 | | The Daily Reckoning | Monday, September 19, 2011 |
- Markets rediscover Greece...no less bankrupt than before,
- Closing the gap between gold and the "diggers,"
- Plus, Bill Bonner on what keeps the world economy turning around...
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|  | | | | Bankrupt Tactics in a Deepening Debt Crisis | | Investors Rediscover European Financial Woes | | |  | | Eric Fry | Reporting from Laguna Beach, California...
The European continent seemed to disappear from the financial map last week. There was no Greece, no Portugal, no Italy nor any other euro-anything that troubled investors. European equity markets rallied for four straight days, while the Dow Jones Industrial Average rallied five straight days — chocking up a 500-point gain in the process. Precious metals, on the other hand, retreated as investors seemed to forget what worthwhile purpose these elements serve.
Your Daily Reckoning editors dutifully reported these curiosities, while also urging their Dear Readers to distrust them. “The longer these counter-trend moves proceed — i.e. stocks up, gold down — the better the opportunities for forward-looking investors to re-weight their portfolios,” we remarked last week.
“The recent selloff in gold, for example, is providing a glittering opportunity to add a little more weight to the precious metal sector. And as we mentioned in last Wednesday’s edition of The Daily Reckoning, gold stocks, rather than gold itself, seem particularly compelling at the moment.”
This morning, the financial cartographers have re-discovered Europe...and its worsening debt crisis. The European equity markets are down about 3% — led to the downside by European bank stocks.
The falling share prices in the Old World are weighing on share prices here in the US. The Dow is down 230 points to 11,278.
Greece is the culprit...again.
The Greeks are probably not any more bankrupt than they were last week, but neither are they less bankrupt. Unfortunately, the leaders of the European Union seem to be tactically bankrupt. The more money they send to Greece, the more the debt crisis deepens.
The multi-billion-euro bailouts are not producing anything that resembles solvency. Instead, the Greeks merely cash the checks, spend the money and await more checks.
The Greeks are insolvent. Bailouts are not the remedy. Default is the time-honored remedy, and it works every time. A default eliminates debt and restores solvency in the twinkling of an eye. This remedy is not without pain, of course. But it is very effective.
To the modern financial mind, however, a default seems primitive and unnecessarily brutal — like amputating a gangrenous limb without anesthetic. So instead, the central bankers of the West have adopted a more humane approach to insolvency: Anesthetize the patient and hope the gangrene doesn’t spread.
Much less pain; much more humane; but ultimately disastrous.
The Greek debt crisis is worsening and spreading. Unless the surgeons in the European Union break out their saws and start hacking away the dead flesh, the euro is going to get a lot sicker...and perhaps perish.
No matter what tactic the EU pursues, economic conditions are likely to get worse before they get better. Stocks, in general, are likely to provide disappointing returns for a while. But precious metals are likely to provide a satisfactory (at least) hedge for a while. And as we pointed out last week, precious metals stocks might provide an even more satisfactory hedge than the precious metals themselves.
“Gold stocks are as cheap as they have been in a decade,” we observed. “Now the details: The chart below shows the price-to- EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price- to-earnings (PE) ratio.
“In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to- EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.”
Apparently, Mr. Market sometimes reads The Daily Reckoning. In today’s trading action on Wall Street, the stock market is down...a lot...and gold and silver are both down...a lot. Nevertheless, a wide variety of gold and silver mining stocks are trading higher on the day. Newmont Mining (NEM), Barrick Gold (ABX), Buenaventura (BVN), Silver Wheaton (SLW) and Silver Standard (SSRI) are among the many gold and silver mining stocks that are trading to the plus side.
One day does not make a trend, but it does make for a very interesting data point. In today’s edition of The Daily Reckoning, guest columnist, Fred Sheehan offers a few more kind words for gold and silver stocks.
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| | The Daily Reckoning Presents | | Buy Anti-Dollars! | | |  | | Frederick J. Sheehan | The prices of gold and silver shares are derived from the price of their reference metals. The referral method has gone astray, akin to a renegade ETF.
