians are unscathed.

The Case for Dumping Dollars, Buying Gold

With regard to the coming and ongoing $$$ devaluation: all resources denominated in US dollars will be more expensive, and oil and silver may outperform gold. Treasuries will likely get killed for the next ten years as interests rates cant go much lower.

Consider shorting via TBT.

Consider silver via slv and SLW

Consider Energy services cos via: XES

Long: all four of the above.

A Dow Double in 10 years? Easy

Check out graphs of the Nikkei falling from PE of 80 in 1989 to less than 15 today. Earnings rose at a un-constant rate over the last 20 years--but due to debt deleveraging--the PE fell by more than 2/3.

Nikkei--39,000 in 1989 to 9,832.47 today.

Couldn't happen here right, because that's Asia--like a different planet.

But wait, housing prices don't always increase--sometimes they decrease for a decade or more. Virtually no one talked about that before the crash.

Where else did real estate crash? Japan. Prices falling for the last 20 years, more or less. Couldn't happen here though. This is America. Stocks and homes go up over the long run.

I hear this argument all the time. It makes sense.

And Its wrong. The market could (not predicting it will) be cut in half from here. Its possible to have deflation in some asset classes and inflation in others. Stocks can decrease while gold increases or vice versa. Inflation and deflation often occur simultaneously.
Hedge your bets and consider the possibility.