What Will Replace the Dollar? by Bill Bonner London, England If you haven't seen it, there was a "news" item supposedly from Pravda that tells us the United States, Canada and Mexico have secretly planned to introduce a new North American currency, the Amero. Below is the alleged sample of the 50 Amero bill:
Will the Amero replace the dollar? Not at all...this myth has already been debunked online. If there were a new currency we also wouldn't expect to see it any time soon, that's our guess. We're in a depression. Maybe it will become a Great Depression...or a Greater Depression, we don't know. But it is a time of credit contraction...not credit expansion. For the moment, prices are falling. The dollar is safe...at least, for now. We paid a visit to France over the weekend. No one knows how France stays in business. Everything is very expensive and very difficult. Half the population struggles to earn a living. The other half struggle to stop them. But more about that later.... What caught our eye, walking down the street near the Communist Party headquarters, was a clothing shop. A few blocks away, you will pay $100 for a pair of jeans. But in this sidewalk shop, you can get a pair for $10. Shirts for $5. Jackets for $8. The store is owned and run by what appears to be a Chinese family. They probably skirt French employment law by keeping the entire operation in the family. Then, rather than an expensive store, they have a cheap storefront in a bad part of town and put everything out on the wide sidewalk. Even in bad weather, they stretch out a tarpaulin over the clothes racks. A $3 shirt? A $10 pair of jeans? That's deflation. A few months ago, these same clothes may have had designer brands on them - alligators or polo players, perhaps. But upscale sales are falling. So the factories take off the brands and dump their excess production onto the low-rent market. We don't know that for a fact...we're just putting two and two together. Excess capacity was built with excess credit. That's what happens in an expansion. Entrepreneurs borrow to increase production so they can sell more products to credit-addled consumers. Then, the excess capacity dooms them. They put out too many goods and too many services. When demand falls - along with incomes and housing - prices fall too. Yesterday, the dollar held steady. The yield on the 10-year T-bond fell to 3.69% after reaching up toward 4% a few days ago. The rise in bond yields (with falling bond prices) was probably the most interesting story in the financial world...until they stopped rising. What's going on? As we explained, there is no real economic recovery taking place. In fact, there is a lot more risk and mayhem on the horizon. And with no real economic recovery, don't expect a real bull market on Wall Street. Or real pressure on bond yields. (Of course...there's much more to the story...so stay tuned.) In the meantime, yesterday, the Dow dropped 200 points. It looks to us as though the rally is coming to an end. If you're invested in U.S. stocks now, sell them. They could go higher...but it's not worth the downside risk. In the meantime, check out the 'millionaire's market'. It may be your best bet for turning a profit in this environment. See here. More news from the 5 Min. Forecast: "Sales of existing homes inched up 2.4% in May," Ian Mathias reports today. "The National Association of Realtors announced a sales rate of 4.77 million units a year this morning. Given that the rate of existing home sales has managed to stay near that level most of 2009 - in fact this month's pace is only down 3.6% year over year - we hear a growing chorus declaring a bottom to the housing market. As you might expect, we hesitate to sing along. "Why? Because the rest of the numbers just don't add up. According to the NAR's release this morning, 3.8 million homes are still for sale... a nosebleed-high, 9.6 month supply.