Osiris Investment Partners L.P. in Boston, under the authorship of Principal and Managing Member Paul Stuka, wrote to clients on August 18, 2011. The XAU Gold Index was down 6% for the year-to-date, and the GDXJ Gold Stocks Index of smaller gold miners had fallen 10%. On that same mid-August date, gold — the real stuff that hardly anyone owns but of which everyone within the media’s range is expected to express an opinion — had risen 26% in 2011.
The gap between gold and the diggers will close — when is hard to say. In which direction we will discover. The view here is that the stewardship of paper currencies, the medium in which gold, silver, and oil (crude, canola, and palm) are priced, has never been in worse hands. This is saying less than might be thought since it was not until 1971 that official money went untethered from impartial restraint (usually, gold). Alas, the world is slow to grasp the fact that central banks are peopled by political hacks (as Senator Harry Reid called then-Federal Reserve Chairman Alan Greenspan in 2005, but equally true of today’s empty suits). So now is the time to make money. Real money.
Money is to be made by holding “anti-dollars” like gold. Federal Reserve Chairman, Ben S. Bernanke, remains one of the anti-dollar’s very best friends, since he continuously reiterates his intentions to debase the dollar for the public good. Last week, Bernanke remarked that the United States is blessed with lower inflation than other countries and “Low inflation means that the buying power of the dollar, in terms of domestic goods and services, remains stable over time.”
It does not take a trial lawyer to see the inconsequentiality, inconsistency, or mendacity in that labored claim. Ben may be fishing turtles from the local creek, painting his barbarous equations on their backs, and selling them at the local five-and- dime (which would still be overvaluing his scholarship by at least a nickel), but shoppers at local farmer’s markets are paying the price for purchasing with dollars.
Osiris Investment Partners went on to write: “[S]ince the early 1980s, when the XAU Index was first constructed, until the fall of 2008, this ratio remained in a range of .16 to .38, even during the depths of the gold bear market. [That is the ratio of the XAU Gold Stock Index divided by the price of an ounce of gold in US dollars]. During the financial crisis of 2008, this ratio dropped briefly to .09. Since that time, it has traded up to .16, but it has never exceeded the former floor.
As I write today the ratio is .114. In other words, the gold shares are currently the cheapest that they have ever been, excluding a one-month period in the fall of 2008. On a fundamental basis, gold stocks have historically traded at 10 times or more annual cash flow. We are presently seeing many companies priced at one to three times potential forward cash flow, if they can execute their plan. Clearly, not all of them will realize the potential. However, many will.”
Of the cash flow, Erste Group, (Erste Bank, Vienna: “In Gold We Trust;” July, 2011; Ronald-Peter Stoferle), estimates the “aggregate free cash flow of the 16 companies in the Gold Bugs Index will amount to [$8.5 billion] this year and will increase to [$14 billion] by 2013.” Erste Group continues: “The companies in the Gold Bugs Index currently command an estimated 2011 [price-to-earnings ratio of] 14x, which is expected to fall to 12x in 2012. This is extremely low in terms of its own history (average PE 2000-2010: 33x) and in relation to many other sectors.” (The Gold Bugs Index consists of 16 mining companies that do not hedge their gold production. This is not necessarily true of the miners in the XAU Index.)
Potential investors seek the potential catalyst. What might that be?
First, the correlation among sectors in the S&P 500 has never been greater. ETFs and high-frequency trading rule the waves. Machines trade stocks in bulk, with little distinction among industries and companies. Such periods of over-zealous gimmickry and of intimidated investors are often good times to buy stocks that will later assert their superior characteristics.
Second, gold- and silver-mining shares are “under-owned” in relation to one-stop-shopping ETFs. The miners know this. Shareholders have enlightened management: they need to pay out dividends to distinguish themselves as real companies. Recently, Newmont Mining stated it will increase its dividend by twenty cents per share for every $100 rise in the price of gold. Gold Resource Corporation has set a target of paying out one-third of its cash flow in dividends to shareholders.
