 | | The Daily Reckoning | Friday, March 2, 2012 |
- A closer look at some...er...investment assets... Yeah, that’s it...
- Is the general public underinvested in our favorite yellow metal?
- Plus, Patrick Cox explains why we are at an incredibly historic juncture...and why it could be great for your investment future...
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|  | | | | Over/Under Valuations | | A Closer Look at Stocks, Commodities and the US Dollar | | |  | | Joel Bowman | Keeping an eye on things from Auckland, New Zealand...
Up...up...and away!
Stocks...commodities...the US dollar...there’s more unbridled enthusiasm being lavished upon these three investment vehicles than would be on an impromptu Victoria Secret fashion show in San Quentin.
Anything demanding that much attention must surely be worth a closer look. So grab your bifocals, Fellow Reckoners, and let’s investigate...
Wait...wait! We meant the investment assets. Forgive us for spoiling your Friday afternoon. Let’s try that again...
Stocks. In the US, the S&P 500 polished off its best February in 14 years yesterday, ending the session up just over half a percent to close at 1,374. The broad market measure has been on a scintillating streak of late, adding nearly 10% year-to-date.
Are you excited yet?
And this just after the Dow eclipsed the psychological 13,000 mark earlier in the week. (The thirty bluest chips have since retreated a smidge, but still stand proud — incredibly, we reckon — at 12,980 points.)
And lo! It’s not just companies that make stuff and do stuff that are rallying. Stuff itself is on a tear too!
The Thomson Reuters/Jefferies CRB Commodity Index has added 5.5% so far for the year. The energy complex seems to be leading the way with tightly constrained oil markets at the forefront of traders’ minds. In fact, crude topped $110 per barrel just yesterday afternoon on mere whispers of further unrest in the Middle East...though this time not from the sandy patch you think.
Bloomberg was on the case:
Oil climbed over $110 a barrel for the first time since May after an Iranian state-run news channel reported an explosion on a pipeline in Saudi Arabia. A Saudi official said no oil facilities were sabotaged.
Futures reached $110.55 at 3:17 p.m. in New York after Iran’s Press TV reported on its English-language website that “an explosion has hit oil pipelines in the flashpoint Saudi Arabian city of Awwamiya,” then fell back below $109. Major General Mansour Al-Turki, a spokesman for the Saudi Interior Ministry, said no oil facility in the region has been sabotaged after reports of a fire near the Ras Tanura refinery. In other words, markets are on high alert for rumor, hearsay and scuttlebutt. Commented Phil Streible, a Chicago-based commodities broker at RJO Futures, in the same Bloomberg article, “It looks like it’s a rumor but it shows you how sensitive the oil market is to any kind of supply constraint.”
We’ll have to reckon on that a bit more another day. Suffice to say, if a rumor can pop oil up a couple of bucks a barrel within a few minutes, imagine what an(other) all-out war in the region could do.
[Ed. Note: “All the more reason for homegrown energy independence,” says our resident geologist, Byron King. If you haven’t yet seen Byron’s eye-popping “Re-Made in America” report, you can still catch it here.]
The dollar, too, has been strengthening steadily in recent months. Commented Addison in yesterday’s Daily Reckoning:
Throughout the eurozone crisis of the last few months, the US dollar has been attracting widespread “flight to safety” demand. But the dollar is not merely rallying against the euro; it is rallying against almost every investable asset on the planet. For example, a dollar buys 36% more silver today than it did six months ago. A dollar also buys 20% more wheat, 13% more corn... and even 2% more “American house.”
If we broaden out our analysis to include stocks and currencies, the results are similar. A dollar buys 32% more French stocks today than it did six months ago... as well as 34% more Indian stocks and 18% more Japanese stocks. Among world currencies, a dollar buys 11% more Norwegian kroner today than six months ago... as well as 15% more Swiss francs and 8% more Canadian dollars. Not that we should be looking the strong dollar gift horse in the mouth, cautions the chief. Addison sees an opportunity in using the currently strong greenbacks to purchase what he sees as a relatively undervalued Canadian loonie. It’s all part of his ongoing and always evolving Apogee Advisory strategy to sidestep (and maybe even profit from) what he calls the mother of all bubbles.
