E.D. Hart

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber
I will check WorldBeta, thanks of the quick reply.
looking for those elusive numbers....


On Jul 23 02:27 PM WorldBeta wrote:

> Both a strategic (buy and hold) and tactical (using the timing model)
> allocation justifies up to a 20% allocation to gold.
>
> Thanks for the read! And PS, SA only pulls some of my posts, you
> can find them all on my blog World Beta.

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber,
Great stuff, your posts are one reason I read Seeking Alpha.

It seems that we have experienced a tectonic shift--earthquakes happen not often--but when the do, they are the result of many years of seismic forces building up in the tectonic plate. In a matter of minutes the landscape is changed, something I believe happened in fall 2008.

I was a financial earthquake and the landscape is completely different. People are asking, when will things return to normal? It depends on what you mean by normal. We have seen the results of the seismic shift, but the shift itself is invisible, unlike an earthquake. (My answer is that they will never return to normal--the financial landscape is permanently altered.)

Going forward I expect, significantly lower equity returns, significantly higher inflation, and the gradual erosion of the US Dollar hegemony resulting in re-rating of US Government debt, and much higher interest rates. The economic locus of power will shift to Asia, etc, etc. Nothing that about 10,000 other people haven't already predicted before me.

This begs the question, which asset class can be expected to perform best in such an environment?

One answer I suggest is gold. From a low of $252 on July 20, 1999, to a price of $950, on July, 20 2009--this is a greater than 14% CAGR.


I have pilfered, plagiarized and otherwise stole the following from a Lee Rogers editorial to make my point below:

Lee Rogers
From 1982 to 2000, the Dow Jones Industrial Average went from a bottom of 776.92 to a peak of 11722.98. This represents an annual compound return of 16.8% over the course of 17 years and 5 months. Ironically this rate of return is almost identical to the annual rate of return gold is delivering in its current bull market run. If we say for argument sake that the gold bull market lasts the same amount of time as the previous run in the DJIA from 1982 to 2000, we can project a gold price of $3,736.13 per ounce of gold by 2016.

Gold bottomed at $252.80 on July 20, 1999. 6.81 years later on May 12, 2006 gold peaked at $725 per ounce. This represents an annual rate of return of 16.7% which is only .1% off from what we determined the DJIA’s annual rate of return during its bull run from 1982 to 2000. Based upon the 16.7% annual rate of return this is how we came up with the $3,736.13 per ounce figure by 2016.

Please consider running your numbers with gold broken out as a separate asset class, if nothing else, for curiosity sake. What would a 20% allocation to gold do to a portfolio returns/volatility/Sharpe ratio in sample periods you've already considered?

Thanks for all of your work.

Stock Rally Built on Fundamental Sand

Schiller calculates the S&P PE at 14 (ten year Trailing) and this points to something that I saw on SA a few weeks ago. At major market meltdowns with economic fundamentals declining such as the 73-74 bear market, and today--PEs can go, and do go, as low as 6 to 7. Therefore, the worst case scenario is that markets fall 50% from here. Don't just hope for the best, but be prepared for the worst. Not many are prepared for a 50% loss from here. They are the ones in denial.

Which Inflation Is It Anyway?

Globalization makes things different this time.

With China, Japan, Middle East countries increasingly taking their dollars and putting them to use in other asset classes, including commodities, we will see inflation here in the US, while wages fall and unemployment rise.

It will be the worst of all possible worlds for the US. A weaker dollar, and higher unemployment, as well as stagnant wages.

The experts will tell us that inflation should be falling because wages aren't rising--so don't worry.


Foreign governments and individuals control HALF of the total dollars in circulation, a little more than 7 trillion.

These dollars are starting to come home to roost--driving up inflation here. It is the unwinding of the exporting of inflation that we have been so successful at the last three decades.

Credit will continue to contract, and inflation will continue to accelerate--and people will shake their heads and wonder "why?"

Is Oil a Bubble? Part One

Learn to distinguish between trends and bubbles. Oil is in a trend. Not everything that increases rapidly is a bubble. Oil was $2 a barrel in the 1940s--now its $135. Do we revert to the mean? Or does the worlds diminishing supply and rising demand portend a rising trend?

