Since we spoke last Monday, how has your life changed? If it hasn’t changed, what did you do different to make it change? It can be as simple as reading a self-help book.
US Debt and Iceland
The USA has the rare privilege of holding the world’s reserve currency. If investors don’t buy all the massive debt the US constantly needs to fund its ongoing spending spree (mostly to patrol the world with its armies), it just prints more money and buys its own debt. This is exactly what The Federal Reserve has been doing.
Simple, right?
Simple, yes. But it’s also disgusting. It’s a direct breach of The Constitution. The idiotic media have named it ‘Quantitative Easing’ and there are even debates about whether there should or shouldn’t be QE3 (a third phase of so-called Quantitative Easing), and with a doting nod to the beloved Fed chairman, everyone’s swallowed it.
Think about this for a second….
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Let’s say you’re in debt. And you need money to pay the interest on that debt. But you can’t get enough banks to lend you the money you need. So you head off to the printer and have him run off copies of all the money you need to lend it to yourself to make the payments on your loans.
It’s absurd when you think about it. And this last week the country of Iceland agreed. Iceland decided to abandon its own currency and instead choose someone else’s. So they chose the US Dollar, the reserve currency, right? Wrong. They chose the Canadian Dollar.
The world is slowly waking up to The Fed’s scam, and it’s been reflected in the price of gold. And if a country like the US can’t raise enough loans through selling Treasury Bills, it has to raise interest rates it will pay on its debt to make lending to the US more appealing. The rates the Fed offers lenders over a 10 year period is what sets your mortgage rate payments. The Fed has been buying its own debt with counterfeit money to keep mortgage rates down in an attempt to stimulate the economy.
Last week I explained how US Treasuries were at last headed for a fall and that the TBT fund was a good buy at those levels. It’s raced up and broken through since then, but I think there’s more to come this year, so it’s not too late. In fact, I think this is shaping up to be one of those few trades you get a year that are really worth going for.
The only downside is this: if there’s a financial scare again to do with the European debt crisis (and it’s very possible), TBT will head down again as investors flock to US Treasury Bills for safety (TBT is a bet AGAINST US Treasuries). BUT, as I explained last week, the VIX (a measure of market volatility that goes up when there’s fear in the markets) is currently priced very low.
This trade seems pretty sound for 2012: buying both TBT and VIX at these levels (21 and 17 respectively as I write).
Gold in a bubble?
Something I’m hearing lately is this: “Is gold in a bubble?”
As League of Power members know, a contrarian approach to investing is our strategy, so it’s not surprising to hear some members ask this question. After all, some omens are out there, such as the growing number of commercials advertising gold coins, the increasing chatter about gold and government illegal money-printing. But here’s why I do NOT think gold is in a bubble (yet)…
There may well be more people speaking about gold now, but ask yourself this: how many people do you personally know who own a single gold coin or bar?
None or very few, I bet. So what if the pizza delivery kid spoke about gold? Does he own any?
Let’s take a recent example of a bubble and compare this to gold: The Dot Com bust…
You remember this, I’m sure. In this bubble, people weren’t just talking about tech stocks, they actually OWNED them. Any time some hare-brained tech stock IPO was launched, you were killed in the rush! These companies were selling for ludicrous prices based on no earnings at all, and the valuations were sky-high. Plus, it all happened very fast, didn’t it? If you look at a chart of the rise and fall of the tech stock boom, it looks like a vertical pole!
Now compare this to gold…
Gold hasn’t shot up in a short space of time. It’s gone up in a steady rising channel for over 10 years from a low of around $200 an ounce. That’s not a speculative bubble.
The price of gold in 1980 was $2,080 an ounce. Now adjust for rampant inflation over the last 30 years since then! Does gold sound expensive? Especially when you consider that 30 years ago we weren’t having sovereign states defaulting, and the USA still had a triple A credit rating!
