Friday, 27 April 2012

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More Sense In One Issue Than A Month of CNBC
The Daily Reckoning | Thursday, April 26, 2012

  • Britain’s double dip...and much bigger problems for the union,
  • Readers weigh in with their own Permanent Portfolio submissions,
  • Plus, Bill Bonner on activists at the Fed, what it spells for bonds and more...
------------------------------------------------------


And now over to Bill Bonner who has the rest of today’s reckoning from Baltimore, Maryland...
The Burgeoning Scam Market
 
Bill Bonner
Bill Bonner
“Monetary policy cannot fulfill each and every market expectation.”

So said the head of the Bundesbank, Jens Weidmann.

Why not, investors want to know.

Mr. Weidmann was talking to The Wall Street Journal. He was explaining why Germany was sticking to its guns. They don’t use that expression in Germany. But you know what he meant.

“The crisis can be solved only by embarking on often-painful structural reforms,” he insisted. “If policy makers think they can avoid this they will try to.”

Mr. Weidmann is talking about the present. He is also describing the future. In the old world there is a backlash growing against the Germans and their financial guns. Austerity doesn’t seem to work. Countries try it. They cut spending. They fire people. They get nothing from it. Their budgets are still far out of balance, with deficits way above the 3% limit demanded by the European Union. Unemployment goes up. GDP goes down. Unhappy mobs start breaking windows. Why bother?

Look what is happening in Britain, for example. The Telegraph reports:
The unexpected 0.2pc contraction in UK growth followed a 0.3pc fall in gross domestic product (GDP) in the fourth quarter of 2011, signalling a technical recession and Britain’s first double-dip since 1975. 

Economists had expected the Office for National Statistics data to show the economy grew by 0.1pc between January and March. 

The Prime Minister said the figure was “very, very disappointing” but added that that it would be “absolute folly” to change course and jeopardise Britain’s low borrowing rates. He told Parliament: 

“We inherited from [Labour] a budget deficit of 11pc. That is bigger than Greece, bigger than Spain, bigger than Portugal [...] The one thing we mustn’t do is abandon spending and deficit reduction plans, because the solution to a debt crisis cannot be more debt.”
Of course, you might look at these facts and conclude that they are not trying hard enough. Instead of making smallish cuts...why not make big ones? Why not actually balance government budgets so that they can tell German central bankers to drop dead?

Everyone agrees that that would be too radical. It would invite “social upheaval.” Apparently, actually living within your means is no longer politically or socially acceptable. You have to live beyond your means... The only question is ‘who will pay for it?’ The answers to that question are not easy. When debt levels were low, the answer was probably ‘future generations of taxpayers.’ At today’s debt levels it is unlikely that the debt will ever reach future generations. And with so much of the debt now being taken up by the central bank the burden shifts, from lenders to borrowers, taxpayers and consumers. Good debts may fall on debtors...even those who are not even born yet. But bad debt and inflation float down like leaves...blown by the winds...and eventually dropping down on innocent passers-by. 

With perhaps the exception of the German central bank, all the others — or most of them — are trying to “fulfill each and every market expectation.” They are trying to drive asset prices higher...reach full employment...and cure diabetes. 

The Fed is at the helm. And The New York Times reports that this week’s policy meeting produced an assurance. The Fed will stay on course...guided by its own star:
WASHINGTON — In a statement following a two-day meeting of its policy-making committee, the Fed said that it would continue its existing efforts to stimulate the economy, but it decided again not to expand those efforts, even though its projections show unemployment will remain a massive and persistent problem for years to come. 

The statement also said that the Fed plans to maintain those existing efforts, including holding short-term interest rates near zero, “at least through late 2014.” 

But a separate summary of the views of senior Fed officials showed that a majority of the committee now expects to raise interest rates by the end of 2014. 

“The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the statement said. It said unemployment would “decline gradually” and that inflation remained under control despite the impact of the recent rise in oil prices, which it regards as temporary. 

The Fed’s chairman, Ben S. Bernanke, strongly defended the calibration of the central bank’s policies at a press conference following the release of the statements. He said that the Fed already was engaged in a massive effort to bolster the economy. 

