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Last week, I talked about
"contrarian" investments
for 2008, which was mostly along the lines of insurance. Like CDS in January
2007, this sort of insurance is very cheap compared to its potential value in
the event of general economic dislocation, or even just a local dislocation
like an ice storm. I suggested a $1000 budget, which is one month of heating
bills for some people. This person lived through the economic collapse in
Argentina in 2001. What would he do? Read it here. You'll notice that he
recommends the exact same $100 LED headlamp/rechargeable AA batteries/solar
charger combo that I suggested last week -- and I didn't read this until a
few days ago. Also, I just read Michael Panzer's Financial Armageddon, which makes similar
suggestions. (Panzer has worked for HSBC, Soros Funds, ABN Amro, Dresdner,
and JP Morgan.) Argentina in 2001 was just a plain-jane economic wipeout.
Today, you should also be prepared for a geophysical element, whether floods,
rising seas, extreme windstorms and other wild weather, earthquakes, and so
forth -- on top of potential economic collapse. This doesn't mean
"more preparation," necessarily, so much as it suggests planning
to make do with less. If you are just preparing for a short-term
electric blackout, a gasoline-powered generator might seem to fit the bill,
but if you are planning for long-term electricity intermittency, unavailability
of fossil fuels, and possibly the need to relocate due to
crime/floods/inavailability of food/etc., then the $100 LED
headlamp/batteries/solar charger combo might be more appropriate. So, you
see, you can be ready for more by having something that is simple, robust,
self-contained, flexible, lightweight and cheap.
OK, enough of that. Let's
talk about financial investments. Oddly, though, the world of financial
investments and the alternate "doomer porn" universe of headlamps
and rechargeable batteries has begun to converge. I know of at least one
Swiss asset manager who has relocated all operations to over 1000 ft. above
sea level. (Remember the flooding in Jakarta? Why not New York?) This fellow
says that 2008 will be the year when "the system breaks". Jim Sinclair, a 40-year
Wall Street pro, has been saying for months that the entire US financial system is at risk
today, and that investors should take delivery of stock investments in paper
shares. The normally circumspect, and fairly mainstream, John Mauldin said
that he thinks that CDS counterparty risk (beginning with the monoline
insurers) will be the big story of 2008, like CDOs were for 2007. If you're
still holding CDS, cash in your chips! At least some of them.
US Stocks: US stocks are still
rather expensive -- only about 10% off all-time highs -- which is amazing
considering the damage that has been going on. Much more potential for downside
here, and what's the upside? Especially when considered in gold terms (i.e.
accounting for currency devaluation), US stocks are at high risk. Get out
unless: a) you find something really exceptional, or b) you find something
reasonably priced that is likely to benefit from more inflation (commodities
producers mostly). No bargain hunting unless something is really cheap (like
5x earnings or 10% dividend) and financially durable, e.g. low debt and
operationally secure.
Inernational Developed: Europe has many of the
same issues as the US, although not so extreme perhaps. There has been a
housing bubble in the UK and Spain as well, likely Italy and France, and much
of eastern Europe. Banks are suffering already from US exposure, and will
suffer more from domestic issues. Corporates have been struggling against a
strong euro. Europe's stock markets have shown a very high degree of
correlation with the US. Maybe there will be some bargains here later. The
Nikkei and Topix have been a major stinker, reflecting a weak economy and
concerns about, among other things, the prospects for more tax hikes in
Japan. There might be some bargain hunting to do here later. In gold terms,
the Nikkei is back to its lows of 2003!
Emerging Markets: The idea that "emerging
markets will do better than developed" was popular enough in 2007 that
the EMs powered higher despite all the nasty stuff happening in the developed
world. Now, that idea is already "priced in," at least partially.It
seems hard to imagine that the EM markets can continue to rise when all the
developed world is deteriorating, or that there wouldn't be at least some
negative economic effects. Plus, valuations are much less accomodating today,
generally speaking. You might find some interesting individual situations,
which could warrant a small allocation. The eastern European economies seem
especially robust due to their excellent tax systems.
Bonds: Ugh! Still, it may be
worthwhile to keep some high-quality "cash." Today, this means
government t-bills, preferably diversified among currencies. Consider t-bills
from Canada, Australia, Switzerland, Germany, etc. Traders might squeeze a
few bucks out of the long end, but long-term US Treasury bonds are likely to
be a disastrous investment. Individuals in high tax brackets can consider
closed-end muni funds trading well below NAV. (Check www.etfconnect.com.)
