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The Daily Reckoning | Thursday, July 22, 2010 The Whiskey Bar Panel divulge their Trades of the Decade, Conspiracies and forecasts for Mother Nature's money, Plus, Bill Bonner on the malleable spines of world leaders... The Long and Short of Informed Investment Decisions A few more suggestions for the Trade of the (New) Decade Joel Bowman Checking in from Vancouver, Canada... "What is your favorite government agency, and why?" "What are the two largest holdings in your own personal wealth?" "What is your trade of the new decade [best long and short idea for the next ten years]?" "Where will the Dow and gold be a year from now...and what is your favorite chilled beverage?" The questions came on thick and fast at last night's "rough and tumble" Whiskey Bar Debate here in Vancouver. If you've attended our little shindig before, you'll know what it's all about. If you haven't yet partaken in the feistiest chapter of our annual symposium, we basically get our most outspoken, controversial contrarians liquored-up and hit them with a slew of attendee-penned questions. Here's a taste of what went down when the Trade of the (New) Decade question popped up, as relayed by our mates over at The 5-Minute Forecast: John Mauldin - Buy emerging markets, sell sovereign debt...but not now. Treasuries are going to go lower in the short term Andrew Lowenthal - John is 100% right: Rolling over US debt is going to be so much easier than what people think...it's too early to short Treasuries Eric Kraus - Buy resource producers in places where people are afraid to invest. Short finance sectors of developed countries Barry Ritholtz - Short the euro, long stocks in 2016, when the next bull market begins Byron King - Sell the euro: It's doomed, just a question of time. Buy crude oil. There's just not enough of it. I'm long the Tea Party, too Doug Casey - I'm inclined to own a lot of gold, cattle and agricultural land...keep it simple. I would short the euro, yen and US stock market Gary Gibson - I own nothing. If I had anything, I would have dollars now, uranium later. Buy energy. Eric Fry - Short euro, long uranium Porter Stansberry - There are just too many good shorts. Short Treasuries, especially in US and Italy. Buy gold, silver, timber and super-high-quality blue chips when they yield 10% or more Chris Mayer - Short the state of California and Illinois. Long uranium and high-quality farmland. [For extensive coverage of this year's investment symposium, including the specific stock tips and sold out presentations, you can't go wrong with the CD/MP3 recordings. They're available at a discount this week, while the event is still in full swing, but that ends when the conference does. Details Here.] The gold/Dow/chilled beverage question also yielded some colorful responses from the panel: Gold at $1,800 per ounce...Dow down 20%...Mojitos... Not a member of the distinguished panel, your humble editor didn't throw in his 2 cents last night, so we'll do so now. But instead of measuring the index in points and the metal in dollars, we'll do away with floating abstractions and simply measure the index in metal. Historically, the peak of a gold bull market/stock bear market occurs when you can pick up the 30 bluest stocks for about one, maybe two, ounces of gold. The Dow/Gold ratio, at that point in time, is said to be around 1:1 to 2:1. During the furor of tech. mania in the late '90s, early '00s, when the Midas metal was scoffed at in polite company, that ratio reached 45:1. In other words, it would take you 2.8 POUNDS of Mother Nature's money to buy the Dow. During the past decade, as stocks stagnated and gold rallied fourfold, that ratio has slipped dramatically. Today, it takes about 8.6 ounces of gold to buy the Dow. Our bet, for what it's worth, is that this trend continues for a while yet. Next year, we're probably looking at a Dow/Gold ratio of about 6:1...and not because the Dow goes to 60,000. Oh yes, and we'll take a caipirinha. Addison Wiggin has more on how to invest in - and avoid losing - your own gold in today's essay. Details below... The Daily Reckoning Presents Golden Shell Games AddisonWiggin That's right, gold. You know, the ultimate money. Or Gold: The Once and Future Money, as our friend Nathan Lewis titled his 2007 book, for which we were privileged to write the foreword. Hey, Wall Street can take a $250 million sewer project in Alabama and turn it into an insurmountable debt 20 times as big. So it can find a way to pervert the Midas metal, too. And the evidence is piling up: You don't have to be partial to conspiracy theories about the "manipulation" of gold to conclude something just doesn't look right. That means you need to be very careful about how you hold any gold outside your physical possession - especially in a retirement account. Of course, it's always important to ask oneself, how much is there to these conspiracy theories, really? Well, ever since the publication of his book, Lewis has been scrutinizing them. And this year, they've reached a fever pitch. Did you hear about the 400-ounce gold bars filled with tungsten? (Tungsten's weight is nearly identical to gold, so the deception is simple if the bar isn't properly assayed) Or the one about the London metals trader turned whistle-blower who alleged JP Morgan Chase is suppressing the silver price? And how he was injured in a mysterious hit-and-run? (His injuries were minor) Or how the head of the Gold Anti-Trust Action Committee testified about gold manipulation before the Commodity Futures Tradition Commission and the camera conveniently malfunctioned? You could go very far down the rabbit hole trying to separate fact from fiction with these kind of stories. And you'd be wasting your time. Marc Faber, editor of The Gloom Boom & Doom Report stated it well in April, so well we quoted it in The 5 Min. Forecast: "If you have manipulation to keep the price down, it eventually goes ballistic. So all the people that are bitching about the manipulation of silver and gold should be