 | | The Daily Reckoning | Thursday, September 29, 2011 |
- Mining for profits from Russia to Kyrgyzstan, Serbia to New Mexico,
- Using pullbacks in “rock solid” companies as investment opportunities,
- Plus, Bill Bonner on “Cash on the barrel...cash in hand...cash and carry...” and more...
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|  | | | The Welfare/Warfare Confidence Game | | A Look at the Long-Term Trends in Government Spending | |  | | Joel Bowman |
Reporting from Mendoza, Argentina...
Today’s missives are a little longer than usual, Fellow Reckoner...so your editor’s lead will be a little shorter than usual.
Still, there’s much going on in the world, so let’s get to it...
Stocks are up a tad as of this writing. They were up quite a bit more than a tad earlier today but, as happened in yesterday’s session, confidence waned around lunch, sending them lower in the afternoon. All in, the major US indexes are off by about 3% and change for the month...and down a little over 4% on the year.
Gold, too, is having a tough time of it of late. An ounce of the precious metal “languishes” just above $1,616 per ounce after having traded up over $1,900 just a month ago.
What gives?
If you believe the papers, markets fall because of “uncertainty surrounding the Eurozone debt crisis...” or “an unexpected rise in jobless claims...” or “some other unexpected economic phenomenon that threw experts for a loop.” Conversely, if we are to believe the mainstream media, markets rally due to “renewed confidence in the Eurozone...” or “a hunky dory jobs report...” or “because something finally fell in line with what a panel of experts had predicted.”
None of this is true, of course. At least not on purpose. Call it reactive reporting...sometimes known as “deductive fallacies”...other times known as “meeting a deadline.”
Get a journalist under the pump and he’ll say just about anything to ensure he’s out of the office by cocktail hour. Anything, that is, except “I don’t know.” People don’t want to read “I-don’t-knows.” They want answers...even if they are incorrect, poorly thought out and bear the martini-stained scars from a long lunch meeting.
But sometimes it’s worth admitting a little ignorance, a little doubt and uncertainty. At the very least, it lends a bit more credibility to the times you do know something (or at least when you think/suspect that you do).
We suspect (there’s that word again) that, when it comes to stock market prognostications, the shorter the time frame of events, the less likely we are of having any real knowledge about anything. That may be true for many things...but it’s especially true of the markets. Ask us what’s happening today. We’ll tell you we have no clue. Tomorrow? Nope. Still out of luck. How about a year from now, or longer? Ahh...now we’re getting somewhere.
That’s because larger trends take time to work themselves through the pipes. Take gold, for example. In the very near term — like tomorrow — anything could happen. Volatility over the past few weeks has certainly testified to that. $60 up one day. An $80 drop the next. Generally, however, the recent trend has been down. People are heading into the “safety” of cash and bonds. But that, in itself, is still a reasonably short-term trend. Gold may yet go down to $1,400 per ounce. Or $1,200. Maybe lower. But stretch that trend out a bit further and see what you get. Gold is down about 15% over the past month...but it’s up more than 500% during the past decade. Smooth the trend line out a bit. Take out the bumps. What does it tell you?
Cash and bonds might be a “safe” place to be right now...but where will they be in another five years? Or in ten?
Government issued money — be it in cash or bonds — represents a promise to pay. Nothing more. The key, it must be noted, is not only the ability to pay, but, more importantly, the perceived ability to pay. It’s a confidence game, in other words.
Is the US government going to cut spending during the next five to ten years? We doubt it. There might be talk about it along the way (impacting shorter term trends) but, long-term, the fix is in. A report carried in today’s Washington Times, making the point for us, notes how budget cuts would “hollow out [the] military.” An addiction to the military is part and parcel of being an Empire. It doesn’t go away until it shoots itself in the face. Even Nobel Peace Prize-winning presidents are seen to expand the size and scope of the warfare state. Why? Because they have no choice. Too many vested interests. Too many greasy handshakes. Too many kickbacks and too many entrenched lobbyists.
But what about the other component of Empire, the welfare state? Here too we see no choice but for the beast to grow. In fact, it must grow. That’s the long-term trend of a welfare state. And it’s a trend protected by democracy itself. Once the majority become net recipients, as is the case in the US, they vote themselves ever- fatter slices of other people’s pies. The welfare state grows and grows until it ends up feasting on its own tail. Today, some 46 million Americans eat at the government’s table thanks to food stamp programs. Another 60 million or so cash Social Security checks...with 10,000 more baby boomers set to retire every day for the next decade. The warfare/welfare state gorges on itself from one end...and shoots at itself from the other. Eventually, even the perceived ability to keep this charade going collapses. And with it goes the paper dollar promises used to pay for it all.
Still, you’ve got to do something in the meantime. In today’s guest column, editor of the Energy & Scarcity Investor, Byron King, takes a look past the day-to-day turbulence in the markets to identify a few medium term plays that have piqued his interest. Please enjoy...