Craig Israelsen: Commodities Provide Good Diversification

A timely and important article. By the time that this information becomes widely known, believed, and practiced, the commodity bull will be over.

Studies show that investors are slow to adapt to changing environments and new paradigms that conflict with what they think they know.

People that include a percentage of their portfolio to commodities will be better off on average over the next decade. Great article, thanks.

Fed Easing: No Free Lunch for Dollar, Oil and Commodities

Bravo John Egan. To a certain extent you get the government you deserve...but the current government is acting above the law, above the constitution, and certainly above the wishes of the people.

Hard Assets Investing: An Interview With Brad Zigler

This seems to be a balanced article. I have read Swenson's book and the Ibbotson study and they are well researched, lucid documents.

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.

Peak Oil, Gold and the U.S. Dollar

Inflation is a global phenomenon that is not going away anytime soon.
See also excellent WSJ article on Chinese inflation: online.wsj.com/article...

Get Out of Commodities - Barron's

see also:www.financialpost.com/...

Did Barron's Really Pan All Commodity Investing?

see also: www.financialpost.com/...

Barron's Misses the Other Side of the Commodities Story

SEE: www.financialpost.com/...

Did Barron's Really Pan All Commodity Investing?

The Barrons article equates ETF money with "dumb money", but many of the ETF buyers are strong hands, unleveraged, and long term investors. This is the opposite of "speculative".

I know because this is what clients say they want.

Then, it makes the erroneous connection that commercials are "smart money".

Keep in mind that Citigroup's purchase of MBS and other derivatives was "smart money", as was the idea of off balance sheet investments. Thats "smart money" taking more risk than the "dumb money".

But many of these commercials are more "speculative" (i.e.--short term and leveraged) than the ETF holders.The short term, and leveraged positions of the commercials shorts in particular is the opposite of "non-speculative".

The evidence that the article uses would better used to make the opposite conclusion of the one it comes to.

Moreover, The word "bubble" is overused, and in fact, a linguistic bubble has developed in its use. The contrarian linguistic sentiment indicator I use tell me that as the use of the word Bubble increases in the press...the overall level of actual financial bubble declines. (ok, not really, but it amuses me).

Bubble should include--increasing financial leverage, short term traders taking more and more of the trades, and a subjective sense that the assett price cant decline,

Therefore: belief that Houses cant decline+excessive leverage+ house flipping= bubble.

lets look at commodities: overwhelming belief that they will decline+little leverage on long side (but excessive leverage on short side in some commodities+little evidence (at least in most of ETF's) that traders are DOMINATING the markets. What does this spell?

Not a bubble...a short term correction perhaps. Lets not contribute to the linguistic bubble by overusing the word "bubble".

Its a misuse of language and non-analytical.

Barron's Misses the Other Side of the Commodities Story

According to the FTarticle: " Its new index of non-exchange traded metals rose by 598 per cent from January 2002 to early this year. During the same time, an index of exchange traded metals rose by 246 per cent." Non exchange traded metals are still hitting highs.
Looks like more than speculation to me.

Get Out of Commodities - Barron's

A few thoughts:
1) Commodities are increasing in US dollar terms, but in other currencies as well...so it is not merely a US dollar play, and over the long term, commodities can rally with an increasing dollar (but not short term).

2) Commodities are an asset class, simple as that, although under owned. Most people, by far, have little or no exposure.

3) Commodities do well in a rising inflation environment, but tend to under perform in stable or falling price environments.

4) Why no mention of the "bond bubble"? Bonds are ridiculously overpriced and under yielding. Why isn't the smart money rushing for the exits from bond exposure, including treasuries? Answer: There is hope of another rate cut, and inflation expectations are for moderating prices going forward.

5) Keep your exposure to commodities to a reasonable level--say 5-30% depending on your inflation expectations, and then don't worry about it. Diversify across the four mega classes of assets and the markets will take care of themselves--real estate, stocks, bonds, commodities. Then it doesn't matter if Barron's is correct or not--going forward, you are protected.