Look for uninsured funds, because the insurers are going to go bust. At 5%
nominal yield, that works out to about 8% or even more on a tax-adjusted basis.
There is some risk here as municipal finances are deteriorating, but at least
you're getting paid to take the risk. Look for geographical diversification
(not all CA/FL) and a highish credit rating.
Gold: The supranational
currency of mankind has matured from an ugly ducking to head cheerleader. In
the future she will develop into a Hollywood starlet. Gold will be
"volatile", and sometimes it is an extremely boring and
unproductive investment, but it is never risky. Silver is more of a speculator's
game, but the high silver/gold ratio (i.e. cheap silver) indicates nice
potential reward for those who can handle the risk and volatility of silver.
Make sure you have at least some of your holdings in the form of physical
metal within your local area, not in Zurich. You might keep some in Zurich
too. Or Singapore.
Remember that gold never
really goes up, it's currencies that are going down. In normal times, there
is always something "going up," but conservative investors are
often happy to stick with something they understand, like bank CDs. However,
in an inflation, those bank CDs can go effectively to zero. You can't
"stay safe" by keeping everything in cash, when the value of cash
is sliding lower. Conservative, fixed-income-heavy investors need some kind
of inflation strategy, which includes at least some gold. Just figure out
what your allocation is -- let's say 30% in inflation hedges -- then figure
out some reasonable approach to this allocation, like 10% gold, 10%
commodities producer stocks, 5% silver and 5% ag/softs or commodities index
ETF. For the other 70% in "cash," you could go with 35% USD cash
and 35% other currencies, such as euros, cando, Swiss francs, aussie, etc.
Gold and silver miners: Undervalued today, these
could become very sexy going forward. Historically, they haven't had much
correlation with general equities. However, real economic problems, such as
unavailability of fuel, could severely curtail operations, and the
early-stage projects need a constant supply of new capital. Nobody needs
to mine gold, if you know what I mean. And nobody needs to
finance early-stage exploration. At some point, you might be better off with
plain bullion, which doesn't have any valuation or operational issues. I
think we'll get at least one more major upleg here.
Energy: The big producers have
huge cashflow, low debt, reasonable valuations and benefit from inflation.
That's what we're looking for here. I'm still a fan of natgas, although it
has been taking a while to get up off its back. If we get a selloff to under
$80 on the front-month futures, it would be worth looking into the out-year
futures for long-term holdings.
Metals: Perhaps more downside to
go as economies slow further, but they could make quite a comeback. I'm with
Peter Grandich, looking for a $2.00-$2.50 bottom in copper and then up past
$4.00. With gold at $800+, $2 copper is a lot cheaper in gold terms than it
was a few years ago.
Ag/softs: Way more upside
potential here, although it might be nice to wait for a pullback. The DBA ETF
is a nice way to get exposure. Food is the new global crisis, says one watcher (the
fact that it has been widely reported shows that consensus thinking is
evolving in this direction). And yet, as we've documented, grain prices,
measured in gold, are still a tiny fraction of their average during the
1900-1970 period. If there really is a grain shortage problem, and low
inventories and bad harvests indicate there may be, then the real (gold)
price will probably go up several multiples from here.
Jim Rogers made the point
in his book Hot Commodities that one of the nice things about direct
commodities investing is that you don't have to worry about all the fuss of
corporate operations when you buy commodities directly. That might be
something to think about going forward. In the event of serious economic
difficulties, there may be things that are bad for producers (no diesel to
deliver crops from fields means a total loss for growers) but good for commodities
prices (shortage causes price rise). Also, stocks have a valuation which
typically reflects cash flows and an implied discount rate. Commodities have
a valuation as well (expensive or cheap), but it is not as dependent on
interest rates and so forth. In 1974, you could buy Exxon at a 10% dividend
yield. The stock's valuation was crushed, along with the general market, even
though oil prices soared.
Other kinds of
investments: Think of things you can own directly, instead of something that
depends on layers of abstractions and counterparties. Some sort of rental
property can provide steady income in the currency of the day, whether
dollars, gold, silver, euros, gasoline, or wheat. Producing farmland has
become expensive, but abandoned farmland (particularly in the Northeast) is
still cheap. Or, a small home business that can expand later. Beer or alcohol
is easy to make, can be done at home with little investment, and would seem
to have a universal market. Or maybe some solar panels could provide a local
electricity source. Or the classic inn or boardinghouse. Property in a
foreign locale is favored by many. You might even just try traveling to a
foreign locale that seems promising, and getting to know the area, which
would make it easier to relocate there permanently if you had a need to.