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate,” he said. “The view of the committee is that that would be very reckless.” 

He added that the Fed’s ability to reduce the unemployment rate more quickly was somewhat “doubtful” and that any success likely would be small.
And more thoughts...

Low rates are a kind of hustle. They take money from savers and redistribute it to debtors. Borrowers — such as the big banks — get money at a preferentially, artificially low rate. But savers pay the price.

Recently, thanks to the shale oil story, scammy rig operators are promising returns as high as 14% PER MONTH. Retired people, supplementing their Social Security payments with interest income, are tempted. At today’s rate, the pensioner gets less than $2,000 on his $100,000 of savings. He is desperate for more. Even to the point of listening to shysters and investing with fraudsters.

But in a system pumped up by counterfeiting...hoist on the gassy petard of economic BS...and kept from blowing away by the short memories of the investing public...

..what is not a scam?

A partnership that promises a 14% per month rate of return is surely a flimflam. But what about an IOU from the world’s biggest debtor...promising almost nothing?

Investors must have had the same faith in bonds back in 1946. Then, bonds had been going up for a whole generation. Stocks crashed in ’29...and again in ’37...and in ’42...and bonds went up. Real estate sank and stagnated for two decades...and bonds went up. A Great Depression lasted, on and off, for 12 years...and still bonds went up. Even throughout the biggest war in human history...the full faith and credit of US Treasury bonds was as solid as Ft. Knox. Now, in 1946, with the war over...Europe demolished, and the Soviets ready to invade...millions of returning soldiers who might find no work...

..what better to buy than US bonds?

But monetary policy held more or less steady. Despite double digit inflation and despite a series of post-war recessions...monetary policy was relatively calm. It let the money supply fall...and prices rise...

And the bond market gave way. 

Bonds went down for the next 36 years. An investor who bought US Treasuries during the Truman administration years lost 83% his money before Ronald Reagan moved into the White House. 

Meanwhile, prices rose to more than 4 times what they had been in the post-war period. The poor investor. Hammered by inflation...smashed by the bond market. He was black and blue all over. And by the end of the ’70s he considered government bonds nothing more than “certificates of guaranteed confiscation.”

But those were the good ol’ days. Now, nearly every central bank — especially the Fed — aims to fulfill all market expectations. Stock market buyers expect higher prices; if they don’t get them, it won’t be the fault of the Fed. 

Bond market buyers also expect higher prices...or at least stable prices for their US Treasury bond. The Fed is on their side too...buying up bonds in staggering quantities in order to keep yields low and prices high.

This time, an activist Fed is on the case. And bonds are doomed...even more than in ’46.

Regards,

Bill Bonner
for The Daily Reckoning

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Musings on the Work of Harry Browne
A Few Responses to the Latest Daily Reckoning Group Research Project
 
Eric Fry
Eric Fry
Reporting from Denver, Colorado...

After a quick whistle-stop tour through Chicago and Atlanta, your California editor’s Pullman screeched to a halt in Denver, Colorado last night. Upon arrival, he stepped down from his Pullman, which bore an uncanny resemblance to a Boeing 757, hailed a porter, which bore an uncanny resemblance to a conveyor belt, climbed into his awaiting Packard Phaeton, which bore an uncanny resemblance to a Ford Fiesta rental car...and rolled down the motorway to his father’s house.

Your California editor’s father turns 88 years old in one week, so your editor took the occasion to stop in and wish Dad an early Happy Birthday! But let’s not let these modest festivities stand in the way of our daily reckonings...

A few weeks back, your team here at The Daily Reckoning highlighted thegroundbreaking work of Harry Browne, creator of the Permanent Portfolio.

“A few decades ago,” we remarked, “a guy named Harry Browne devised an investment strategy he dubbed the ‘Permanent Portfolio.’ The idea was so simple it seemed almost moronic. And yet, with the passage of time we have discovered that his idea was pure genius.

“He suggested building an investment portfolio out of only four components: gold, bonds, stocks and cash.

The Permanent Portfolio

“The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living. Incredibly, this simple strategy has delivered some surprisingly strong investment results.”

