Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Thursday, June 10, 2010 Investing in an age of supreme government ineptitude, Asking ridiculous questions about gold, paper and trust, Plus, Bill Bonner on the end of the fantasy recovery, why Venezuela and Cuba are NOT the richest countries in the world and plenty more... Gold to Fight Fiat Currencies for Useless Title Why gold is still better than faith-based money Eric Fry Reporting from Laguna Beach, California... "In the land of the blind," the old saying goes, "the one-eyed man is king." In the world of untrustworthy investment assets, therefore, which asset deserves to be supreme global ruler? US Treasuries? Picassos? Shares of Apple Computer? Vintage Corvettes? Beachfront Real Estate? It's a tough call, made even tougher by the volatility of the foreign exchange markets and the capriciousness of national tax authorities. Truth be told, there is probably not just one supreme asset that merits trust above all others. But if there were just one, that asset would be gold...simply because it has the longest and most impressive resume. Nevertheless, this trustworthy asset commands surprisingly little respect from most American investors. They remember gold as the asset that slumbered for two decades while stocks jumped 10-fold. And despite gold's strong performance during the decade just passed, most investors are still quick to point out that gold has delivered a negative inflation-adjusted return since 1980. That's 30 years and counting. "At some levels," reasons Brett Arends of The Wall Street Journal, "gold, as an investment, is absolutely ridiculous. Warren Buffett put it well: 'Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.' "And that's not the half of it," Arends continues. "Gold is volatile. It's hard to value. It generates no income... It's a currency 'substitute,' but it's useless." Arends offers a familiar and relatively coherent critique of gold's stature in the world. And yet, if gold is as 'ridiculous' and 'useless' as he contends, the dollar must be doubly ridiculous...and the euro triply useless. What intrinsic "value" or utility do these sovereign IOUs possess? A dollar possesses value only because enough people agree that it does. But if a large body of dollar-holders rebelled against this notion, the dollar's value would decline, if not disappear altogether. Faith and habit support the dollar's value. Nothing more. Isn't that a bit ridiculous too? And yet, the world's ridiculous "faith-based" monetary system underpins the entire network of global commerce. Without dollars and yen and euros, global commerce would function very poorly. So the system persists, despite its obvious shortcomings. Oil producers, for example, continue to spend decades developing new projects, building pipelines and expanding refineries so that they can continue to exchange one gallon of gasoline for three pieces of green paper. The whole thing is kind of insane...when you really think about it. But this form of insanity is benign in most economic settings. Everyone knows that a piece of green paper possesses zero intrinsic value. But no one cares, as long as four pieces of green paper buys a breakfast at Denny's, five pieces of paper buys a lunch at McDonald's and six pieces of paper buys a coffee at Starbucks. Unfortunately, here in A.D. 2010, currencies are coming under suspicion. No one knows which currency is good or which is bad...or if any currency at all can be trusted. The global monetary system is creaking under the weight of excessive government debts. In such an environment, what asset is truly safe? If money itself is not trustworthy, what is? What asset evokes confidence? What national treasury, government agency, financial institution or pension system inspires complete trust? The time has come to ask ridiculous questions...and to continue asking ridiculous questions until some of the ridiculous answers begin to make perfect sense. Gold might be as "useless" as the Journal's Arends contends, but an ounce of it buys about 1,200 dollar bills. In a few years time, this same useless ounce of metal might buy 5,000 dollar bills. The question then would be, "What do I do with all these green pieces of paper?" Better Than Gold! One investment should rocket even faster than gold over the next 12-24 months... yielding at least 3-to-1 gains on every dollar invested... GUARANTEED. In fact, I'm so sure of this, I won't charge you a penny to show you how. Click here for the full metals investing research report. The Daily Reckoning Presents Crisis Investing Byron King Not long ago, several Outstanding Investments subscribers invited me for a sit-down chat. I told them that I love to talk with readers, but I can only chat general themes. I CANNOT offer personal investment advice in the context of a small group. That is, when it comes to specific recommendations, I only do that in the pages of my newsletters. Everyone was OK with the ground rules. So after juggling our schedules, we wound up in the beautiful oak-paneled lobby of the old Summit Inn, south of Pittsburgh near Uniontown. It's right alongside historic US Highway 40 - the road carved by British colonists from the East Coast into the Western frontier. It was great to listen to the reader questions, comments and concerns. As you can imagine, the ongoing deep-water disaster in the Gulf of Mexico was high on everyone's list of issues. "Can't the military do a better job of dealing with this mess than BP (NYSE:BP)," asked one reader? It's a fair question. The US spends hundreds of billions of dollars every year on the Department of