happy that it is manipulated, because it still gives them an opportunity to buy it at a depressed price." Exactly. Manipulation stories are a source of entertainment, outrage or both. They underscore the perils of the Wall Street Fandango. But their truth or falsehood makes little difference if you hold gold in your physical possession. Or in an allocated account (the gold has your name on it) in an independent, insured depository. Or if you use a reputable electronic gold purveyor. (We like GoldMoney.com and BullionVault.com.) But it makes a lot of difference if you hold "paper gold" in the form of an exchange-traded fund. Many people buy vehicles like GLD and IAU with the comforting illusion that what they're buying is "good as gold." And it's an incredibly convenient way to get metals exposure in a retirement account. Which brings us to the revelations of Janet Tavakoli. Tavakoli is not a gold bug. She's an expert in structured finance and credit derivatives who runs her own consulting firm in Chicago. Recently, she published a client report that took the format of "advice" she would give to Wall Street sharpies trying to corner the gold market. Not that they'd ever try that, of course. Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange-traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the "gold" to be commingled with the custodian's gold, and the custodian can lease out the gold. Moreover, the "gold" custodian can give it to a subcustodian that the manager doesn't know. The subcustodian can give it to yet another subcustodian unknown to the original custodian. The manager will never audit the gold, and the gold is not "allocated" to a particular investor. Since this is an "exchange traded" gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn't. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute. The "plan" involves buying huge futures contracts and expecting physical delivery. If this sounds familiar, it's pretty much what the Hunt brothers did when they tried to corner the silver market in 1980. Silver shot up to $50, however briefly. It's never seen that territory again. But the consequences this time around would be far more serious. It could collapse banks holding huge short positions in the futures market, accustomed to settling contracts cash only. More to our point, it would crater the ETFs: Their complex network of custodians and subcustodians would be laid bare. ETF investors would realize they have a claim on the same chunk of gold as, say, Goldman Sachs. But Goldman would have the actual metal. The ETF investor would have to settle for pennies on the dollar. Far-fetched? Maybe. Just remember that ETFs are ultimately, like a complicated mortgage derivative, subject to counterparty risk. If the day comes when trust evaporates from the system, value will evaporate from the ETFs. If you want to play gold's short-term ups and downs, the ETFs are an ideal instrument. Otherwise, stay away. Addison Wiggin, for The Daily Reckoning Joel's Note: In the latest issue of Addison's Apogee Advisory, Mr. Wiggin makes the case for a couple of metals plays you can buy from your existing retirement account with just a few clicks of a mouse...both without the "shenanigans that undermine the ETFs." "Both [closed-end funds] hail from north of the border," Addison writes. One old and one new, "both are rock solid." The second, we noticed, also gives investors significant exposure to the upside potential of silver. Addison is still offering the "beta-test" deal on his latest research service. If you haven't already given it a look over, you may wish to do so here. Bill Bonner Public Debt Replaces Private Debt in the Name of Progress Bill Bonner Reckoning from Vancouver, Canada... The Dow fell 109 points yesterday. Gold was flat. Otherwise, all quiet on the financial front. We're keeping these reckonings short this week. Your editor is attending a financial conference in Vancouver. He doesn't want to miss anything. What have we learned so far? Both Rob Parenteau and John Mauldin mentioned the danger of fiscal retrenchment. Tightening seems like the right thing to do. It IS the right thing to do. But it results in bigger deficits. How could that be? "It sets in motion a vicious cycle," said Rob. The private sector is already correcting. If the public sector tries to correct its debt at the same time it puts even more pressure on households and companies. Their income goes down (less government spending). And their taxes go up. So they cut back. Jobs are lost. So tax revenues fall. So the government's deficit increases and it must cut even more. "That's what is happening in Ireland. Ireland has done everything right. It cut spending just as it said it would. But the picture has deteriorated, not improved." What's the solution? There is no solution. But both Rob and John implied that perhaps the government should wait for an upturn in the private sector before it begins cutting in earnest. Here at The Daily Reckoning, we wouldn't worry about it. First, we don't think governments really are cutting in earnest. We think they're just flirting with the idea. When the time comes to go upstairs, our guess is they'll have to leave the party rather than get serious. Already, Hungary announced that it was fed up with austerity. When push comes to shove, will other nations stick it out? Probably not many. Second, the real problem is still too much debt. It needs to be destroyed. The sooner, the better. Nobody ever said it would fun. But it's better to get it over with. That's why a hands-off approach would have been much better in the beginning. After Lehman went down, the whole street was ready to fall. Households, businesses, banks - trillions in debt might have been wiped out overnight; we'll never know. Instead, we're headed for Tokyo where they've had bailouts, boondoggles and counter-cyclical fiscal stimulus for 20 years. And for what? "It would have been worse had the Japanese authorities not acted," say the neo-Keynesians. How they know that is a mystery to us. As it turned