Gold: Deja Vu All Over Again?

June 28, 2013 2:12 pm 17 comments

I live for these moments.

When I start getting spam comments that indicate fear (for gold investors) and schadenfreude (for gold permabears), I know that some kind of important turning point is near. These sort of heuristics make my life easier. My roommates can attest that when gold drops in price, my reaction is to do a really quick dance, followed by an enthusiastic cheer. Then I  go back to living my life. People judge others by themselves, so they assume I am feeling the same panic they are. Well what makes me able to buy when no one else has eyes to see is that I don’t get emotional to the point of self-destruction about these things. I connect the dots, but I also know what the hell a dot is in the first place.

What you are witnessing now is gold permabears taking center stage with their impressive display of sophistry. They talk about the end of QE, or the U.S. economy improving, or this and that to explain gold’s fall. They display their ignorance every time they speak. QE is significant to the extent that it drives perception in the short run. The primary driver of gold was not the Fed’s direct purchase of bonds. In the first place, whose bonds were they buying? If it is a foreigner’s bonds, then guess what? We just exported inflation. What about real estate purchases of foreign investors that increase the money supply? Does that not create inflation? What about the fact that Europe is deflating to oblivion? Does that not create deflation in gold? What about the mandatory dollar rally that is occurring as we speak? Deflationary for gold, yes? There are countless countervailing forces at work here, and QE is about #14 on the list of importance. I’m not even joking; this is far more nuanced than people realize.

Whatever you want to call it: guts, chutzpah, brashness- not many people have it at these turning points. Gold is most likely headed lower, but 3 years from now there will be a lot of pain and tears because people didn’t buy at $1200. This is starting to look a lot like 2011 in domestic real estate when it was the most obvious bottom I’ve seen in my life, yet I could get only about 3% of people to agree with me. Well those people doubled their money in 2 years. This is the exact same thing, and in 3 years you’ll see why some investors always make money and others should just hide their money under the bed.

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Gold: The Once and Future King

April 14, 2013 9:04 am 20 comments

One of the greatest joys of investing is going totally against the crowd and getting it right. Not only does this guarantee the biggest returns, but it shows your are thinking independently. It always surprises me that people get locked into panic mode, as is the case now with gold, mostly because by definition one overdone trend creates a trend of equal or greater force in the opposite direction. Call it the law of “shake out the weak longs so the smart money can take their positions and receive the greatest profits from the rally as they always do”. You can literally poll 1,000 people and ask them what they think about an asset. If over 90% are bearish on a trade, then close your eyes, buy, and go on vacation somewhere. It’s not quite that simple, but it sort of is.

You don’t necessarily get wiser as you age. Certain types of people with certain personality profiles will continually grow, while others stay the same because experiences are perceived differently by people. The same thing holds true for investing: certain patterns happen over and over and over again and some people just don’t learn. When real estate was the buy of the century, everyone was bearish. When stocks were poised to explode, people were bearish. And now when gold is on the verge of breaking out, people are….bearish? I’m not getting it.

I do my portfolio no favors by being biased and a “gold bug” of religious proportions. This is why I am one of the few gold bulls that said a 50% correction is possible, but no big deal, especially in the commodity space. 50% corrections are totally normal, which is now obvious to most people because of what’s happening with stocks. Just take this lesson and apply it to gold, it’s really that simple. There is a time and place for everything, and gold’s time is coming. Gold will literally be a double in the same way real estate in select pockets of the U.S. was in recent years. Again, no big deal- this is just how assets move.

The only thing that has me hesitating is the dollar, which probably will rally to the moon. The short dollar trade has become crowded to the extent that a rally is pretty mandatory right now. Every investment needs to be viewed with a balanced outlook, which is why I was personally buying real estate and not gold for the past 2 years. Now things are shifting, but I’m not too sure people recognize it. It is still a little early (although a short-lived countertrend rally is likely), but I will probably be giving my obligatory “buy gold it’s the bottom” speech soon. Maybe it will be at $1400, or maybe $1200, but gold is most certainly due for a “nobody saw this coming!” rally, just like the good old days.