After providing more detail about the history and underlying philosophy of the Permanent Portfolio, we invited our Dear Readers to ask themselves the following questions:

1) Is Harry Browne’s original allocation still ideal for today’s macro-economic environment?
2) If not, how would you revise his original allocation for the next 30 years?

We called this little exercise the Daily Reckoning Group Research Project and as usual, our Dear Readers responded with some fascinating suggestions.

Several readers struggled to comply with the rules of the Group Project. For example, some readers could not stop themselves from recommending specific companies; others argued that some of the very best Permanent Portfolio allocations do trade on a public exchange.

One such reader suggested buying grazing land as part of his Permanent Portfolio. Another recommended buying a house. And a third named potash as one of his allocations. We sympathize with these readers who “drew outside the lines.” The financial markets do not possess a monopoly on attractive investment opportunities. We also sympathize with those readers who could no longer stomach the idea of buying Treasury bonds as a “risk free” allocation.

“Mr. Browne’s formula was based on the idea of a functioning and fair government and not a criminal enterprise,” writes a reader named Kent. “I would bet he would eliminate most government bonds since today they really are nothing more than counterfeit and would substitute ammunition, food or fuel.”

A reader from Buenos Aires (not Joel) offers a similar observation. He points out that the Permanent Portfolio mutual fund (PRPFX) has held a large position in both US Treasuries and Swiss bonds. “[This allocation] has been great so far in this über bond bubble. But will it stand the test of time?... I looked at the permanent portfolio’s performance in this century, which yields an increase of about 130%... However, looking at its performance from 1996 to 2002 is quite disappointing. Moving around like a cork on the water’s surface, just bouncing around in the waves. It takes off in 2002, when Greenspan lit the fuse beneath the bond bubble. What will happen when the bond bubble ruptures?”

Not surprisingly, most of the folks who had no use for Treasuries had plenty of use for hard assets.

“Dear Harry (RIP). Things are different now while the dollar is dying,” writes a reader named Susan. “It’s all ‘risk on’ as the world hangs in the balance... You must have your own grocery store at home... I want to be able to put my hands on at least a few of the things I need. All the clouds out there storing my stuff for me make me very nervous and I hope to end up with more than vapor and fumes at the end of the day.”

“There might have been a time when the permanent portfolio idea may have worked,” writes a reader named Ken, “but I believe that time has passed, which is why we avoid most bonds and buy gold and silver.”

A reader named Carl concurs. “I do not believe in a ‘permanent’ portfolio,” he writes, “because things work in cycles as you surely know... We are in our sixties and plan to stay conservative and just continue to buy silver bullion each month (dollar cost average). We have had more than a few of our stocks go to zero but we know that gold and silver, especially today, will never even approach that point... Mundus vult decipi, ergo decipiatur. (‘The world wants to be deceived, so let it be deceived’)”

Hard assets were not the only crowd favorites, however. Many readers suggested investing in real estate investment trusts (REITs) and other types of high-dividend-paying stocks. Biotech stocks also seemed to be a favorite.

So without further ado, allow us to present a sampling of the Permanent Portfolios you submitted in response to the latest Daily Reckoning Group Research Project...
 
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The Daily Reckoning Presents
The Permanent Portfolio...Revised
By The Readers of The Daily Reckoning
 
Tim writes:
My choice of investments: SPDR Gold Shares ETF (GLD), SPDR Dow Jones Industrial Average ETF (DIA), Vanguard REIT ETF (VNQ), US Aerospace and Defense ETF (ITA), and DJ-UBS Commodity ETN (DJP).
JP Writes:
Equal allocations to the Nasdaq 100 Index ETF (QQQ), MSCI Emerging Market ETF (EEM), DJ Real Estate ETF (IYR), Barclay’s 20+ Year Treasury Bond ETF (TLT), and SPDR Gold Shares ETF (GLD).
Keith writes:
My suggestion would be for a five-asset combination with all assets equally weighted. This would consist of commodities, gold, real estate, stocks and bonds. 20% in the PowerShares DB Commodity ETF (DBC), 20% in the SPDR Gold Shares ETF (GLD), 10% in the SPDR DJ International Real Estate ETF (RWX), 10% in the Vanguard REIT ETF (VNQ), 20% in the Vanguard Total World Stock ETF (VT) and 20% in the PIMCO 25 Yr Zero Coupon US ETF (ZROZ).

