 | | The Daily Reckoning | Monday, June 13, 2011 |
- Six weeks in the red: just how rare is that...and where to from here?
- Surviving the next leg down with energy, metals and...farmland?
- Plus, Bill Bonner on China's breakdown, Europe's debt dilemmas and the US between a rock and a hard place...
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|  | | | What to Do In Case of Liquidation | | Examining the Importance of the Market’s Recent 6-Week Losing Streak | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The Dow Jones Industrial Average tumbled 172 points last Friday - punctuating another thoroughly forgettable week for American capitalism. Friday's loss submerged the Dow back below the 12,000 mark, while also producing a sixth straight losing week for the US stock market.
How rare is a six-week losing streak?
During the last twelve years, the US stock market has suffered only five losing streaks of six weeks or more - the last of which occurred in the summer of 2004. In three of those five rare losing streaks, gold and commodities also fell. In the first two such instances - September- October of 2000 and February-March of 2001 - the S&P 500 Index fell 20% or more over the ensuing year...and was still showing losses three years later.
The third of these three instances is underway at the very moment...and that's probably not good news.
Most of the time, when stocks go zig, gold (and commodities) go zag. That's called "inverse correlation" or "non-correlation."...and it is one of the many reasons gold is a nice thing to own. You can usually count on it to shine when almost every other investible asset is losing its luster.
Lately, however, gold is doing very little zagging to the upside, even though stocks are zigging to the downside. In fact, there isn't a lot of non-correlation going on anywhere in the financial markets. Many assets are correlating with stocks much more than usual. When all asset classes begin falling together, even worse declines are usually on the way. Professional investors call this a "liquidation event."
The recent min-selloff on Wall Street hardly qualifies as a liquidation event...yet. But one thing is very clear: during the last few weeks it has been much easier to lose money than to make it...no matter what you owned.
During the last six weeks, the S&P 500 has dropped nearly 7%. During that same timeframe, gold is down 2%, oil is down 13% and silver is down 25%. Even Inflation-protected Treasury bonds [TIPs] are down. In short, there have been very few places to hide for the last month and a half.
This simultaneous selloff in stocks and commodities is not comforting. But lest we be accused of "data snooping," allow us to advance a theory to validate the apparent connection between the six-week losing streaks of the past and the present.
The theory is pretty basic: when everything starts falling at the same time, a liquidation event is underway. Investors simply want out...of everything. In such circumstances, risk avoidance takes the place of risk-taking...and this attitude tends to persist for a while, as the examples of 2000 and 2001 illustrate.
A liquidation event may or may not be underway, but investors do not lack for solid reasons to head to higher ground...or to any ground that doesn't act like quicksand. Past is not necessarily prologue, dear reader. But when investors become eager sellers of all assets, caution is in order.
It's time to do one of the following things:
1) Panic and reduce your exposure to equities, just in case.
2) Think long-term and don't worry about it.
3) Buy the stuff that holds its value long-term, no matter what the short-term noise might be.
4) Both #1 and #3. Our vote would be #4.
We would point out, for example, that the prices of gold and commodities were higher one year after the six-week losing streaks of 2000 and 2001 - and much, much higher three years after both losing streaks - even though stock prices were lower. But gold and commodities are not the only "stuff that holds its value long-term."
Saskatchewan farmland might belong in the same category, as Chris Mayer, editor of Mayer's Special Situations, explains below...
| | | | Chris Mayer's Capital & Crisis Presents... |
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| | The Daily Reckoning Presents | | Buy Gold...or Farmland | |  | | Chris Mayer |
My friend Brad Farquhar is the co-founder of Assiniboia Capital in Saskatchewan, which invests in farmland there, among other things. He sends the following note:
"Farm Credit Canada, the biggest ag lender in Canada, publishes a province-by-province report on movements in farmland prices in Canada every six months.