Gold mining stocks are DIRT CHEAP. They have P/E ratios of single digits in most cases!
I’ll be selling gold when everyone is actually lining up outside coin dealers to buy the stuff, and the shopkeeper comes outside with a sign that says: “Sorry, No Gold Today (Again)”. And when the chart looks like a vertical pole. But by then, gold could be well over 3 or 4 thousand dollars an ounce. Some say even higher.
Most of all, always remember this golden market axiom:
A bull market tries to take as few people along for the ride as possible.
Skepticism is exactly what this gold bull wants. It sometimes acts like a bear to scare people away.
Similarly…
A bear market tries to take AS MANY people along for the ride as possible.
The bear disguises itself as a bull, keeps offering glimpses of hope. Doesn’t that sound a bit like how the stock market is behaving…?
So what to do now if you didn’t buy any gold? It’s climbed quite high, and the end game of mismanaging governments around the world (USA included) is finally playing out, and paper currencies are all ultimately doomed in their present form.
Two options:
1. Close your eyes and just buy a set amount each month.
2. Buy platinum instead! Its ratio against gold is VERY favorable right now.
3. Buy gold stocks…
Gold stocks are currently stupidly underpriced in relation to the metal, and this cannot last. This could be your last chance to get some exposure to gold. You can buy a gold miner ETF called GDX. Or you could buy individual miners such as Kinross Gold, Yamana Gold, Iamgold, Barrick Gold. Can you believe all these miners have PE ratios of under 7!?
So TBT with VXX as insurance, Gold Stocks, and Platinum. They’re my 2012 bets…
Property
Finally, a word on the residential property market. You probably don’t need me to tell you that it’s a buyer’s market, but property is, and always will be a powerful form of building capital and securing income IF it’s done right. The problem with the recent boom was that it became amateur hour and people weren’t doing it right.
So it’s far less crowded than it was, and that’s a good thing, because with the amateurs out of the way and not driving up prices to silly levels, we can start looking at the sums again.
The golden rule is this: NEVER EVER buy a property for a net income of break-even or less and rely on capital appreciation for your gain. If the numbers don’t add up for the rental market, the property is too expensive. And be conservative with your estimates for rents- look at what similar properties have ACTUALLY rented for.
But bargains are out there, rates are low, and there are ways to fix credit problems. Sellers are getting desperate and creative ways of doing no-money down deals are once again doable (see your League of Power lesson on property).
Get to know your local market and see what sells for what. Befriend a realtor. Don’t be afraid to make insulting offers- they don’t have to take it.
I put the Olde in Olde England
So, I’m still in Merry England with my son. I enjoyed fish and chips today as I strolled through the park and admired the graffiti on the fence.
For some reason my son and I ended up in a conversation tonight about making a music compilation, and I (stupidly) explained how we had to make music compilations in the seventies: We had to get out this big black thing called a record, lift the needle on to the track we wanted (hoping we wouldn’t make a terrible scratching sound and land on just the right part), push ‘record’ so the blank cassette- this plastic thing with tape inside- would capture that song we wanted. We’d have to hear that song play out, then do it all again for the next song. Yeah, we made quite a night of it…
As my son dragged and dropped songs onto his iPod, he looked at me almost in pity, as if I must be SO old to remember such technology. I decided not to talk about rotary phones…
And then I found myself saying something that is the proof that I am officially an old man: “You kids don’t know you’re born, these days!”
I pushed the ‘send’ button on this week’s newsletter and recalled the days when we used to have to actually send a newsletter in the mail….
Anyway, by stark and alarming contrast to father-son bonding, I thought I’d leave this with you- something my wife sent me from a Yahoo questions posting. Now, I must tell you, this is NOT a hoax. This guy was perfectly serious…
Hey, I can’t understand why your kids don’t like you! But you have one thing right: they would be better off without you.
Until next week, my friend, and meanwhile, go hug your kids…!
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Regards,
James Sheridan