out, Japanese investors lost nominal wealth equal to three entire years' GDP. And the economy today hasn't grown in 17 years or created a single new job. Nor has the debt been reduced. Instead of permitting the private sector to destroy and pay off its debt, the public sector fought against it...borrowing heavily to try to bring about a recovery. Result: no recovery...and almost exactly the same amount of debt. But while the private sector paid off its debt, the public sector picked up the borrowing. Now it's the government that owes money all over town. Is that progress, or what? Meanwhile, 'double dip' sightings are becoming more frequent. Here, The New York Timesbrings joyless tidings from the housing industry: Construction starts on residential buildings declined in June to the lowest level since October, the government reported on Tuesday, as the sector struggles with a tepid recovery and the end of a government tax credit. The Commerce Department reported that housing starts in June were at a seasonally adjusted annual rate of 549,000, about 5 percent below the revised May estimate of 578,000. The June rate was at its lowest level since October 2009 and also fell below analysts' estimates of 580,000, according to a Bloomberg survey. The June figures were primarily the result of a 20 percent decline for condominiums and apartments. Another indicator in the report showed that building permits for June were slightly higher at 586,000, up 2 percent compared with May, while those for single-family homes dropped to 421,000 in June, about 3 percent below the figure for May. "It reflects what builders are thinking about the housing market," said Patrick Newport, an economist with IHS Global Insight. Referring to the June figures, he said, "They just don't think they are going to sell many homes, and for good reason." The median time to sell a home in the United States has crept up to about 14 months, he said. "We need to start creating more jobs," Mr. Newport said. A better jobs market would generate demand and get construction back on track. And this report from Charles Hugh Smith: Financial analyst Meredith Whitney recently joined the ranks of those who foresee a serious decline in housing prices in the second half of 2010. Her reason: Banks are starting to unload higher-priced homes in their bulging "shadow inventory," and with sales dropping sharply now that the federal tax credit for homebuyers has expired, there's a massive mismatch between supply (rising) and demand (falling). Evidence for falling demand is plentiful: Pending home sales have tumbled 30%, hitting two records. Mike Larson of Weiss Research recently said: "Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever." The consensus is the sharp decline in home sales is the result of the federal tax credit ending, but few analysts have hazarded guessing where new demand will come from, absent the tax credit. Meanwhile, the supply of homes for sale or in default marches ever higher in all price segments. To the surprise of those who reckoned that higher-end homes were holding up better than the rest of the market, the delinquency rate on investment homes with an original mortgage of more than $1 million is now 23%. And a staggering one in seven homes over $1 million is in default. Even the posh Beverly Hills zip codes have seen prices shrivel by 31%. An Ever-Larger Shadow Lenders are thus rightly worried that many of the 11 million homeowners who owe more than their house is worth - the 24% of homeowners who are "underwater" - will walk away from their mortgages, especially if the real estate market rolls over again. Such an increase in so-called strategic defaults would burden lenders with even more unsold homes - a category known as "shadow inventory" because lenders don't always list a newly foreclosed home for sale immediately. This shadow inventory could reach as high as 7 million homes by some estimates. Other analysts have calculated that it will take 103 months (about 8.5 years) to clear this gigantic inventory of foreclosed, distressed and defaulted homes. To put these numbers in context: according to the US Census Bureau, 51 million households have a mortgage and 24 million own homes free and clear (no mortgage), and about 37 million households rent. Even more sobering, the total number of vacant dwellings in the US increased to a record 19 million in the first quarter of the year, up from 18.9 million in the fourth quarter of 2009. As new homes continued to be constructed, inventory rose last year by 1.14 million to 130.9 million, while occupied homes increased by 1.07 million to 111.9 million. And more thoughts... "This is the Greater Depression...and it's going to be worse...far worse...than the Depression of the '30s," said Doug Casey. "We're just in the eye of the hurricane now. It seems calm. But the other side of the storm is going to hit soon. And it's going to be much worse..." Doug proceeded to list all the reasons this storm will cause more devastation than the '30s tempest. For one thing, people have much more debt. There was relatively little consumer debt in the '20s. Credit cards hadn't been invented yet. And if you wanted to buy something from a store you had to pay for it in advance. They had 'lay-away' plans. You could pay a little each month. Then, when you'd finished paying for it, they'd give you the merchandise. Generally, people still believed in saving money. Other reasons: There was no expensive social-welfare establishment. There were few bailouts and few boondoggles. The US government had little debt and was relatively little-involved in the economy. The US had a positive trade balance. The US was still a growing, dynamic economy...and the world's leading exporter. And the US wasn't involved in any foreign wars. Its military expenses were trivial compared to those of today. People wanted to invest in the US. The US dollar was backed by gold. "Now, smart Americans are getting their money out of the US," said Doug. "This time it's going to be much worse." Bill Bonner for The Daily Reckoning