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E.D. Hart
147 Comments
Current Valuations Are Well Above the Market's Historical Average
It is about as useful as asking the real estate agent about a town you are considering moving to: "What is the average temperature for_________(insert name of town here)?"
Um, the average temperature for Omaha Nebraska is 58. It may be accurate, but completely useless. Highs of 100+, and lows of -20 are more valuable information.
It begs the obvious question: what time of year? average high and average low by month?
Carrying the analysis further requires one ask: "What is the range of average high and ave. low P/E's for a rising inflation environment, where interest rates will be significantly higher in five years?"
What period of history in the markets showed this pattern? The obvious answer is 1968 to 1982--a 16 year period of sideways market, where the P/E started high and contracted to approximately 8 by the end of the period as interest rates and inflation were low but building, culminating with the high in 1980 of 18-19% interest rates.
Our low interest rate environment may persist for another year, but will almost certainly rise for a long time after that. Looking out past a year, we will see rates rise, along with inflation, and the corresponding contraction of PE ratios to a more normal 12-15.
Looking 5 years out (which is ridiculous, but fun nonetheless) a risk is present that inflation could drive rates to triple or more what they are now.
A risk is present that p/e ratios could contract to a more normal 8 for high interest rate environments.
A reminder: The S&P from 1972-1982 lost half of its value, after adjusting for inflation. We may be in a similar time now.
Indexing Our Global Market Portfolio
Although not precisely the same obviously as the active team that MR. Swneson leads to manage Yales billions, this apporach represents a way forward.
In fact, you present a way, as others have done, for a retail investor to passively allocate assets globally, and rationally. Thanks for the article.
Commodity Forecasters See Prices Declining
I recall in particular the years 2000 through 2002 as particularly unkind to the commodity investor--in the media. But the money made has been superior to any of the alternatives.
I have been long gold since 1997 and it has more than made up for my losses on conservative blue chip stock losses. Wheres the risk?
In approximately 10 years, the media will report that commodities are a safe and lucrative investment.
And in 15 years, you will read widespread articles that stocks and bonds aren't such a good idea to invest in, as they don't keep pace with a well diversified commodity portfolio.
At that time, 15 years hence, I will switch out of commodities and into stocks and bonds.
Why Gold is Likely to Keep Moving Higher
A few rejoinders:
"Enough with the charts and all the fancy analysis where gold is concerned: How about a common sense approach!"
The analysis presented is not emotional nor fancy, but is instead rational and empirical, vs. your ideological and deductive remarks.
"Gold has no fundamentals and practical no industrial use." Incorrect on both counts, The fundamentals are supply and demand, as presented buy the author, and are entirely relevant.
Just as we are likely near peak oil, so are we likely near peak gold, with gold demand outstripping gold supply. How much more fundamental do you want?
As for the "no industrial uses comment", this is both irrelevant and incorrect. Many great investments have no industrial uses. And according to reliable sources, gold is made into literally tons of jewelery. This may not meet your definition of 'industrial', but it is real consumption of a limited resource.
"So, gold is either one of two things; a hedge against inflation or a hedge against uncertainty: On inflation, Gold is up about 42% per year since 2001 with US inflation somewhere between 5 and 9%, so gold is light years ahead itself in this respect. Historically though, gold has not been a sound inflation hedge."
Inflation over sufficiently long periods of time tracks the creation of money. The creation of money in the US and many other countries has been growing greater than 15% annually. The official inflation numbers are bogus and completely fabricated. Inflation globally is increasing.
Gold has historically been a poor inflation hedge during periods of falling or stable prices. We are not in one of those periods.
Moreover, gold does not trade in a free market, and this accounts for much of the last 25 year underperfomance. Gold trades in a manipulated quasi free market, very much controlled by governments. This control is ending.
"As a hedge against uncertainty, if things get really bad, gold is virtually useless. One certainly cannot eat gold and jewelry is probably not going to be foremost in most folks minds, except to sell!"