Third, the argument of whether the world is inflating or deflating is tangential to the price of gold. Better expressing the “price of gold”: how many units of paper currency (such as the dollar) does it cost to buy an ounce of gold? (We are returning, now, to the reference metal). Gold has performed better in deflations than inflations, but the cause and effect that this relationship addresses (“gold is an inflation hedge”) may be misleading. Monetary, military, and political chaos have more often corresponded with deflationary than inflationary times. The real story is that gold is money, but only speaks up when the credibility of states and their currencies deteriorate.
Fourth, the proportion of people who own gold and silver is small. (Particularly so in the United States, but that is not the point, here.) This is the greatest flaw of the “gold in a bubble” chorus. There has been no panic into gold, or, more likely for the Average Joe, into gold shares. At some point, the mere sight of Bernanke may be worth a quick $500-an-ounce trading profit. But that’s not happening yet.
Regards,
Frederick J. Sheehan,
for The Daily Reckoning
Joel’s Note: For reasons oft-cited in these pages, the gold story — sometimes known as the “anti-dollar” story — is becoming an increasingly important one for individuals who wish to distance themselves from the Fed’s unscrupulous, dollar-debasing clutches. In fact, the story is so important, Addison has made it a mission to get a copy of Ron Paul’s “Lost Gold Bible” into as many hands as possible. Be sure to grab your copy — and a few issues of Addison’s Apogee Advisory — right here.
Mr. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and The Coming Collapse of the Municipal Bond Market (Aucontrarian.com, 2009)
| | | | | When Will Obama Confess to the Secret “Timebomb” Event Ahead? |
Obama and Congress won’t even talk about it...but we’ve got a much bigger problem ahead than anybody cares to admit...and it could hit harder than the 2008 banking collapse.
What problem?
Nothing less than a secret new meltdown for world oil supplies — with gas potentially doubling in price and oil potentially about to hit $300 — and it could hit as early as the end of this year.
Find out how in this urgent new report...
| | | | | | Bill Bonner | | As the World Economy Turns | | |  | | Bill Bonner | Reckoning from Buenos Aires, Argentina...
What keeps this world economy turning around?
Not the US. America’s private sector isn’t spinning at all. It’s stuck...dead in the water...out of gas...pumped out...
GDP growth is reported at 1%. But that’s almost all government transfer payments and stimulus deficits. Real growth is negative.
And all the recent reports show it is getting worse. Wall Street is cutting earnings estimates...strategists reduced their S&P 500 targets 8%.
..corporate tax receipts have decelerated sharply...
..the president’s job bill is DOA in Congress...
..retail sales are slowing...
..and prices are softening, with the core CPI headed below 2%.
As we keep saying, there is nothing unusual about this. It’s just what you’d expect in a Great Correction. And it will probably get much worse.
How about Europe, then? Maybe Europe is providing the steam to keep things moving.
Uh uh. Moody’s just downgraded French banks... It assumed they would lose 60% on their Greek debt holdings. But the banks themselves have only written off about 20%. And then there’s the Italian debt. And the Spanish debt.
They’ve got a long way to go. And it’s all down.
Merkel and Sarkozy may pledge to keep the olive countries from defaulting. But where will they get the money? France is deep in debt too. And the German economy has stopped growing all together. Not to mention that German voters are just about fed up. They won’t pay for the Greeks to take early retirements forever.
Europeans are becoming old, tired pinchpennies. Just like Americans. They’ve got a social welfare system they can’t afford — just like Americans. And they’re going broke — just like Americans.
What they don’t have is a huge, expensive, aggressive military. Americans regard their armed forces with pride. They see the Pentagon as their greatest strength. Actually, it is their biggest weakness. All told, the imperial agenda costs the US $1.2 trillion per year. Ultimately, both Europeans and Americans may be forced to tighten their social welfare belts.
But can the Americans off-load their ammunition belts? We don’t think so. There are two parts to the human character, said the ancient Greeks. There is appetite and spirit. Appetite is logical, goal-oriented, material...and sensible. But the spirit is mad. It is concerned with symbols...atavistic impulses and the length of God’s arms. The spirit sets off on the road to Hell. The appetite shows it how to get there.
But we are getting off the subject. What keeps the world economy going, we asked? Europe is stuck in the mud. The US is exhausted.