Defense. Where's the return on that investment? Can't any military people or equipment help? The short answer is that the military is designed to fight wars, not oil well blowouts. And as we all know, much of the military is busy fighting wars right now. Wars or no, Secretary of Defense Robert Gates recently said that private industry has better deep-water technology than the US military does. Mr. Gates was referring, in part, to the remotely operated vehicles (ROVs) built by the likes of Oceaneering (NYSE:OII) and FMC Technologies (NYSE:FTI). The share prices for these companies are down just now, what with the so-called "six-month moratorium" on deep-water drilling in the Gulf. But over time, the ROV makers will come back strong. As for the military, it's good at organizing people and things and then focusing them on a mission. But by definition, it's a military mission. Sure, there's military capability to deal with, say, an oil spill during a military fueling operation. But overall, the DOD is not geared to fight a widespread environmental battle, such as what we have in the Gulf. That said, however, the military is supplying personnel, ships, aircraft, command and control support and much else to the oil-fighting effort. And let's distinguish the DOD from the US Coast Guard, which IS playing a critical role in all of this. Indeed, Coast Guard Adm. Thad Allen is the National Incident Coordinator for the oil disaster. Adm. Allen has become a well- recognized presence in the media coverage. Plus, Adm. Allen is a key decision maker in the process of deploying all manner of public and private resources. He signs off on permits for many efforts to deal with the blowout and combat the oil spill. So the Coast Guard is right there, in the thick of things, delivering value. From this point, the Summit discussion with Outstanding Investments subscribers moved to a different, but related, issue. "Are there things that the government just can't do?" asked one participant. It's an important philosophical question. There's no denying that "the government" can accomplish great things over time. Given enough time and resources, the federal government can build great edifices like the Grand Coulee Dam or accomplish monumental tasks like landing men on the moon. But keep in mind that big dams, and even men on the moon, are "deliverables." They're technological things you can wrap your brain around. They're also things that you can design, plan out and throw money at over a period of time. But what happens when bad things occur abruptly? Natural disasters like earthquakes, hurricanes and volcanoes come to mind. Or in the current case, we have a man-made disaster - a deep-water oil well blowout. People aren't prepared for really bad things - mentally or physically, if not technologically - and nobody can deal with the consequences. We quickly find the edge of the envelope of government power. That is, sometimes government just plain lacks ability to control events. The Gulf of Mexico oil well blowout is one of those times. Look at the aura of helplessness exhibited by many of the highest-ranking politicians in the country. The big shots can rant and rave and threaten lawsuits from here to the end of time. But can they plug the oil well? No, they can just sit there and bellyache. The subscribers at the Summit Inn had their own views of how, exactly, the federal government - as well as BP and the rest of the energy industry - was simply not ready to deal with the oil well blowout. "The federal government owns the offshore," said one subscriber. "The government has allowed deep-water drilling for 20 years. Now the politicians and bureaucrats act like it's a total surprise that there's a deep blowout. It's so hypocritical. At Department of Homeland Security, they have people whose job is to think about a nuclear bomb going off in Washington, where THEY live. Isn't there somebody at Department of Interior whose job is to think up terrible scenarios like a deep-water blowout where they DON'T live and then plan for it?" Great point. Along these lines, a recent headline speaks volumes: "Gulf Oil Spill Surpasses Scope of Disaster Training." This headline comes from a well-regarded nationally distributed newspaper. What newspaper? Navy Times. Wow! Consider the source. Navy Times is privately published by Military Times Co. But over the years, Navy Times has carved its niche as the newspaper of record for the US Navy, with a large readership within the Coast Guard. That is, Navy Times is a newspaper for sea service insiders. What are people on the inside actually saying? The insiders are admitting candidly that the disaster planning and training was inadequate to meet the ongoing crisis in the Gulf of Mexico. Yes, there was some thinking, planning and training. But not for anything this big. According to Navy Times, "A month before the BP oil rig explosion in the Gulf of Mexico, more than 50 federal, state, local and private organizations swarmed a simulated oil spill in the Gulf of Maine... The Coast Guard dubbed the event the 'Super Bowl of exercises.' But this effort appears dwarfed by the size and complexity of the environmental disaster unfolding off the Louisiana coast." Yes, it sure "appears dwarfed." No Super Bowl rings for this one. Of course, there's no denying that there's a gigantic, all-government level of response to the deep-water blowout. And there's a learning curve evident. So there's progress out there. But before the explosion on April 20, there sure was a failure of imagination when it came to the dangers of deep water. The deep-water disaster is - or ought to be - a humbling moment for people who place their faith in the power of government. Especially government people, and particularly politicians. That is, the deep-water blowout shows that there are things that government can't control, let alone fix. As environmental damage lingers into the future, it'll drive home that point about the limits of government capabilities again and again. One participant at the Summit conference made a terrific point. She said, "Washington was unprepared for the fall of the Soviet Union back in 1991. Washington was surprised by Islamic terrorism, and blindsided by Sept. 11. Washington was caught flat-footed with the housing crash, and the Wall Street meltdown in 2008 and 2009. The government is unprepared for a deep-water well blowout. What's next? What ELSE doesn't the government plan for, what other big things? What if the euro fails? What if the dollar crashes?" That's quite a way to look at it. Over the past 20 years, the US government has dropped the ball in a lot of areas. Thus, it behooves you, as an investor, to connect these dots. When it comes to big stuff that can change the national direction, and screw up your life in the process, the government may very well fail to anticipate things. Even if the government does see the asteroids coming, what will your government do for you? Will your favorite politician give up his room in the survival bunker? For you? Are you kidding? The bottom line is that every investor needs to prepare his or her own lifeboat. Along those lines, the subscribers with whom I met have a stash of physical gold and silver. That's just the beginning. They "get" Peak Oil and the decline of the dollar. I won't get into personal details, but there's a reason that these particular subscribers live in a semirural area south of Pittsburgh, in the mountains, with spring water, fertile soil and plenty of time to practice their target shooting. Sure, these Outstanding Investments subscribers may play the stock markets. They may even invest in gold miners and energy firms. But at the end of the day, each one of these subscribers is building his (and her) own measure of personal security in a world where the financial future of America is looking more and more precarious. Byron King, for The Daily Reckoning Joel's Note: Right now Byron is busy helping his Outstanding Investments readers protect themselves against what he's calling the "New Oil War" - an event that could send a barrel of the world's goo well over $200, crippling any lingering "recovery" hopes and decimating the portfolios of many an unprepared investor. He shares some of his insights in this special research note. Daily Reckoning readers are invited to read the whole thing online, right here. Bill Bonner Unwelcome Correction Mistaken for a Double-Dip Recession Bill Bonner Reckoning from Baltimore, Maryland... Oh Bama...could this really be the end? To be stuck inside this mobile, with the Memphis Blues again... - Bob Dylan, sort of Who believes in the 'recovery' now? Robert Reich (former Labor Secretary under Bill Clinton): "The only reason the economy isn't in a double-dip recession already is because of three temporary boosts: the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can't continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories). Oh, and, yes, all those Census workers (who will be out on their ears in a month or so)." Yes, it's the end of the road for the "quick recovery" crowd. Now, the whole world has the Memphis blues. "The hastily assembled stimulus packages were a throwback to naïve Keynesianism," adds Jeffrey Sachs. "The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be welcomed." But nobody welcomed the Great Correction. Except us. The others all pretended that it was a recession...even a Great Recession. They treated it like an invasion of cockroaches or a stopped up toilet. They thought they could get rid of it. But it wasn't that easy. Nope. Now, we're looking at a "double-dip recession," says the mainstream press. Once again, they've got it wrong. You can tell by reading their advice. If they knew what was really going on, they wouldn't have any advice. As Mr. Sachs himself put it, this is an "adjustment to be welcomed," not fought. But even Mr. Sachs cannot resist a fight. Especially one that others will pay for. Like everyone else, he has a can of Raid in his hands. The government should do this... The government should do that... He thinks the government should do all sorts of mischief, including "insist that the rich pay more in income and wealth taxes - indeed a lot more." We don't have any doubt that the feds are going to hit the rich hard; but what kind of economist would advocate it? Mr. Reich has his own foolish prescriptions too - similar to those of Mr. Sachs: "We need a new New Deal that will bolster America's floundering middle class. "We have to get to the core problem: a middle class that doesn't have the dough to buy the goods and services the economy is capable of producing. Where to start? Expand the Earned Income Tax Credit and extend it up through the middle class. Finance that extension through higher marginal income taxes on the wealthy, who have never had it so good." Let's see. Both men must imagine themselves as Robin Hood, stealing from the rich in order to subsidize the middle classes. They don't seem to understand that the story of Robin Hood may make a good movie. It makes goofy economic policy. If taking money away from the rich could make a society more prosperous, how come Venezuela is broke? And Cuba? Here in Baltimore, after you add in state and local taxes to