"Of course, we track this and are interested in what they have to say. No great surprises in their new data, but we also played around with it to see what else might pop out at us. "Sometimes in my presentations I show a chart that demonstrates the correlation (within a range) of the price of gold, oil and farmland in Saskatchewan. The correlation is pretty good. Farmland tends to lag a bit because it is a less-liquid asset class and not quoted daily. Also, one acre of farmland is not necessarily substitutable for the next acre the way ounces of gold and barrels of oil are.
"But as the next chart shows, the Sask farmland/gold ratio is getting well outside its traditional range.
"These things tend to correct themselves, and would do so either by the price of gold coming down or the price of farmland going up. Given the various forces at work in the financial world, I don't see the price of gold coming down. Which leaves farmland to go up (particularly here in Saskatchewan, where it is still undervalued relative to its productivity).
"With gold held at $1,500, the price of Sask farmland would need to move to $865 per acre just to get back within the normal historical range. The current price is $526 per acre, representing upside of 65%. Of course, we expect gold to move higher too, dragging all other real assets along with it."
Brad's firm has been in Saskatchewan farmland since 2005. It's turned out to be a good call. I have written about Saskatchewan farmland many times in the past...and I have been a longtime advocate of buying farmland. That's why I'm planning to visit Brad in Regina next month and have a look around. I'll have more to share with you on all of this soon, as well as ways you can participate.
There are many opportunities in Saskatchewan, which is an agricultural powerhouse. Saskatchewan exports a large percentage of the world's goods:
- 67% of world's lentil
- 56% of world's peas
- 25% of world's mustard
- 40% of world's flaxseed
- 18% of world's canola
- 33% of world's durum
- 53% of world's potash
I remain a big believer in agriculture-focused investments as one of the very best "hard asset" allocations for the decade ahead. Ag investments not only provide a hedge against dollar weakness, they also stand to benefit from extremely favorable supply-demand trends worldwide.
The world needs more food. It won't be easy to supply it. That's the kind of trend all investors should crave.
While it's true that you can't transport an acre of farmland or spend it as easily as a Krugerrand, neither can you grow lentils on a gold bar. If you have a hard time choosing between the two, buy both.
Regards,
Chris Mayer
for The Daily Reckoning
Ed. Note: Continuing Chris Mayer's line of thought in the column below, Byron King, editor ofOutstanding Investments, updates the bull case for gold - a story that never seems to grow old, especially for those folks who own it.
| | | | A Dark Shadow Lights Up the Gold Market | |  | | Byron King |
There is a dark shadow hovering over the US dollar and the ability (or, rather, inability) of the US federal government to pay its way in the future.
Below is a chart that shows the percentage of US government income that goes to pay interest on the national debt. It also shows the historical price of gold in real terms.
Before 2010, the chart uses historical data for both gold and the percentage of revenues going to pay interest. In the years ahead, the interest payments are an estimate based on known outstanding debt and the anticipated rates. It's just following the math.
As you can see, in the immediate future, interest on the debt will eat up more and more of the overall federal revenue stream. That's because national debt and interest on that debt are growing far faster than taxable GDP.
What does chart this mean to you, as an investor? It means that within the investment horizon of every Outstanding Investments subscriber age 12-92, we're staring at the potential for utter economic devastation. If you'll grant me a bit of artistic license in all this...life as we know it in the US could come to a crashing halt.
From the standpoint of investing, the chart also gives us every reason to anticipate even higher prices for gold, and, by association, silver. So if you don't have some gold and silver, get some.
Historically, the price of gold rises when there's an increasing percentage of federal revenues going to pay interest on the national debt. And historically, the gold price declines when US interest payments move down as a percentage of federal revenues.
So if you follow the correlations on the chart, the forecast for the price of gold is simply up, up and away. That is, by 2020, we may be living in a country where the government is chronically insolvent, due to interest payments, and gold is going stratospheric.
We'll enter into an era when the government won't pay its day-to-day bills on time, if it pays them at all. Eventually, we may see the US currency in free fall, if not collapse. That's why your ONLY real long- term hope in all of this is to invest in "real" assets - things that will retain value over time. Energy and minerals come to mind, certainly to include physical gold and silver.