"Home prices are still falling too, down almost 17% year over year - an obvious sign homes aren't cheap enough yet. And mortgage rates have climbed about 50 basis points since the end of May - an equally obvious sign that the all is not well with the American credit market. "What's more, distressed properties accounted for a third of all sales in May. Without foreclosures, bank sales and the like, existing home sales last month would have rung in closer to an annual rate of 3.2 million... a number that would send traders running to the hills. And of those 3.2 million more "traditional" sales - consider the Uncle Sam's $8,000 tax credit and the Fed's multi-billion dollar mortgage rate manipulation. This ain't the free market at work... calling the bottom still feels premature." The 5 Min. Forecast is taking today and tomorrow off, as the Agora Financial editors and analysts are once again gathering at our Baltimore HQ for our bimonthly editorial meeting. Unfortunately, this meeting is closed to the public - but you can catch up with all of Agora Financial's best and brightest at this year's Agora Financial Investment Symposium in Vancouver, B.C. The symposium promises to be the event of the year - so don't miss out! Secure your ticket now - before the event sells out! See more here: Agora Financial Investment Symposium, July 21-24 And back to Bill, with more views: Some things are obvious and predictable. Other things are not. And, of course, we always have to remember that we don't know what we are talking about. As colleague Alex Green's delightful new book reminds us, "the only certainty is surprise." More later... What is more or less predictable is that a severe depression is developing. Our iron law puts it this way: the force of a correction is equal and opposite to the deception that preceded it. The Bubble Epoque was extraordinary in practically every way - with illusions, frauds and absurdities galore. Ergo, so must be the Bust Epoque that follows. From the housing sector comes news that even though houses are much cheaper they are not necessarily much more affordable. While prices are falling so are incomes and employment. Mortgage lenders, meanwhile, learned that they needed to be more careful about whom they lent money. In 2007, the banks were so loose their arms practically fell off. If they had been young girls, you would have found short poems about them in the boys' toilets. They weren't prudent lenders; they were promiscuous ones. But now house prices are falling and lenders say 'no' to everyone. But unfortunately, that won't undo the mistakes of the past - the mistakes that are deciding the future of the US economy. The lax lending standards caused the first wave of loan defaults that rocked the banks to their core...and now the second wave is headed straight for the United States. Learn more about it here. So the poor lumpen are trapped between falling incomes and rising lending standards; they can't buy a house even at a much lower price. The retailers are trapped too. They leased huge spaces to sell their wares; now they have no one to sell their wares to. Sales go down; so do earnings. Bloomberg reports that business executives see what is coming. They look at the figures and see their businesses trapped between high output capacity and low pricing power: "Insiders Exit Shares at the Fastest Pace in Two Years," begins the headline. "Executives are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago. "Insiders of Standard & Poor's 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. "Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies' prospects." Even governments are trapped. Yesterday, Nicolas Sarkozy told the French that he wasn't going to follow the 'austerity policies' urged on him by the European Central Bank. "Austerity policies never work," he said. The French deficit is more than twice the levels permitted by the European Union's economic guidelines. But at 7% of GDP, it is still barely half America's government deficit. And over on America's left coast, the government of Arnold Schwarzenegger is faced with the same crisis - only worse. The New York Times tells us that states, led by California, are putting government employees on forced furloughs, releasing prisoners early, closing parks and reducing education budgets. They need to watch out; citizens might notice that they never needed to spend so much money in the first place. Speaking of prisons, for example, the states could save a fortune simply by getting rid of the jailbirds who never really did anyone wrong. By that, we mean the people who didn't harm anyone but themselves...and arguably, not even themselves. There are hundreds of thousands of people in prison for drug crimes, for example. Let them pay a fine and turn them loose. (If we were running things, we'd legalize drugs and make alcohol and cigarettes compulsory. TV, rap music and Barbra Streisand performances, on the other hand, would be outlawed.) "France is rotten," said a dinner guest on Saturday night, recalling de Gaulle's famous warning that Vietnam was a "rotten country"...and that Americans should stay out. "I'm fed up. You can't do anything in this country without either getting permission or getting a fine. You can't drive fast...even though the highways are made for much faster traffic. You can't smoke. You can't start a business...or sell one...or hire anyone. The way these employment laws work it's safer to murder a bad employee than fire him. "Someone is always telling me what to do...and it wasn't like that a few years ago. I'm old enough to remember what it was like in the ’60s and ’70s. France was still a free country back then. You could do pretty much what you