Because of globalization and the desire for maximum diversification, I would suggest a global approach. Obviously commodities and gold are global assets, so this means selecting stock and real estate ETF’s that are global in nature. For stocks this is simple, all one needs is Vanguard’s VT which represents world stocks. For real estate, one could use VNQ for United States REITS and RWX for world REITS excluding the United States.

The last asset, bonds, is a bit more interesting. Instead of using plain vanilla 10-year Treasuries, I would suggest Pimco’s 25 year zero coupon US Treasuries ETF — ZROZ. First, this is the only asset [in my recommended portfolio] that is US-centric...Second, I consider this the most important asset of the group. It has the highest negative correlation to the other assets and therefore acts as a hedge. Also, the interesting thing is the high volatility of the stripped zero coupon bonds leads to lower volatility and draw down of the overall portfolio. If you were to use a regular bond fund with lower volatility then the overall volatility and draw down of the equally weighted five-asset portfolio would rise.
Rich writes: 
A suggested portfolio for the next 10 years, allowing yearly, or sooner if necessary, tweaking:

15% in Gold & Silver

20% in diversified, foreign & domestic high current income fund (MIN)

60% in mutual funds and/or stocks in health-related and commodity sectors: General — (DLHAX), Biotech — (FBIOX, FBDIX), Medical delivery & equipment (FSHCX, FSMEX, SHSCX), Healthcare REITS — (HCN, NHI), Energy & Natural resources — (SSGDX, FSENX, FSESX, FRNRX), Gold & precious metals — (FKRCX, FSAGX), Agriculture ETF — (MOO)

5% in aggressive or speculative stocks with chances for high returns. This is the section that keeps it from getting boring, makes it exciting and maintains your anticipation that something exceptional could happen. With some good luck, this section could make you more money than all of the above.
Alex writes:
How about these five?

1) “Buy a House!” With inflation around the corner, the point is to keep away from cash, especially the USD. So the tangible asset of a home will be just fine. Rent it out. Do leverage with a mortgage, because the real principle amount borrowed will become smaller and smaller (making repayment a breeze) as inflation erodes the borrowed dollar value. Even if the interest rate eventually will rise, rent will keep up with inflation and should cover the mortgage payments. Oh and don’t forget to factor in property taxes on the cost side.

OK and if the rules are to list a public security or index, then Vanguard’s REIT “VNQ” should do.

2) Precious metal: silver “SLV” iShares Silver Trust. Why silver and not gold? Perhaps silver has more upside potential than gold (then again, perhaps the silver market really is rigged and we outsiders have no chance at this game?). And although arguments in favor of gold are irrefutable (I’m a DR disciple, after all), the rumors of fake gold bullion in circulation are scary: the gold-plated tungsten bars that masquerade as 400-ounce “Good Delivery” gold bars. Even “GLD” can’t assure that the gold bars backing their ETF really are genuine. Heck, perhaps all gold in Fort Knox is fake!

3) Energy: Vanguard’s ‘VGENX’. This is an essential component of our portfolio, whether we’re bullish (peak oil) or bearish (worldwide economic recession) on energy, our homes need to be heated and our wheels need to keep turning.

4) Agriculture, PowerShares DB Agriculture “DBA” because the world’s growing population needs to be fed;

5) Australian $ bond Currency bond other than USD, EUR or CHF. I like Australia’s healthy economy, 19% of which is mining-related and feeds Asian demand.
Lastly, Ian writes:
As I am a survivalist, I put the greater emphasis on surviving, than on getting rich, and that may be evident in my choice of investments below.

50% grazing land in a low-population-density region. I’d choose grazing land over farmland as there is a reasonably high possibility of very high costs for diesel and fertilizer [in the future], which would adversely impact more so on farming than on grazing. I would also have a good supply of stock (i.e. preserved food etc) kept there, on location.

30% Gold. This is the store of wealth. It’s the bridge that gets us from here to there. I’d keep small denominations that could be used for trading purposes. 10-gram and 25-gram pieces would be my choice.