The mainstream media and old-line politicians pretty much ignore the looming debt crisis, or they talk around it. And compare this sense of economic non-urgency with how the media and bureaucrats deal with, say, the idea of "global warming" - a scientific possibility, but something subject to much debate.
It's as if protecting future generations from the possibility of a few extra fractions of a degree of atmospheric temperature - over the next century - is a high mission. Yet there's no need to wrestle with the absolute certainty that the country is immediately mortgaging its financial future. The US economy is loaded down with untold trillions of dollars' worth of debt, and it's only getting worse.
Why is that? Why the neglect? Why isn't every church bell in the country ringing, sounding the alarm over the financial catastrophe that's happening before our eyes? Perhaps it's because addressing the idea of so-called "climate change" will increase the power and control of the political class. While dramatically cutting the federal budget and letting the private economy grow will reduce political power. Can't have that, right?
During the last ten years, Outstanding Investments became the nation's the No. 1 investment newsletter, according to Hulbert's Financial Digest. We earned that spot by recognizing the frailties of the American economy and, by extension, the US dollar, long before most other investors. We continuously advocated investments in hard asset sectors like precious metals and energy. Fortunately, most of these investments performed very well.
The road ahead looks a lot like the road behind. Unless and until America's leaders become serious about addressing our broken finances, Outstanding Investments will maintain course and speed - advocating investments in traditional hard assets like gold and silver, as well as investments in non-traditional assets like the "rare earth" elements.
Regards,
Byron King,
for The Daily Reckoning
Joel's Note: It appears, indeed, that the road ahead for the US will be...ahem...bumpy. Consider then Outstanding Investments as a kind of portfolio GPS navigator, helping you avoid the potholes and pitfalls associated with the nation's tattered finances. The last ten years earned Byron's service top marks in the industry. And the next ten look to be even better for the hard asset specialists. Learn more here.
| | | Byron King's Outstanding Investments Presents... |
Third World America...
Once the economic envy of the world...we're now sitting on the verge of bankruptcy and mass chaos...
This shocking report explains how our $14 trillion debt crisis is threatening our very way of life...turning our once great nation into Third World America.
Click this link to watch Third World America and find out how to protect your loved ones and your wealth before it's too late...
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| | | | Bill Bonner | | The Bigger Debt Problem: China’s Local Government Debt vs. US Subprime Debt | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
"We're not bearish enough [on China]." - Jim Chanos
Oh my... China is breaking down. Europe is slipping. And there goes the US too...with stocks down 172 points on the Dow on Friday, closing out a 6th straight week of losses.
Even if the US holds itself together, there's a good chance that either Europe or China will drag it down.
The latest reports show China's property bubble beginning to lose air. The Wall Street Journalreports:
After years of housing prices gone wild, China's property bubble is starting to deflate.
Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.
Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. And legendary short seller, Jim Chanos, says China's local government debt is worse than America's subprime problem. Subprime debt in the US never surpassed 10% of GDP. China's local governments have debt (much of it bad) of more than 30% of GDP.
We went to China recently. We were unable to form a clear opinion about it. Yes, there were plenty of buildings that looked empty...but the streets were full of people.
And there is so much money in China! A friend is an antique dealer in Paris. He tells us that the hottest segment of the market is Chinese antiquities. As soon as something comes on the market, a buyer from China snaps it up. Here's an example. In March, an antique China vase was auctioned off at Sotheby's. The auction firm had appraised it at $800 to $1,200. Instead, it sold for $18 million.
With that kind of cash available, why worry about empty apartments? Surely, the demand will meet up with the supply, right?
Trouble is, without the discipline of the free marketplace, you never know what the demand really is. And given a lot of extra cash and credit from the feds, supply tends to overshoot, often spectacularly.
Without the light of real, free markets, buyers and sellers wander around in the dark like blind drunks. They stumble into each other. They fall down. They bloody their noses and make an awful mess.
In the heady air of post-commie central planning, China may have less than 10% of the world's GDP, but it buys more than half its cement - and nearly as much of its iron ore, steel and coal.