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| | The Daily Reckoning Presents | | Stocks Go Boom! — A Buying Opportunity! | |  | | Byron King |
What a nasty stock market swoon! It’s been painful to watch hard-won share price gains drift downward.
It compounds the pain when I watch the downward share price drift, while I KNOW that great things are happening with the companies I have recommended in my investment service, Energy & Scarcity Investor. Heck, just in the past six weeks, I have traveled to Alaska, Manitoba and Quebec with my eyes wide open, looking for what needs to go on to build great companies.
Earlier this year, I travelled to Russia, Kyrgyzstan, Serbia, New Mexico, Texas, South Africa, Namibia and other locales to check out the goods.
During my travels, I saw real ore deposits, real hydro, real geothermal, real drilling sites, real cores, real ore assays. I saw real people — geologists, engineers, scientists and more — working their butts off, working to design projects, drill holes, create mines and to generate primary wealth from the Earth.
Meanwhile, all summer, the markets just seemed to sell off and sell some more. What’s the excuse? Macroeconomic problems in Europe, Asia and North America. The out-of-control banks. A potential bubble popping in China.
Don’t forget that the US budget is hemorrhaging. And then there’s that bizarre US tax and regulatory monster system that’s wrecking creativity and risk taking in the world’s largest economy. All of which leads to...a generally negative sentiment across the broad investing landscape.
Within the wide range of different resource sectors, there are more- specific issues. For example, in the rare earth space, the share prices for pretty much all the companies are down.
Over the past couple of months, former ESI holding Molycorp has been gyrating within the $50-60 range — as if awaiting its Waterloo. Well, last week, Molycorp’s deal with Japanese giant Sumitomo fell through...and the stock tanked. As of this morning, the stock was trading for $33 and change. Looking back, we sold Molycorp out of the Energy & Scarcity Investor portfolio at the right time and booked a nice gain. I don’t know where Molycorp will go from here, but my hunch is that there’s more downside than upside.
Or look at former ESI holding Rare Element Resources. It’s been as high at $16 per share this year and now is hovering near $8. Rare Element has a good ore deposit at Bear Lodge, Wyo., but in general, it’s tougher to get things done (like metallurgy) than a lot of people thought earlier this year. And with Rare Element, people have been selling.
Then there is Australian hot-runner Alkane. Alkane was a rare earths darling for a while, with a share price over $2.60. Now it’s down in the $1.30 range, and likely lower with a recent announcement of higher costs and more delays for its entire business plan.
Shares in the Canadian firm Arafura have been up over $1.60 in the past year. Now the share price is below 60 cents. It’s the same old story of difficult metallurgy, high costs and delays in getting things done.
The market goes up and down over days, weeks and even the months. But I’m looking for investment ideas that will work out over a longer term, more like a two-three-year time frame. The idea is to buy into these companies along the way and stick it out through the market upheavals. Let management do its thing — as long as management shows that it’s on “our” side.
Eventually, these kinds of companies — with the great assets and strong management — will arrive at a share price that truly reflects the inherent worth of the organization. No, not every company will, say, smack the ball out of the park. But we want the winners to more than pay for any losers.
If a company is good, it doesn’t really matter what the share price does in the short term. Up? Down? Sideways? The market is going to do what it’s going to do. But with good, well-run companies, just hang on and let the business plan evolve. Don’t panic out of your position.
On behalf of my subscribers, I travel to places like Quebec, northern Manitoba and Prince of Wales Island — not to mention Moscow, Belgrade and Windhoek — to see what’s going on. I go there, look around, meet the players and then tell you what the companies are doing, and whether they’re doing it well and doing it right...
We’re in a tough market, with all sorts of unpleasant things happening at the global macro levels, as well as with issues within the different investment sectors. But I’ve looked hard to find you good companies with excellent assets and strong management. We need to ride out the short-term market scares and keep focused on what the companies are doing.
As I said above, a year from now, we ought to look back and smile. I expect more and better things — great things, to be frank — from the companies I have recommended. They’re all the real deal. I’ve seen things up close, and I’ve got the dust on my boots to prove it.
Looking ahead, we’re going to see rare earth deals and positive developments with the gold, silver, oil, uranium and potash fertilizer plays. We’re watching valuable companies develop even greater value as they supply important things that the world needs and wants.
Regards,
Byron King
for The Daily Reckoning
P.S. In case you haven’t seen it yet, my Energy & Scarcity Investor “Fourth Element” research presentation goes offline at midnight tonight. There’s a ton of stuff in there about rare earths and plenty of behind-the-scenes investment insights I picked up from my trips abroad. If you’re interested in taking a look, you’ve still got a few more hours. Just turn your speakers on and click here.
| | | | Byron King’s Outstanding Investments Presents... |
One Year From Now, It Could Take You Twice as Much to Get By
Forget the DC debt circus...this secret Saudi event could double your cost of living, in more ways than one, starting as early as the end of this year.
Nobody wants to talk about it...and neither Obama nor Congress has any idea what to do once this event starts to unfold. Once it does, get ready to kiss your savings goodbye.