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1st Rule of Investing: Don’t Get Wiped Out

February 15, 2013 6:38 am 13 comments

Most people who read this blog are probably concerned about gold, so let me just start off by saying that gold is fine. I am praying for a correction in the $1400-$1500 range so I can buy and plan my retirement somewhere in Asia. Gold is the ultimate hedge against fiscal irresponsibility, and I have seen nothing change on that front. One of the millstone global currencies, the Yen, has been under pressure lately, and the Dollar is not far behind. The gold permabears are out in full force, but they clearly have never studied a gold chart before. Before the great rally in 1980, gold had a shake out period before rising about 4X in a year. Gold needs to be in every portfolio because it is robust to events that can actually wipe out your entire portfolio. It’s just the intelligent thing to do.

But anyway, I don’t view myself as a “gold expert” or gold bug, so I’m not going to talk about every little correction or gold news item. That’s just insane. I find value, period. When I bought gold before it went on a true rocketship launch, it was because it presented value , not because I thought the world was ending. When I packed up my bags and bought real estate in Las Vegas at the bottom, it was because of value, not because I fell for the propaganda that a home is always a good investment. People don’t seem to understand that you can ALWAYS learn about a new asset class; it’s not that hard. It’s not the knowledge of a particular asset class that important, it’s things like: A) having an open mind, B) being an independent thinker, C) distilling information and coming to the right conclusion, and D) having a “feel” for what’s coming. This “feel” is the only thing that I think can’t be taught; it basically separates the great traders from the average ones. But if you have everything else, you will probably outperform most people.

Gold is going to go where it needs to go, and a lot of you will profit. But always think ahead to the next big thing and stay ahead of financial analysts, economists, and CNBC, who are all great at postdicting, but have a horrible track record of predicting. The next big thing is 100% going to be Asia, and more specifically Japan and China. If North and South Korea become one nation again (never say never), I will bet everything on that succeeding. Anyway, it is one of the great ironies that the Communist nation of China is the country displaying capitalistic tendencies. Go figure. And the U.S.? Higher payroll taxes. Investigation of offshore accounts of $50,000 or more. Tracking of wire transactions below even $5,000. Proposals of raising the minimum wage and ensuring that the unemployment rate rises in a true bonehead move. Yes, I am not bullish on America right now, and once again I will put my money where my mouth is and move to Asia in all likelihood.

Don’t Get Wiped Out

Ok, so let’s take a step back and talk about who actually gets crushed by a debt crisis. Contrary to conventional wisdom, “conservative” investors get absolutely wiped out. This means people with pensions, bonds, CD’s, and savings accounts; in other words, Baby Boomers. States and Municipalities are getting demolished too. About half of American households don’t have enough savings to last a couple of months if they lose their job. I have heard from friends that there are tons of 2011 law school grads who can’t find jobs. The service sector is going to contract dramatically mostly because of the internet (not good for commercial real estate). And because the service sector has become so bloated, the contraction is going to be nasty. My advice would be learn about computers and don’t waste your money on higher education unless it is engineering or computer-related. And definitely don’t waste your money on an MBA, especially if you plan on starting your own business.

The Millennial Generation Wipe Out

I am part of the Millennial Generation, and quite honestly I think most people in my generation are morons when it comes to the economy. I read an article recently in the New York Times about the Millennial generation and how we tend to favor big government. Now I’m not one to blindly believe polls, but if this is true, you can just about turn out the lights on America.

The Millennial generation will be protesting on the streets soon enough because they have no jobs and have student debt that they are legally obligated to pay. Of course they will use the excuse that they are social crusaders who are railing against “Wall Street.” But here’s a news flash: most people who work on Wall Street don’t know what the hell is going on. This is the truth. I’m Asian, most of my friends went to good schools because they were good at taking tests, and the dream for most of them for whatever reason was to get a job on Wall Street. And trust me, they are clueless. 

So anyway, the Millennial Generation is getting wiped out. People will profit from this crisis, but they will most likely take their money abroad when all is said and done. We are going the way of Great Britain, and fast. It’s not as if we will fall off the globe as a nation, but we won’t be the lone superpower of the world anymore. I believe the Pound went from something like $4 to a little over $1 when they collapsed as an Empire. We are headed for a similar fate, but it will come after a substantial rally in the dollar when Japan collapses. This is sure going to be interesting.