the federal toll, your editor surrenders almost half of every dollar earned. How much more can they take? Even socialist France has a rule that a person cannot pay more than half his earnings in taxes. But in the new America, things that were taken for absurd a few years ago are now taken for granted. Driving around the Capitol beltway, for example, we see a sign that says "Report Suspicious Activity." This is not in an airport. This is on a major highway. You want to see suspicious activity? Just follow Pennsylvania Avenue to the Capitol Building! A few years ago, urging people to rat out their fellow citizens would have been suspiciously un-American...more in keeping with life in East Germany or North Korea. But the world turns. And now, the snitchers are right here in the USA! But returning to the economy... Even if you add a dip, this is still not a recession. It's not caused by Europe. And it's not go away if we tax the rich or spend more money we don't have on 'stimulus.' We've now reached the end of the recovery fantasy. We need to realize that we are in a correction...one with an attitude and an agenda. Trouble is, we don't yet, what's on the agenda. And more news... The stock market continued its work yesterday. It took another 40 points off the Dow. Gold sold off $15 after hitting a new all-time high. Markets work. They try to discover what things are worth. That's what they're for. And corrections have their uses too. When too many people make too many mistakes, the whole market needs to correct. Most likely, there is still a large gap between current securities prices and the cash-flow needed to support them. A mortgage that the homeowner can't pay, for example, is not worth face value. It's worth less than that. And a company whose sales and profits are stalling is probably not worth 15 times earnings. Maybe it is worth 7 times earnings. And what about government bonds? How likely is it that the world's biggest debtor - the US government - will be able to pay back off its 30-year bonds with money equal in value to today's dollar? That's what the markets are supposed to figure out. And here is Henry Blodget...worrying that the news won't be good: In the past year, we've written a lot about the similarity between the rally of early 1930 and the one we had through April of this year. The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. The spring 1930 rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak. That rally, of course, was also the biggest sucker's rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century. The rally that recently ended in April 2010 came after a crash that was actually slightly more severe than the 1929 crash (53% versus 48%). It took the market up nearly 80% from the low! The recent rally also lasted longer than the 1930 rally did - a year, as opposed to 6 months. Importantly, we won't know for sure what today's market is until we look at it with the genius of 20/20 hindsight. As Peter Schiff pointed out yesterday, even as late as 1931, they didn't know they were in a "Great Depression" yet. On the contrary, the promise from the White House was that "prosperity is just around the corner." "While the crash only took place six months ago, I am convinced we have now passed through the worst - and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us." - Herbert Hoover, President of the United States, May 1, 1930 "...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..." - Harvard Economic Society (HES) May 17, 1930 "Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930 "...irregular and conflicting movements of business should soon give way to a sustained recovery..." - HES June 28, 1930 "...the present depression has about spent its force..." - HES, Aug 30, 1930 "We are now near the end of the declining phase of the depression." - HES Nov 15, 1930 "Stabilization at [present] levels is clearly possible." - HES Oct 31, 1931 "All safe deposit boxes in banks or financial institutions have been sealed...and may only be opened in the presence of an agent of the IRS." - President F.D. Roosevelt, 1933 Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Joel Bowman, with an urgent message for long-time Daily Reckoning readers... As you may recall, a small group of your editors recently visited China. Chris Mayer, Addison Wiggin, Bill Bonner and yours truly met with money managers, industry insiders, property developers, bank managers and various other movers and shakers behind the Great Wall in an attempt to gain a better understanding of the increasingly complicated investment landscape in the world's second largest economy. We asked plenty of questions, took lots of notes and, all in all, enjoyed a most enlightening trip. Now we'd like to share some of our findings with you...over the phone. Addison's brand new "Wire Tap" tool lets you to listen in on "private" monthly conference calls, where his 18 years of inside contacts - from hedge fund managers to company CEOs, successful everyday investors to trading gurus, bulls to bears - reveal and debate their urgent, profitable money making ideas. This month, the topic will be China. Both Addison and Chris will be on the call, and we've rounded up a couple of Beijing-based insiders to help shed some light on the opportunities behind the scenes there. If you'd like to listen in, simply let us know here. We'll get the relevant information to you ahead of the call. We hope you're able to join in. Cheers, Joel Bowman Managing Editor of The Daily Reckoning ------------------------------------------------------- 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