10% silver. My reason is similar to that for gold. It also diversifies the precious metal portfolio. Again, I’d keep small denominations suitable for trading. 25-gram and 50-gram would be my choice.

10% Cash. Mostly in interest bearing deposits that I can easily and quickly get at. I’d spread it between three different banks in order to spread risk in the event of a bank crash. I’d also keep some cash on hand (about $10,000) at all times as well.

Cash is what is needed in an emergency — and that’s what it’s for.

Well, that’s how I’d do it. Basically it’s a case of, prepare for the worst.
Regards,

Your Fellow Reckoners, 
for The Daily Reckoning

Joel’s Note: Thanks, as always, to all those who wrote in. It is this editor’s firm belief that, against the backdrop of an increasingly oppressive state, voluntary communities of freedom- minded individuals will become the way of the future. 

Sharing information — whether about investment ideas, business opportunities, networking avenues, good books, etc. — is, and always will be, of paramount importance to the furtherance of liberty.

It is with this very important cause in mind that we’ve set up the Laissez-Faire Club, the first comprehensive, digital-age society dedicated to the idea of freedom. 

Tomorrow we’re kicking things off by sending a free copy of Rose Wilder Lane’s, The Discovery of Freedom, to a thousand readers. Next Friday, we’ll do the same with another title...only we’ll send that one to more readers. Same goes for the Friday after that. And after that... 

Our aim is to build a global community of people who want to share ideas, both theoretical AND practical, about how to live and enjoy freer lives. So, along with these books, which will be sent out weekly, we’re also gifting new members with theEconomics in One Library package...which includes pivotal works by Henry Hazlitt, F.A. Hayek and Garet Garrett. 

We’re building a community. And we’re inviting you to join us. Find all the details here.
 
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And now over to Bill Bonner who has the rest of today’s reckoning from Baltimore, Maryland...
The Burgeoning Scam Market
 
Bill Bonner
Bill Bonner
“Monetary policy cannot fulfill each and every market expectation.”

So said the head of the Bundesbank, Jens Weidmann.

Why not, investors want to know.

Mr. Weidmann was talking to The Wall Street Journal. He was explaining why Germany was sticking to its guns. They don’t use that expression in Germany. But you know what he meant.

“The crisis can be solved only by embarking on often-painful structural reforms,” he insisted. “If policy makers think they can avoid this they will try to.”

Mr. Weidmann is talking about the present. He is also describing the future. In the old world there is a backlash growing against the Germans and their financial guns. Austerity doesn’t seem to work. Countries try it. They cut spending. They fire people. They get nothing from it. Their budgets are still far out of balance, with deficits way above the 3% limit demanded by the European Union. Unemployment goes up. GDP goes down. Unhappy mobs start breaking windows. Why bother?

Look what is happening in Britain, for example. The Telegraph reports:
The unexpected 0.2pc contraction in UK growth followed a 0.3pc fall in gross domestic product (GDP) in the fourth quarter of 2011, signalling a technical recession and Britain’s first double-dip since 1975. 

Economists had expected the Office for National Statistics data to show the economy grew by 0.1pc between January and March. 

The Prime Minister said the figure was “very, very disappointing” but added that that it would be “absolute folly” to change course and jeopardise Britain’s low borrowing rates. He told Parliament: 

“We inherited from [Labour] a budget deficit of 11pc. That is bigger than Greece, bigger than Spain, bigger than Portugal [...] The one thing we mustn’t do is abandon spending and deficit reduction plans, because the solution to a debt crisis cannot be more debt.”
Of course, you might look at these facts and conclude that they are not trying hard enough. Instead of making smallish cuts...why not make big ones? Why not actually balance government budgets so that they can tell German central bankers to drop dead?

Everyone agrees that that would be too radical. It would invite “social upheaval.” Apparently, actually living within your means is no longer politically or socially acceptable. You have to live beyond your means... The only question is ‘who will pay for it?’ The answers to that question are not easy. When debt levels were low, the answer was probably ‘future generations of taxpayers.’ At today’s debt levels it is unlikely that the debt will ever reach future generations. And with so much of the debt now being taken up by the central bank the burden shifts, from lenders to borrowers, taxpayers and consumers. Good debts may fall on debtors...even those who are not even born yet. But bad debt and inflation float down like leaves...blown by the winds...and eventually dropping down on innocent passers-by. 