Discovering the Correct Path in Investing

January 4, 2013 7:21 am 16 comments

I made a New Year’s resolution to try writing more, both on my blog and in my newsletter. To be honest, sometimes I wondered why I should write. I used to get in the most ridiculous arguments with people who didn’t know what the hell they were talking about, and it used to piss me off.  I also know that things are going to get so volatile that I am likely to get a lot of flack for no reason. But I’m a little older now and have a little more capital to play with. Now I just put my capital into investments, take my profits, and shrug my shoulders if people tell me my investment thesis is wrong. The one good thing about talking to my readers is that I know there are people out there with a genuine thirst for learning who see things through a child’s eyes, which is the beginning of knowledge. I am willing to help these people navigate through the disastrous debt crisis that is unfolding in slow motion.

Anyway, the hardest aspect of investing is seeing ALL possible scenarios and finding the probable solution to a problem. This is a form of divergent thinking, and an exercise to see if you have this skill is to write down as many novel uses for something like a blanket or knife as you can in 10 minutes. There are people with sky-high “genius” IQ’s that literally can only come up with “something to keep warm with” and “a tent”, so don’t expect our “genius” leaders (aka economists and politicians), to figure this crisis out. This is the problem we generally face today. Our leaders only see the economy through the traditional view and don’t realize so much has changed over the years and that this is a dynamic system. And sadly, most people (from psychological studies), only think an idea is valid if it comes from an expert source; in other words, most people can’t see the validity of an “out of the box” idea if it doesn’t come from an expert.

If you take humanity as a whole, you will always find extreme elements on both sides that can not see any other alternative. This is called being a stubborn bastard in colloquial terms. If everyone were unbiased and could (gasp) see things for what they are, we wouldn’t see these great wipeouts of capital. We would not see booms and busts. It would be impossible because stubbornness on both sides creates extreme trends. Anyway, because there always has been an element that has faith in government, there always has been massive destruction of capital when government bonds implode. And governments default on their debt without fail historically. The chart below is courtesy of Economist John Taylor and is based on CBO assumptions. The timeline should be pushed forward because the interest rate assumptions of the CBO are flawed, especially in an environment where interest rate spikes will result in asymmetric increases in debt servicing based on total debt. Also keep in mind that revenue as a percentage of GDP hovers around 18%.

Revenue as % of GDP

It is just crazy to me because Treasury bonds, and by extension the Fed’s balance sheet, CAN’T WITHSTAND even a minor uptick in interest rates. Both Republicans and Democrats are misreading this crisis so bad that you wonder what they are doing with their free time. Republicans, if you eliminated every single social program, we still would pay interest on our debt. Democrats, if we taxed everyone at 100%, we still would pay interest on our debt. So even if either faction got 100% of what they wanted, we would still reach a point where our entire tax revenue is consumed by interest payments. Time for Plan B, anyone?

This is the best chart I could find, although it’s a little misleading. The effective interest rate is actually lower and shouldn’t be based on the 30-year; in other words, the uptick in effective interest rates need not be all that dramatic in absolute terms for huge dislocations to occur. The current effective interest rate is more in the 1% range because the Fed is purchasing shorter maturity debt, so an increase to the 4% or 5% range is actually pretty disastrous. And for some historical perspective, the 3-month T-bill was 5% in 2007; now it is 0.08%.

But anyway, the chart adequately demonstrates how this historically anomalous interest rate environment is affecting debt servicing costs. In 2009, our interest expenditures expressed as a percentage of revenue would have roughly tripled simply by assuming historically normal interest rates. Considering that we have added about $4 trillion in debt since then, at historically average interest rates, we are now talking about almost $1 trillion in debt servicing costs annually. So basically you are adding 2 deficits per year that compound, simply from normal interest rates. This is the dynamic nature of debt. Unfortunately, interest rates climb dramatically in a debt crisis, so the day of reckoning is a lot closer than people suspect. Debt servicing costs can and will rise from $300 billion to $1 trillion in the blink of an eye.