Gold is a store of value. You cant eat stocks or bonds either, but I will invest in them as well. If you have gold jewelry that you sell then you are supporting the point the author is making--that gold can be a rational, even superior investment. As a store of value and an investment holding some of your capital in gold makes sense.
Gold: The Last Cheap Asset Class
This explains much of the reason that "gold has been a poor investment" for 25 years.
There is a tipping point under our noses however. The new guard is the BRIC countries, and the sovereign wealth funds, and the Gulf States. These are entities that are net buyers of gold.
Central Banks selling will have less and less effect going forward.
Additionally, the various gold ETFs hold a total of 10% of all dollars that are invested in gold. This will only increase going forward, and is held by long term investors like you and me.
Tens of Trillions are invested globally in treasuries, and various government bonds. Many of those trillions are DECLINING in VALUE, after inflation.
There is no such thing as a risk free asset. Inflation matters, and matters more than ever. Where will that capital go to preserve buying power?
Gold is increasing in value not just in dollar terms, but in all currencies. This is not merely a dollar flight story, its a global inflation story.
The big story is not that gold is rising but that worldwide, bonds are in an incredible bubble as the "smart money" seeks flight to "safe assets".
The bond market and the commodity markets both cannot be right--bonds predicting deep downturn and deflation, and commodities predicting sharply higher inflation.
Or can they? In fact, we will see both deflation in the housing markets and the debt markets--from CDOs, to treasuries, to corporate bonds--all these assets will deflate in value. Yields will rise as the debt prices decline.
The assets inflating will be commodities. All commodities are higher after five years, and almost all currencies are lower relative to commodities.
This is not speculative buying ala NASDAQ 1999, rather it is economic fundamentals driving investor asset allocation.
Capital is switching out of the assets that are impaired and at risk, and into assets that have some protective value against the ravenges of inflation.
To recap: We are experiencing a global wave of inflation that is not contained to the US; almost all debt, but particularly treasuries are in a gigantic bubble; Central banks selling explains past gold price behavior, but is likely less and less of a factor going forward; price behavior or commodities is rational and is firmly tied to economic fundamentals as investors reallocate capital to asset classes that can protect against inflation; we are at a tipping point as the markets adjust to this new ecology of capital flows.
Oil, Iraq and U.S. Foreign Policy: A Way Forward
The tragedy is that this WAR is costing us much much more than the $3 trillion we will spend on "stability" in the middle east.
Some of the costs: 1) Lower dollar, 2) Higher taxes for decades to pay the debt, 3) deeper recession, 4) higher oil prices, 5) the US overall is less prosperous than otherwise, 6) the US is less free than otherwise 7) terrorism is undeterred and does not make the US safer 8) loss of more than 4000 American lives 9) erosion of civil liberties in the US, and 10) We ARE STILL DEPENDENT ON OIL with no real energy policy. Is this not naive?
Supporters of the Bush policy claim that detractors are naive, but does anyone really believe that we will establish democracy in Iraq when it is not in their culture, history, or inclination?
I don't think that this war was only about oil, but I do think that the planners were (or non planners) were naive to not take into account the full costs. It was stated that the war would cost $50 billion and that later the war would pay for itself. Is that not naive?
Instead we have the first MBA president ignoring cost benefit analysis, rational decision making, and instead takes America to war on his faith and gut instincts that this is an epic struggle between good and evil. Is this not naive?
I watched Beowulf the other night. Great movie. But it was not real, and I recognized it as a fable. The Bushies have not recognized that their dream turned nightmare in Iraq is a fable, and not real.
I mean to say the war is real, but the epic-struggle rationalization of why we went to war, what the costs would be, how soon we would be home, and how it would be fought, with the US coming out of it the vanquishing hero is not real.
This is the very essence of nievte.
This time its the left and the middle that are steering America back to Real Politick. Love is blind. Patriotism is love. Patriotism is blind. But please wake up to the reality of the nightmare.
Commodity Forecasters See Prices Declining
www.financialpost.com/...