liked. You could ride down the road without putting on a seat belt. You could smoke in bars. If you didn't like your job you could tell your boss to go to hell. Then, you'd just look in the paper...there were always hundreds of jobs. People changed jobs. If one didn't work out...they tried a different one. Now, if they don't like their job they go to court and the employer is really in trouble. The whole process is rotten. "What I'm really surprised about is the way the French have gone along with all this bossing... They're sheep." "Wait a minute," another guest challenged her. "France is still a great place to live. The food is good. The weather is usually pretty good. The health service works. The trains run on time...at least, when the workers aren't on strike. It's pretty to look at. I don't know how much you've traveled, but compared to the places I've seen, France is way ahead. Besides, if you don't like it so much, why don't you just leave? Find some other country you like better..." "Ha...I'm too old now...and besides...they're all rotten." Until tomorrow, Bill Bonner The Daily Reckoning P.S. Colleague Alex Green sent us a copy of his charming new book: The Secret of Shelter Island. Alex might be likened to the Roman Emperor Marcus Aurelius who used calm moments to think about what was really important. Alex uses calm moments in his life as a financial advisor to think about what money really means...what it is really good for...and what else really matters in life. The book is a series of short memos, in the Aurelian style, with hundreds of thoughtful, quotable remarks. Add it to your summer reading list: The Secret of Shelter Island...available at Amazon.com. | |||||
| The Daily Reckoning PRESENTS: Gold stocks are among the most volatile asset classes, but old and new research shows that their judicious use can enhance investor returns without adding portfolio risk. U.S. Global Investors' Frank Holmes explores. Read on... Why Now Could Be the Right Time for Gold Stocks by Frank Holmes San Antonio, Texas Conditions have improved for gold equities, and economic policy decisions being made in Washington could further increase the investment appeal of these mining stocks. The charts below clearly illustrate the relationship between gold- mining stocks and the federal budget. The top chart below compares the total-return performance of the S&P 500 (blue line) with that of the Toronto Gold & Precious Minerals Index* (gold line) going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold. At that time, the United States was in the thick of the Vietnam War and was pumping billions of dollars into the financial system to pay for it. The dollar's value dropped compared to other currencies, and the demand for gold and its price shot up. At the same time, the U.S. stock market was languishing, taxes were high and new regulatory entities like the EPA were being created. It was also a period of socialism, unionism and protectionism in Europe.
The bottom chart shows the federal budget, and the trend is readily noticeable - when the federal government is spending more than it takes in, gold stocks tend to outperform the broader market. One hundred dollars invested in the S&P 500 at the start of 1971 underperformed the gold-stock index essentially for a quarter-century. In each of these years, the federal government engaged in deficit spending. The S&P 500 surpassed the gold-stocks in 1997, in the midst of the tech boom and budget surpluses under President Clinton. When those surpluses reverted to widening deficits after the Sept. 11 attacks, you can see the spread between the broad market and gold equities narrowing. At the same time, another important event occurred - China began to deregulate its precious metals markets. During that period, the S&P 500 dropped before largely leveling off, while gold stocks charged forward. Gold stocks have delivered a 9.9 percent average annual return since 1971, while the S&P 500's annualized return has been 9.6 percent. That $100 invested in gold stocks in 1971 would have grown to nearly $3,800 at the end of May 2009, while the same amount in the S&P 500 Index would be worth about $3,400. Gold stocks are among the most volatile asset classes, but old and new research shows that their judicious use can enhance investor returns without adding portfolio risk. U.S. Global Investors has updated research on gold stock investing by Jeffrey Jaffe, a finance professor at the Wharton School, that was published in the Financial Analysts Journal in 1989. Prof. Jaffe's study covered the period from September 1971, just after President Nixon ended convertibility between gold and the dollar, to June 1987. The Jaffe study concluded that adding gold and gold stocks to a large portfolio increases both risk and return, but that the additional return from these non-correlative assets more than compensates for the additional risk. During the study period, gold bullion saw an average monthly return of 1.56 percent, considerably better that the 1.06 percent average monthly return for common stocks represented by the S&P 500. Gold stocks shone even brighter, returning an average of 2.16 percent per month. On the risk side, gold and gold stocks had greater volatility (measured by standard deviation) than the S&P 500. But Jaffe found that, due to their non-correlative qualities, adding gold-related assets to a diversified portfolio would likely reduce overall risk. We picked up the Jaffe study's result for gold stocks (measured by the Toronto Stock Exchange Gold and Precious Minerals Total Return Index, converted to U.S. dollars) and compared it to the S&P 500 Total Return Index from September 1971 through the end of May 2009.