The Nuanced Difference Between Crises

I don’t know what it is about human nature, but people see the future in broad terms, and they will defend that point of view in the face of all evidence. So you have the “Great Depression” crowd that has been predicting a stock market collapse for years now. People always assume I think stocks are going to crash because I’m a bear, but regular readers know I’ve said stocks are going to explode, as they have. These stock market bears fail to account for the change in our monetary system from a gold standard to the floating exchange rate system. They fail to account for our good friend Helicopter Ben who has been balancing out the natural deflation that occurred in real estate with new money. From a social perspective, people in general don’t account for the fact that all these entitlements are a product of the Great Depression- they did not precede it. So in terms of civil unrest, it will be a lot worse than the Great Depression because if people are promised something and don’t get it, they get pissed off.

The “we will grow our way out of this crowd” is arguably worse. Debt at this point is interconnected, and since banks are getting nationalized, the situation will ironically get worse. Basically all the failed investments that went on in the private sector ends up on the government balance sheet. The whole point of getting interest on a bond is to hedge against the risk that the bond will default. If the government makes everyone whole, bankers are the only ones celebrating. The average person is the one who suffers under the weight of higher taxes and austerity. So trust me, if you talk to anyone in the investment community, they will have blinders on, especially if they are a low-level employee (people my age). The people who actually invest successfully in all environments understand a lot better how things are interconnected, and they will just ride whatever wave the government creates.

Debt is also growing globally at a much faster rate than revenue, implying the end is near, so this is just a matter of timing at this point. Our leaders decided to raise taxes on everyone more or less (payroll taxes anyone?), and this is going to stall real growth rates. When revenues fall, our leaders will believe it’s because they didn’t tax enough, so they will raise taxes on everyone again. As usual, they are bringing on their own demise and don’t even know it. It would actually be amusing if their actions didn’t literally affect billions of people.

Real Estate or Gold?

I know people are going to misunderstand what I’m saying about real estate because it is nuanced. After all, I made the move to Las Vegas, so I’m supposed to be an eternal optimist on the real estate market, right? Wrong! And part of the reason is that I see homes I bought for $29,000 going for $45,000-$50,000 in less than a year. I see about 10 all-cash offers above list within a day of a home coming on the market. I talk to real estate agents (who admit to me they got crushed by the crash) who only see perpetually rising prices in Vegas, even though the investment environment just got a lot worse because of our idiot leaders. And most of all, I see publication after publication calling the bottom in real estate. So what does this add up to? Real estate being a hold, unless you purchase with a 30-year fixed mortgage and unless you buy in the right areas. The bigger cities most susceptible to a muni crisis do not apply.

Luckily I don’t get engulfed by any one investment and I am open-minded. And amidst all this, gold has been setting up beautifully for a rocket launch of the ages.

We are talking about the ultimate hedge against government stupidity, and the year-long correction is exactly what gold needed. The perpetual gold bears are going to point at gold and say “see, you doom and gloomers were wrong!” At their maximum point of self-satisfaction, gold is going to shoot right past $1800, then $2000 and never look back. Then when gold hits $3,000, they will say “I always knew gold would rise, duh!”, but of course, they didn’t have a position. Let these people live in their self-imposed dreamland. As for the true investors out there, put your capital in play with gold in the early part of 2013. You will thank me later.

Meltdown in America?

November 19, 2012 3:16 am 17 comments

Those of you who have followed my blog know that I am not inclined to exaggerate and that I am pretty unbiased. I was the biggest silver bull out there, but also silver’s biggest bear when it started resembling a bubble. I was also the biggest real estate bear, criticizing misguided policies like the first-time homebuyer tax credit along the way, but I packed up everything and moved to Las Vegas to profit from a rebound in housing I saw coming in 2012. Investor sentiment swings wildly in opposite extremes; all I’m trying to do is be on the correct side of swings.

Trust me, I understand how crazy it is to say we are approaching a total meltdown in America. But all you have to do is read history to know that really crazy things happen all the time. The people who have their heads in the clouds dreaming about an unattainable utopia are wrong. So are those who perpetually warn that the end is near. The truth is that history cycles between extremes. All I’m saying is that we are entering one such extreme, and it just happens to be the bad kind. 