A friend of mine once
lent me a book written by his father, which was a family history. This family
had been landowning aristocrats in Poland. They owned a huge estate, manned
by a whole village full of peasants, and were very wealthy. When the Nazis
invaded in World War II, the estate became a local military headquarters. The
family fled eventually to southern France, where the father joined the French
resistance. In time, they escaped France by slippng through the Pyrenees into
Andorra and Spain, and thence on to North Africa and Casablanca. The father
continued to fight, in a British regiment of foreign fighters. After the war,
it was impossible to return to Poland, as the country had fallen into the
Soviet sphere. The family's last bit of capital was a pair of diamond
earrings. This was used as a down payment for a house on the outskirts of
London, which needed some repair after the German bombings. The roof over the
kitchen had an open hole into which rain would fall. In time, the house was
repaired and the house was turned into a small inn, from which the family
rebuilt their fortunes.
Inflation and the Fed: When it takes more
dollars, or euros or pounds or yen, to buy gold, that means the value of
currencies is falling. When the value of currencies fall, that's inflation.
The amazing thing, today, is the lack of concern about inflation. With gold
making new highs, the Fed is talking about cutting rates more aggressively,
which shows complete disdain for currency quality and the consequences of
inflation. We could witness a very rapid collapse. At the same time, other
governments are not too happy to let their currencies rise much more against
the dollar due to trade/competition effects. The UK and Japan are pretty
clearly against further currency rises. The ECB is a bit more willing to
allow a strong euro, but they are under pressure from industries suffering
from forex consequences. If the USD, GBP and JPY all fall against the euro
(instead of just the USD), or in other words if the euro is the "odd man
out," and at the same time the eurozone economy is slowing, that could
make things very uncomfortable indeed. That's why I don't see any currency as
a very good alternative to the dollar, and indeed the dollar might find a
bottom vs. other currencies.
As much as possible, try
to train yourself to see beyond the fantasy world of nominal prices
denominated in floating currencies, and focus on the real world of prices in
gold. As you know, we do this all the time around here. Other people are
starting to catch on. Here's an article from the New York Sun, Gold Value of Apartments Sinks. When you do this, you
see that hardly anything has done better than gold (except a few other
commodities), and since gold never really goes up, what we are really doing
here is attempting to lose as little money as possible during an inflationary
episode.
* * *
I mentioned the
"puppetmaster," the head of the Rothschild family's vast wealth,
which, if you had to measure it (not so easy to do), might run north of $10
trillion. One reader asked: who is the puppetmaster? The answer, as I
understand it, is: the puppetmaster has no name. He has no driver's license,
no social security number, no address, does not pay taxes, does not have a
passport, does not have a bank account or credit card, is not officially
listed as the direct owner of anything, does not pay bills, and so forth.
Indeed, the puppetmaster is more of a position, like president or chairman,
than a person. The position can be filled with the most able family
representative. Thus, if you can name someone, that is not the puppetmaster,
because the puppetmaster has no name.
The puppetmaster
supported Kerry for president in 2004. The military has been in revolt
against Bush since August 2003, when the "nuclear football" was
taken from him. Ever wonder why there has been no attack on Iran? To win back
the support of the military, and thus re-establish the thread of control puppetmaster-->president-->military,
the puppetmaster looked to a non-controversial, duly elected president.
Nothing needed to be done by the puppetmaster, as Kerry actually won the
election. However, Karl Rove's election fraud was surprisingly successful, and
put Bush back in the White House. (The Bushies represent a Revolt of the
Puppets, actually.) In the 2006 Congressional elections, the puppetmaster
fielded an 8,000-person task force around the US to counter Rove's
election-rigging. This was successful, and the 2006 elections were, to the
surprise of people on both sides of the aisle, actually quite reflective of
the people's choice. Thus, if you have been wondering why the New York Times
just ran a story about potential election fraud in its magazine:
this is because the NYT
has reportedly been prodded by the puppetmaster to do so at this time.
Normally, the NYT would remain studiously silent about such a matter, as it
has up to this point despite the amazing investigative work
blackboxvoting.org and others. However, when the sitting president becomes unpopular
among The Powers That Be, all of a sudden the NYT is a hotbed of
investigative journalism! Watergate, which really was a "third-rate
burglary," is a case in point. Why hasn't anyone at the NYT investigated
the dozens of people associated with the Clintons who ended up dead? I suppose the time for a
Clinton takedown has not yet come, plus nobody among TPTB wants the sheeple
to figure out how business is really conducted in the United States.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street Journal
Asia, the Japan Times, Pravda, and other publications. He has appeared on
financial television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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