Our research included creation of an efficient frontier series to establish an optimal portfolio allocation between gold stocks and the S&P 500, with annual rebalancing. As you can see on the chart above, a portfolio holding 85 percent S&P 500 and 15 percent gold equities has essentially the same volatility as the S&P 500 (horizontal axis) but delivered a higher return (vertical axis). Between September 1971 and May 2009, the S&P 500 averaged a 9.34 percent annual return. A 15 percent allocation to gold equities, with annual rebalancing, would have yielded on average an additional 0.89 percent per year. How much is 0.89 percent per year? Assuming the same average annual returns since 1971 and annual rebalancing over 25 years, a $10,000 investment in the portfolio with 15 percent gold stocks would be worth about $114,000, 22 percent more than the 100 percent S&P 500 portfolio, while adding virtually zero risk.
U.S. Global Investors consistently suggests up to 10 percent gold in a portfolio allocation, so we also looked at returns for investors at that level. A 10 percent allocation to gold equities, with annual rebalancing, would have yielded on average 0.63 percent more than an exclusive S&P 500 portfolio. In dollar terms, the $10,000 investment in the 90-10 portfolio would grow to $107,611 over the ensuing 25 years (assuming, the same average annual returns since 1971 and annual rebalancing), compared to $93,210 for the portfolio solely invested in the S&P 500. And when you look at the efficient frontier in the chart, the 10 percent weighting is two diamonds above the 100 percent S&P 500 allocation. You can see that adding gold stocks also increased return with no increase in the portfolio's volatility. More than two decades and many ups and downs have passed since Prof. Jaffe published his study, but our follow-on research shows that the relationship between gold, investor returns and volatility has remained pretty much the same. Another bullish indicator for gold and gold stocks is that, for the first time in my 20 years at U.S. Global Investors, pension fund consultants and other gatekeepers for large institutional investors are advocating an exposure to gold. These gatekeepers have influence over managers of many hundreds of billions of dollars in retirement funds, and they are advising a 5 percent to 8 percent allocation to gold, which is similar to the long- term exposure suggested by U.S. Global. Another thing that held gold stocks down was the number of gold equity financings. In early 2009 there were roughly 50 deals and more than $5 billion raised, and that put a short term cap on many of the established gold producers that that said that they were going to start buying the junior exploration companies. The emergence of a new merger-and-acquisition cycle has been a key driver for the small exploration stocks, which have significantly outperformed the actual producers in 2009. The miners that can replenish their reserves while also controlling their costs to enhance profitability will see this reflected in their stock price. Regards, Frank Holmes for The Daily Reckoning Editor's Note: You can catch Frank Holmes at this year's Agora Financial Investment Symposium in Vancouver, British Columbia. This year's event promises to be the best on record, and it is already over 70% sold out...so secure your ticket now. Get all the information you need here: Agora Financial Investment Symposium, July 21-24 Frank Holmes is CEO and chief investment officer at U.S. Global Investors, a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX), Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX). Frank will be hosting a special webcast double feature this week. On Thursday, June 25, Frank will discuss key signs that the worst is behind us. Register for "Searching for Signs of a Recovery" here. Then on Friday, special guest Andy Rothman, CLSA's chief macro strategist, will present on China's Impact. Register for "China's Impact" here. ----------------------- Special Offer ------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and about to become ultra-wealthy. This will go down in history as the "story of our era..." Most importantly, you'll be rich because you took decisive action in 2009. See the full report here. | |||||
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