With perhaps the exception of the German central bank, all the others — or most of them — are trying to “fulfill each and every market expectation.” They are trying to drive asset prices higher...reach full employment...and cure diabetes. 

The Fed is at the helm. And The New York Times reports that this week’s policy meeting produced an assurance. The Fed will stay on course...guided by its own star:
WASHINGTON — In a statement following a two-day meeting of its policy-making committee, the Fed said that it would continue its existing efforts to stimulate the economy, but it decided again not to expand those efforts, even though its projections show unemployment will remain a massive and persistent problem for years to come. 

The statement also said that the Fed plans to maintain those existing efforts, including holding short-term interest rates near zero, “at least through late 2014.” 

But a separate summary of the views of senior Fed officials showed that a majority of the committee now expects to raise interest rates by the end of 2014. 

“The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the statement said. It said unemployment would “decline gradually” and that inflation remained under control despite the impact of the recent rise in oil prices, which it regards as temporary. 

The Fed’s chairman, Ben S. Bernanke, strongly defended the calibration of the central bank’s policies at a press conference following the release of the statements. He said that the Fed already was engaged in a massive effort to bolster the economy. 

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate,” he said. “The view of the committee is that that would be very reckless.” 

He added that the Fed’s ability to reduce the unemployment rate more quickly was somewhat “doubtful” and that any success likely would be small.
And more thoughts...

Low rates are a kind of hustle. They take money from savers and redistribute it to debtors. Borrowers — such as the big banks — get money at a preferentially, artificially low rate. But savers pay the price.

Recently, thanks to the shale oil story, scammy rig operators are promising returns as high as 14% PER MONTH. Retired people, supplementing their Social Security payments with interest income, are tempted. At today’s rate, the pensioner gets less than $2,000 on his $100,000 of savings. He is desperate for more. Even to the point of listening to shysters and investing with fraudsters.

But in a system pumped up by counterfeiting...hoist on the gassy petard of economic BS...and kept from blowing away by the short memories of the investing public...

..what is not a scam?

A partnership that promises a 14% per month rate of return is surely a flimflam. But what about an IOU from the world’s biggest debtor...promising almost nothing?

Investors must have had the same faith in bonds back in 1946. Then, bonds had been going up for a whole generation. Stocks crashed in ’29...and again in ’37...and in ’42...and bonds went up. Real estate sank and stagnated for two decades...and bonds went up. A Great Depression lasted, on and off, for 12 years...and still bonds went up. Even throughout the biggest war in human history...the full faith and credit of US Treasury bonds was as solid as Ft. Knox. Now, in 1946, with the war over...Europe demolished, and the Soviets ready to invade...millions of returning soldiers who might find no work...

..what better to buy than US bonds?

But monetary policy held more or less steady. Despite double digit inflation and despite a series of post-war recessions...monetary policy was relatively calm. It let the money supply fall...and prices rise...

And the bond market gave way. 

Bonds went down for the next 36 years. An investor who bought US Treasuries during the Truman administration years lost 83% his money before Ronald Reagan moved into the White House. 

Meanwhile, prices rose to more than 4 times what they had been in the post-war period. The poor investor. Hammered by inflation...smashed by the bond market. He was black and blue all over. And by the end of the ’70s he considered government bonds nothing more than “certificates of guaranteed confiscation.”

But those were the good ol’ days. Now, nearly every central bank — especially the Fed — aims to fulfill all market expectations. Stock market buyers expect higher prices; if they don’t get them, it won’t be the fault of the Fed. 

Bond market buyers also expect higher prices...or at least stable prices for their US Treasury bond. The Fed is on their side too...buying up bonds in staggering quantities in order to keep yields low and prices high.

This time, an activist Fed is on the case. And bonds are doomed...even more than in ’46.

Regards,

Bill Bonner
for The Daily Reckoning