Gold, too, is well off its $1,550 per ounce starting point for the year. Alas, all the excitement proved more premature celebration than sustained performance this week when the Midas Metal got smacked down a whopping $90 in a single session. Last we checked, the ego bruised anti-dollar was sulking around the $1,720 mark. But is there more to the story?
The ever vigilant Dave Gonigam rounded up a few expert opinions in yesterday’s issue of The 5-Minute Forecast. We quote at length:
“You pretty much have to be brain dead not to see that this engineered price decline was precious metals specific...and deliberate,” says Ed Steer over at Casey Research.
“The ‘tell’,” adds the trading veteran who blogs as “Jesse” at Jesse’s Café Americain, “is the lack of a serious sell off in equities. The yawning divergence in the risk trade is hard to miss.”
“I have seen reports,” he adds, “that 225 million ounces of paper silver were dumped on the Comex in less than thirty minutes. The last time I checked there were less than 35 million ounces of silver registered with the dealers for delivery in at the Comex.”
“Unless you are a full time experienced trader playing with ‘cool money,’ stop trading,” he counsels. “This market is far too thin and given over to gimmicks for the average person to participate.”
But if you’re a long-term holder? They’ve just handed you another buying opportunity.
“A look at investment flows proves that [gold] isn’t anywhere close to being overbought,” reads a year-old analysis from Canadian resource investing legend Eric Sprott and Andrew Morris that’s still fresh as a newly-minted Gold Eagle.
They cite figures from CPM Group: Back in 1968, when gold first started to break from its moorings of $35 an ounce, gold held by individuals for investment purposes made up 5% of global financial assets.
“By 1980,” they write, “that amount had fallen to roughly 3%. By 1990 it had dropped significantly to 0.6%, and by the year 2000 represented a mere 0.2% of global assets.”
During gold’s run-up in the previous decade, that number has recovered to a mere 0.7%. “So despite gold reaching record nominal highs,” write Sprott and Morris, “the world holds about the same portion of its wealth in gold as it did over two decades ago.”
“Consider that to return to a meaningful level of gold investment, say to the 5% level of 1968, it would require over $9 trillion of gold investment today, or about 6.5 billion ounces of gold at the current gold price. This would represent well over 1.3 times the amount of gold ever produced throughout history and four times the amount of known gold reserves.”
“So not only is the public relatively underinvested in gold, but at current prices it isn’t even possible to increase our gold holdings back to a meaningful level.” “What does that mean for the dollar price of gold longer-term?” pondered Dave. “For reasons you’ll see here, $5,000 isn’t out of line.”
Thanks, Dave.
And now, let’s bring our noses back from the trading screens for a moment. (Our eyes are still hurting from that earlier, technical mishap.)
Switching gears, today’s big picture guest essay comes courtesy of Patrick Cox, editor of the very Breakthrough Technology Alert. Please enjoy...
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| | The Daily Reckoning Presents | | The Folly of Intellectuals | | |  | | Patrick Cox | I have referred often to a theory of business cycles that was first described by the Austrian Joseph Schumpeter, but amplified by contemporary American Thomas Sowell. Both are brilliant economists who have described in mathematical detail how free markets produce the most wealth and well-being for society, including for those at the lower end of the financial spectrum.
It is their explanation for why things go wrong, however, that I find most illuminating. Both Schumpeter and Sowell write about “intellectuals” who have academic credentials of some sort but are lacking in knowledge that would make them particularly valuable to the market. Incapable of commanding significant wealth and status through voluntary market mechanisms, these intellectuals resent the wealth of more-successful people. As a result, they envy and resent the entire market system that has failed to reward them as they believe they deserve to be rewarded.
Others have also explored this theme. Another Austrian, Helmut Schoeck, wrote the book that is widely considered a masterpiece of sociology, Envy: A Theory of Social Behavior (Der Neid: Eine Theorie der Gesellschaft). You can go back even further, if you like, to the Tenth Commandment’s proscription against “coveting.”
Intellectuals who consider inequalities in wealth evidence of injustice often seek political remedies. These take the form of legislation and, more often, regulation. In the process, of course, they are able to portray themselves as heroic opponents of injustice. If they have sufficient support, they are also able to acquire significant power, wealth and status. We know from experience, however, that these intellectuals rarely consider their own wealth evidence of injustice.