But wait. There’s China. Uh oh. The Middle Kingdom looks like it is slowing down too. Ambrose Evans Pritchard in The Telegraph:
China risks hard landing as global woes spread... China’s carefully- managed soft landing is turning harder by the day, threatening to deflate the torrid credit bubble of the past three years. Beijing is alarmed by inflation above 6pc and price-to-income ratios for property in the rich coastal cities... “There is a large potential risk,” said Zhu Min, the deputy managing director of the International Monetary Fund and a former Chinese official. Mr. Zhu said China had doubled the loan ratio from below 100pc of GDP before the Lehman crisis to roughly 200pc today. The danger is that this excess could start to unwind just as the West goes into a sharp downturn, and possibly a double-dip recession. China and emerging Asia are fundamentally in weaker shape this time, having used up their “fiscal cushions”, leaving them with little leeway to cope with a fresh global shock. China is our last great hope. If China goes down, the world economy falls with it.
And more thoughts...
When the stock market crashed in ’29, people had no idea what it meant. They referred to it as a “break” or a “crash.” Almost everyone figured it was just a matter of time before things were back to ‘normal.’ They were more-or-less right. The Dow returned to its ’29-high 17 years later. In real terms, it was still around its ’29-high as late as the mid-’80s — 55 years later.
But in the early ’30s, it looked as though the economy was recovering; the stock market was soon to follow, they figured.
Then, after regaining about half their value, stocks fell hard again. And then banks failed. And companies went broke. Roosevelt began his Fireside Chats. And unemployment rose to 25%.
Still, people did not see it as the “Great Depression” until later.
Similarly, when the subprime crisis and the collapse of Lehman Bros hit the markets few people knew what to think. The feds were particularly dim; they thought it was just another typical post-war downturn. They thought they could fix it the way they fixed all of them — with more credit.
But more credit wasn’t the solution to this problem, it was the cause. And adding more just made it worse.
Little by little, month after month, commentators and analysts have opened their eyes. They realize that this is a balance-sheet problem...not an inventory, liquidity or interest rate problem. But that is only the immediate problem. Gradually, they are beginning to realize that there is more going on.
Our Daily Reckoning view of it was better than most — if we say so ourselves. We knew it was a Great Correction from the very outset. We knew debt was the problem.
But even we did not see the power of this correction.
Of course, we don’t have much experience with this sort of thing. There are only two examples in the last 100 years — the ’30s in the US. The ’90s and ’00s in Japan. Not enough data points to draw much of a conclusion. But at least these two have one genetic similarity — longevity. It took 2 decades to end the Great Depression. The Japanese de-leveraging episode has already lasted more than 20 years.
We should have taken it at face value. Instead, we figured the US de-leveraging would be shorter. We saw it as a battle between the forces of deflation (the markets) and the forces of inflation (the feds). We thought the feds would have won by now. After all, they’ve got a printing press. And Ben Bernanke told us that they would use it.
But it’s not that simple, is it? The feds turned on the printing press. They added trillions in cash and credit. But so what? It hasn’t had much effect. Inflation is low...and apparently going down. If the economy goes back into recession, the CPI could even turn negative.
To make a long story short, the Great Correction appears to be greater than we realized. It has frustrated the feds completely. It has sunk bond yields to their lowest levels in 6 decades. It has knocked the upper stories off every house in America. It has taken 7 million people out of the job force.
And it looks like it is just getting started.
So, what’s this correction aiming for?
..will it correct the housing bubble that began in 1997...and stop there?
..will it correct the stock market boom since ’01...or since ’82...and be done with it?
..will it correct the bull market in bonds that goes back to ’83...or the bull market in bonds that goes back to 1971?
..how about the post-1971 dollar-based monetary system?
..will it correct the credit expansion/consumer spending boom that began in ’49?
..or maybe it will correct the boom in US economic and military power that dates back to 1917?
..Who knows? Maybe it is going to take out the entire industrial revolution boom going back to the 18th century...
..or even the boom in the human species that goes back to the 17th century?
We don’t know where this correction is going...but we want to make sure we’re somewhere safe when we finally find out.
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
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