Hear our shocking new warning in this special report...
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| | | | Bill Bonner | | Lower Lows in the Cat-Like Real Estate Market | |  | | Bill Bonner |
Reckoning from Paris, France...
Cash is still king.
Cash is king because non-cash is a commoner and a loser...it’s losing its value. An article in yesterday’s Financial Times, for example, tells that:
“US inflation expectations at lowest point in year.”
In other words, forget inflation. Forget price increases. It’s cash...cash...cash.
Cash on the barrel...cash in hand...cash and carry. You got cash? You da king!
People expect cash to be more valuable. And if we’re right...it will be more valuable.
Stocks, for example, fell yesterday. The Dow dropped 179 points.
And gold. It lost $34.
Another article in yesterday’s financial press told us that “it’s a great real estate market...if you’re rich.”
Why? Because the rich have cash. They’re the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.
A friend sent us an investment opportunity...a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, it’s available for $750,000 — with owner financing at 5%.
Let’s see...if you can get $800 per unit per month...whoa...this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.
But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way...and every roof leaks in a different spot. If you don’t know what you’re doing...don’t do your homework...and can’t manage a property, including collecting the rent from people who don’t have much money, you probably won’t do very well.
Here at The Daily Reckoning we prefer the public markets, where the tenants don’t give you hard-luck stories and the paint doesn’t peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?
All over the investment world — except for US government debt — yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey...killing them slowly while having some fun at it.
Real estate has already been whacked hard. It’s down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We don’t think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.
- Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to ‘move up’ the real estate ladder when his income is going down?
- And the rate of new household formation is going down. Instead of setting up new households of their own, the young...and not so young...are moving back in with mom and dad. The unemployment rate for young people is 20% — near Great Depression levels.
- Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?
- Most important, the Great Correction is far from over. We’re expecting a long period of stagnation, de-leveraging and depression. Prices don’t go up in a credit contraction. They go down. What we’ve seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.
But wait, we know what you’re thinking. At today’s levels, houses in America are not over-priced. They’re about in line with the very long term trend. They’re about where they should be. And at today’s ultra-low interest rates — mortgages are below 4% — housing is a good deal.
Maybe so. But Mr. Market doesn’t care. Just as he didn’t mind pushing up prices to dizzying heights he also doesn’t mind pushing them down to dreary lows. He’s an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he’ll make them think that it always goes down. And when he’s finished, you’ll be able to buy a house for about half today’s price.
Of course, then...you won’t want to. Because you will have learned an important lesson that you can pass on to your children: ‘Don’t buy a house. Rent. It’s cheaper.’ Then, perhaps house prices will begin to rise again.
In the meantime...and perhaps for a long time...cash is king.
And more thoughts...
“Your problem is that you’re a prescriptivist.”
Among the many things couples may argue about is why they argue at all. Some argue about money. Some argue about the children. But some disagree about what they disagree about.
The subject set off declarations in the Bonner household recently. One of the team suggested that the reason for much of the (minimal) discord in the family was the tendency of the other member of the team towards prescriptivism. He had taken the term from linguistics, where two schools of thought have fought bitter battles. On the one hand, some linguists insist that language should follow certain prescribed forms. Saying ‘ain’t,’ for example, is thought to be incorrect. Other linguists — the descriptivists — believe the rules should be derived from actual practice...not imposed. They see nothing wrong with saying ‘ain’t.’
Back at home, the other member of the team denied the “prescriptivist” charge vigorously.
“You make it sound like I lack imagination.”
“Well, I’m not saying you lack imagination. I’m just saying that you insist on having things just so. And ‘just so’ happens to correspond with the way you want them...and how you think they should be.”
“What’s wrong with that?”
“Well, nothing, if the way you wanted them was interesting and imaginative.”
“I’ve learned over the years spent with you that there’s a reason why things are normally done the way they are usually done. You always want to experiment with things. New ideas. New places. New ways of doing things. You even dance funny.
“...all very well, but it’s really just another form of egotism. You turn your back on 2,000 years of accumulated experience...and then insist that your own innovation...or your way of looking at things...is superior.”
“Well, at least it’s not hidebound...backwards looking...and conventional. And I don’t dance funny. I just don’t get much pleasure out of doing the same stupid motions that everyone else does, over and over, all night long. I like to experiment.”
“Well, it ends up being eccentric, quirky, and not very nice.”
“What?”
“Take architecture, for example.’
“Oh no...”
“Yes, take architecture. The classical column was designed thousands of years ago. It has withstood the test of time. Its proportions are graceful and beautiful. It tapers up from the bottom. Not the other way around. If you turn it upside down, you will have an original shape. But it will not be very nice. It will be stupid and ugly.”
“I don’t turn columns upside down.”
“No, but you do other things. And they don’t always work. And I prefer to have things that look nice. Things that work.”
“You’re just a rigid, stuck in the mud, prescriptivist.”
“Sticks and stones...”
Regards,
Bill Bonner
for The Daily Reckoning |
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