The Major Trends

The major trends are really easy to spot. Most people know something is wrong, they just can’t pinpoint exactly what it is. Their confusion leads them to false conclusions such as “the rich don’t pay their fair share. Let’s raise taxes on those bastards!” Little do they know that this kind of class warfare has occurred throughout history, and getting the rich bastards never solves anything.

We are witnessing capital flight of proportions unmatched in modern history. The wealthy are selling their investments and locking in their profits before capital gains taxes rise. Americans are renouncing their citizenship in record numbers, and one of my friends in Asia confirmed that this trend is indeed occurring among expats. All these things are occurring before the economic implosion. Why? Well just like in any bull market, the “smart money” gets in on a trade before anyone knows what’s happening. The “smart money” right now is getting its capital the hell out of the U.S.

Austerity and Higher Taxes

It’s pretty clear that Obama is set on cutting spending and raising taxes. This is an utterly asinine policy, but that’s what we’re getting. Austerity is inherently deflationary, so we must understand that bondholders, aka banks, are the ones who benefit; believe me, they will continue to push austerity on the government. Unfortunately, this is going to create civil unrest of the magnitude none of you has ever witnessed. Some see this as a grand conspiracy of bankers, but it’s more accurate to say that bankers are just looking out for themselves and guaranteeing profits. Greedy? Yes. Sinister? No.

As far as taxes, a lot of intelligent people see the top rate rising from 35% to 39.6% and say: “what’s the big deal?” Well first of all, it’s not really the increase in earned income tax rates that’s the problem, it’s the dramatic rise in capital gains and dividend/interest tax rates. But more importantly, it’s out in the open that the government’s policy is to increase taxes on the wealthy until we have this debt crisis under control. Well, anyone with half a brain understands that this debt crisis is unavoidable, which implies the braindead government will continue to raise taxes until this whole thing implodes. So what does a prudent person do, stay here until all their wealth is confiscated or go to a country with a 0% capital gains rate where capital is welcomed with open arms? You don’t have to be a genius to answer this one.

Consumed by Interest

When you study the composition of national debt, you come away understanding that compounding interest is the problem, and there is no plan to stop this process. The majority of the national debt at this point is composed of accrued interest payments. Even if our government magically closed the deficit of over $1 trillion annually (unlikely), interest payments would continue to compound. Given current interest rates, the annual interest payments on our debt will rise to roughly $500 billion in 2017. And this is assuming record low interest rates. To put that in perspective, interest payments on our debt by 2016 will outstrip the combined spending in: The Department of Education, Department of Homeland Security, Department of Energy, Department of Justice, Department of Agriculture, Department of Transportation, Department of Interior, and Department of Commerce. So this policy of austerity and spending cuts in a recession sounds nice, but it is entirely misguided and doesn’t solve the problem of interest.

The CBO, aka the government, is predicting over $5.3 trillion in interest expenditures over the next decade. Common sense tells us the numbers will be far worse because of flawed CBO assumptions. The CBO assumes that the 10-year Treasury yield will rise from 2.3% this year to 5% by the end of the decade with the yield on 3-month T-bills increasing from 0.1% to 3.8%. We have been in a 30-year bull market in government bonds and still the majority of the bull market was at interest rates of above 5%. The bull market will end simply from a cyclical perspective, and when interest rates rise, they rise very quickly. Assuming interest rates in the 7.5-10% range is much more realistic. 15-20% is not really out of the question either. But the point is that even with a modest rise in interest ratesthe interest payment alone will consume the majority of our tax revenue. Game over.

Political and social unrest always follow economic implosions. A profound meltdown is avoidable, but policy needs to shift 100%, which is not happening. I am losing hope that anything will change before a monumental crisis hits. Europe is on the verge of collapsing once Spain falls, and then you will really understand what volatility means. Tremendous investments opportunities will arise, but this crisis is going to wipe out the average person who blindly believes the government and the media.

I am now advising things I never thought I would: get your capital out of the country if you can. Get out of the country if you can. It will only take 2 or 3 years to really understand why I’m saying this. Asia is where all the opportunity is. I will be talking more about Asia in my subscription service.

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