In Europe, these intellectuals have been far more successful in the past than in America. For this reason, American intellectuals in academia, politics and media have for decades told us that the US is woefully unsophisticated and behind the times. In fact, economists have shown consistently that quality of life is higher for Americans at all income levels than it is in most European nations. It is difficult, however, to compete with a movement that has had, until recently, a near monopoly on pulpits, podiums and programming.
That’s all changed. Not only has the United States seen Keynesian policies on steroids crash and burn, but the European model has been revealed as the house of cards that it is. For decades, governments have propped up living standards by borrowing to appease voters. In effect, nations have consumed at artificially high levels by sending their children the bill.
Naturally, governments run by these intellectuals have tried to raise taxes to support their habits. Many succeeded, but then discovered the reality of the Laffer curve. Taxes necessarily transfer resources from the private tax-generating sector to the public tax-consuming sector. At some point, taxes depress economic growth, which reduces government revenues. This point is usually much lower than the critics of capitalism assume. Moreover, their targeting of the wealthiest individuals is most damaging to the economy. The wealthiest are also those with the most money to invest in the innovations that create all net new jobs.
So we’re seeing tax recipients rioting in Greece and elsewhere. These riots will spread, but it will do no good. The money doesn’t exist to support the intellectuals’ schemes, no matter how bloody their tantrums. Times will get hard enough to create a generation that hates the intellectuals who promised that everybody would be able to retire young with no worries.
We are in the midst of a historic transition. The intellectuals got their way. Now the consequences of their ideologies are going to be painful enough to allow market reforms. That’s how self- equilibrating market mechanisms work.
This is all very good news for North Americans. Canada, by the way, is way ahead of America in learning the limitations of government. America, however, is learning quickly.
Three years ago, the intellectuals were gloating that they could use the forthcoming economic downturn for their advantage. The public, they predicted, would blame free markets and give even more power to the planners.
That, as you know, has not happened. Despite the orchestrated efforts of the Occupy Wall Street crowd and other fans of socialism, the American public is far more wary of government than it is of business:
An overwhelming 64% of people surveyed said big government was the biggest threat to the country, compared with just 26% who said big business is their gravest concern and 8% who picked big labor.
Government debt schemes are failing. This is creating remarkable opportunities for investors. It amazes me, in fact, that more people don’t understand this.
On those rare occasions when I watch financial shows, I’m always surprised by the never-questioned assumption that up-markets are good and down-markets are bad. This is nonsense.
The name of the game for investors is “Buy low, sell high.” Given the inevitable fluctuations of the market, we know that markets have always gone through this sort of big cycle. They always will.
If this were not the case, “Buy low, sell high” would be nearly impossible. Sure, selling high is more fun, but you can’t do it if you haven’t bought low. This seems awfully obvious to me, but it’s clear that most people just don’t get it.
We are at an incredible historic juncture. The world is, once again, realizing it has been duped by fast-talking political scam artists. This is not a new story. In fact, we’ve actually gotten off pretty easy this time. By necessity, market-killing programs will be cut back, freeing investors and innovators to create wealth once again. This liberation of capital will come just as the greatest scientific revolution in history swings into high gear, delivering extended healthy life spans and new levels of wealth. I know it doesn’t always feel like it, but these are wonderful, extraordinary times.
Someday, some younger investor is going to say something to you like this: “You were so lucky to be investing back then, when prices were at rock bottom but the whole world was changing for the better. I’d be rich too if I were investing in those days.”
In fact, they will probably be wrong. Most people never see the big picture while it’s happening. This type of once-in-a-lifetime situation is always easy to see in hindsight. When you’re living through it, though, it takes real character and vision to grasp the opportunities.
Regards,
Patrick Cox,
for The Daily Reckoning
Editor’s Note: If there’s one thing you’ll never be able to accuse Patrick of, it’s lacking vision. A perennial breakthrough investor, he spends countless hours researching the next wave of important technologies...and figuring out the best ways to profit from them. And he recently discovered something big... So big, in fact, it “could allow 10 million blind to see again.” We were skeptical, too...until we saw this report. If nothing else, it’s definitely worth a few minutes of your time. Click here now to view Patrick’s unique presentation.
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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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