What does it do with all that? It adds supply! It builds.
From first hand observation we weren't able to draw much of a conclusion. But theory tells us that there is no way you can invest that kind of money - often with the help of local governments - without making some major mistakes.
Of course, that's why there are corrections. That's why every boom caused by excess, artificial credit is followed by a bust of excess, un-payable debt. Which is also why, here atThe Daily Reckoning, we like corrections. They are like soap and water. They help get rid of accumulated debt dirt. And the grease of bad guesses. And the parasites that accompany a plan-gone-bad. So, lather up. Rinse well. And you're fresh and ready to go again.
But the authorities don't like washing up. After all, one man's grease is another man's career path. And the parasites vote.
The Chinese authorities may or may not be smarter than their American counterparts. But they've got parasites to look out for too. Voters? Maybe not...but they've got plenty of officials...and some 100 million young men looking for work; they're desperate to keep them busy.
We don't know whether a Chinese blow up is around the corner or not. But it could happen any minute.
(One of the Chinese stocks in our Family Office portfolio is trading at only 2 times earnings. It was more when we recommended it. And if China blows up, it will go lower still. Perhaps they will give it away at the bottom.)
And more thoughts...
Meanwhile, Europe grows more troubled and more troubling. The Greeks want money. The Germans want austerity. The European Central Bank wants another bailout. Germany's finance minister says he'll support more money for the Greeks only if lenders agree to take a haircut first.
In the streets of Athens, demonstrations have become everyday occurrences. And the government, desperate to raise money, is said to be putting price tags on the Parthenon, the Acropolis, and several islands. "Discount!" "Going out of business!" "Inventory Reduction Sale!"
It is not our place to give advice, but we will give it anyway. It is the same advice we give to underwater homeowners.
It is obvious that Greece cannot work its way through this problem. It would have to increase GDP by 12% a year for three decades in order to "grow its way out of debt."
Since it cannot pay its debt honestly, it should at least default forthrightly. Stop sniveling and complaining. Own up to having erred.
Don't borrow more money, in other words; renege...walk away... Be of good cheer, knowing that lenders will suffer the losses they deserve.
Default and be happy.
*** America is so rich...and so wasteful...that it could probably cut its spending by half and most people would still be fat and sassy.
Here's a report from The Daily Mail in London:
The US is providing hundreds of millions of dollars of foreign aid to some of the world's richest countries - while at the same time borrowing billions back, according to report seen by Congress.
The Congressional Research Service released the report last month which shows that in 2010 the US handed out a total of $1.4bn to 16 foreign countries that held at least $10bn in Treasury securities.
Four countries in the world's top 10 richest received foreign aid last year with China receiving $27.2m, India $126.6m, Brazil $25m, and Russia $71.5m.
Mexico also received $316.7m and Egypt $255.7m.
And yet despite the massive outgoings in foreign aid, the receiving countries hold trillions of dollars in US Treasury bonds.
China is the largest holder with $1.1trillion as of March, according to the Treasury Department.
Brazil held $193.5bn, Russia $127.8bn, India $39.8bn, Mexico $28.1bn and Egypt had $15.3bn. *** And here's another little item. As we keep saying, man is neither good nor bad, but subject to influence. And what's the real effect of modern communications technology? A report from Miller McCune.com:
From reality television to dumb-and-dumber films, contemporary entertainment often amounts to watching stupid people do stupid things. New research suggests such seemingly innocuous diversions should have their own rating: LYI.
As in: Watching this may Lower Your Intelligence.
A study from Austria published in the journal Media Psychology found students performed less well on a general-knowledge test if they had just read a short screenplay about an idiotic thug. This suggests stupidity may indeed be contagious - particularly if it is presented in narrative form.
"Narratives tend to make people 'walk in someone else's shoes,'" Appel notes. Since that experience can be temporarily transformative, you might want to make sure the characters you follow have IQs higher than their shoe size. Regards,
Bill Bonner,
for The Daily Reckoning |
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