Gold: The Last Cheap Asset Class
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Gold: The Last Cheap Asset Class
But, just as plate tectonics alters the landscape invisibly beneath our feet, until the silence is broken by an unexpected earthquake, inflation is building but is masked by debt deflation, bogus cpi data, and recessionary fears.
Everyone knows that recession and inflation don't go hand in hand...right?
Gold is a terrific asset to own during periods of rising inflation. Such as now. The great bubble of the day is not gold, or commodities, it is debt of all kinds.
Look at the 10 year treasury: 3.56% (give or take). This means that you are locking in a loss for each year you hold the paper with reported cpi inflation at 4.1%. Real inflation is closer to 8%.
Gold is rallying not because of speculation but because people and institutions are beginning to wake up to the reality of rising inflation, and yet, why is it not $2000?
See numbers 1-4 above. The IMF, the US government, and central banks of the world have systematically been selling yearly to depress the price for decades. The quick and dirty reason gold isn't at $2000 or higher is because gold doesn't trade in a free market. Its quasi free.
Moreover, it is a frequently misreported "fact" that in order for gold to return to its inflation adjusted high, it would have to clear $2000.
But again, this assumes that the CPI is correctly gauging real price increases, which is false. In reality, the inflation adjusted price of gold is closer to $4000 per oz.
Look for gold to hit $4000 oz in the next five years.
And finally, don't suffer the false dichotomy of the crazy gold bugs vs. the rational sensible investors. This may seem odd, but you can own commodities and stocks and bonds and real estate all in the name of investment.
Its not an either or argument. (although I certainly wouldn't be owning too much debt right now).
Systemic Financial Crisis and Its Implications for Gold
Debt assets,real estate, banks and debt paper will deflate, and real assets will inflate.
Foreigners are net sellers of US treasuries and the US dollar will continue to decline for several years as the Dollar loses its reserve hegemony, and is replaced by gold and baskets of currencies held as reserve.
This process will be take decades. The IMF is a political organization as much or more than a financial one--it will lose money on the sales.
Finally, Visa does have debt exposure--as fewer people use their cards, and bankruptcies increase, transactions will not materialize as expected.
Bank of America: Earn 6.5% While You Wait
BAC wouldnt need to cut the dividend fo the price to trade sideways. They might just not raise it for several years.
Hard Assets Investing: An Interview With Brad Zigler
One problem--I don't agree with Swenson about one little item. As a small investor (non-institutional) an individual can participate although not replicate what Swenson does in the real asset space.
It is through ETF's that the average retail investor has unprecedented access.
Sure, you cant replicate the complicated trades of the big traders, but so what?
If there is a major commodity bull market destined to last 5-10 more years--which seems very likely--it makes sense to buy and hold commodity ETFs (CUT, SLV, DBA for example) until money supply growth and inflation moderate.
Silver, for example likely has significant upside from here, as does natural gas--two undervalued commodities right now.
After 25 years of falling inflation and interest rates, it appears likely we are headed to a stagflationary environment. Such an environment favors commodities.
It is wise to allocate a portion of your overall portfolio to some commodity base, as bonds and stocks trade sideways.
An Energy Policy that Makes Cents (and Sense)
Projects that don't pan out would get cut.This needs to be on the order of trillions of dollars of research for a decade or more.
One of the biggest tragedies of the Iraq war is that we will have spent $3 trillion or more by the end of the war and we will have not achieved peace in the middle east, nor democracy, and certainly not a reduction in terrorism, nor secure oils supplies.
What we will have achieved is the removal of a brutal and evil dictator, and it only cost $3 trillion.
That is money that should have been spent on National Energy security/research that would pay real dividends and economic benefits for decades.
It is both comedy and tragedy when Bush says "we need to break our addiction to oil". He has insured that we are addicted to oil by doing nothing.
Peak Oil, Gold and the U.S. Dollar
See also excellent WSJ article on Chinese inflation: online.wsj.com/article...
The Myth of Gold as an Inflation Hedge