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The Daily Reckoning | Thursday, May 24, 2012 The problem with civilized (and über-civilized) investors... Charlie Munger and Warren Buffett are right about gold...er...sort of... Plus, Bill Bonner muses on the exit of Greece from the euro, and plenty more... -------------------------------------------------------- Robert Has Alzheimer’s. This Tiny Company’s Breakthrough Gives Robert Hope... This tiny company could also be on the verge of delivering fast, life-changing gains. Get all the details — and find out why you must act before Midnight Wed., May 30th — in this epic new research presentation. Trademark of the Uncivilized Investing in Gold as World Economies Falter Eric Fry Reporting from Laguna Beach, California... Are you a civilized individual or a Neanderthal? Berkshire Hathaway’s Charlie Munger provides a simple litmus test... “Civilized people don’t buy gold,” says Munger. There you have it. If you possess absolutely no gold, other than maybe a tooth filling, you are civilized. Congratulations! If, however, you’ve stashed a few Krugerrands under your mattress, we’ve got some bad news for you. You are hopelessly uncivilized — a financial Neanderthal, deserving of pity from your civilized counterparts. “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,” Munger remarked recently, “but I think civilized people don’t buy gold. They invest in productive businesses.” Yes, that’s right, Charlie. Civilized people invest in productive businesses...until an uncivilized government decides to steal it, or merely tax and regulate it into oblivion. Some Jews in Vienna in 1939 operated extremely productive businesses. Unfortunately, they could not stitch any of those into their garments. In other words, Charlie, civilized investment strategies function in civilized societies. In uncivilized societies, gold is usually a better bet. Or to put it another way, as civilizations lose their civility, share prices fall and gold soars...which is exactly what has been happening here in our beloved US of A. During the last decade and a half, the investment return of Berkshire Hathaway, perhaps the most civilized of American stocks, has trailed far behind that of gold. Civilized folks like Charlie Munger and Warren Buffett consider that 15-year trend a fluke. Maybe so. Or maybe this trend is a warning that America is becoming a bit less civilized — a bit less friendly to productive businesses. Notwithstanding this trend, civilized folks know better. They shun gold in order to invest in the shares of overhyped social media companies, highly leveraged banks, bonds of bankrupt governments and complex derivatives that are impossible to value precisely... until they go to zero... at which point their precise value is known. That, Dear Reader, is civilized! But there is one additional echelon: the über-civilized investor. Über-civilized investors shun gold to invest in über-complex derivatives. These are the folks like Warren Buffett who do not merely shun gold, but also belittle it very publicly while loading up on highly leveraged finance companies that are loaded up on complex financial derivatives. Often, these banks are run by über-über-civilized investors — the kinds of guys who do not merely load up on complex derivatives, they load up on complex derivatives linked to the bonds of bankrupt governments. Then they utilize a “risk control” methodology that has a perfect record of failing to control risk. You just can’t get any more civilized than that. Why Some People DIDN’T Go Broke In The Bust From 2008 until now, some people watched their gains go UP... On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it — and so could you. Click here to watch the full report that shows you how. The Daily Reckoning Presents Uncivilized Investing Dan Denning Uncivilized times call for uncivilized investments. Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC recently, “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.” In a way, Munger is correct. Gold is uncivilized in the sense that it functions best when civilization functions worst. The more uncivilized a society becomes, the more civilized gold becomes. So the easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time “we’re all Jewish families in Vienna.” But let’s not let Charlie off the hook so easily. Instead, let’s “unpack it,” in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: “productive” and “civilized.” Charlie might be right if the world were, indeed, civilized. But maybe the modern world isn’t as civilized as he thinks. Part of what made the world so uncivilized in 1939 was unsound money. The abandonment of the classical gold standard in 1914 made the expansion of the Warfare state possible. The equally unsound system that emerged from World War I — including the Treaty of Versailles — virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished. Gold, on the other hand, is sound money. You are not buying it for a capital gain. You are buying it, by our reckoning, as a way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilized. Interestingly, for more than a decade Berkshire has underperformed gold — the investment asset Buffett recently called “forever unproductive.” Since 1997, Berkshire’s shares have declined relative to this forever unproductive asset. The nearby chart depicts the trailing 10-year return of gold since 2007. Thus, the first data point on this chart shows the return an investor would have received from buying gold or Berkshire Hathaway in 1997. Moving across the chart to the right shows subsequent 10-year time frames. Bottom line: Based on a 10-year holding period, there has not been a single moment since late 1997 what an investor would have been better off buying Berkshire Hathaway instead of gold. No wonder Charlie is so cranky! This lengthy underperformance by Berkshire may explain Buffett’s and Munger’s very vocal and public hostility toward gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it. But the chart above isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world’s fiat monetary system! A civilized society with civilized people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and investment. This stability rewards investors for identifying which businesses are the most productive and efficient users of shareholder capital. For these exact reasons, William McKinley campaigned for President in 1896 and again in 1900 as a champion of the gold standard. He won...twice. But just 12 years after his assassination in 1901, the Era of Incivility began: The Federal Reserve came into being. Just 20 years after that, FDR confiscated all privately held gold. And 38 years after that, Nixon cut the dollar’s last remaining ties to gold, thereby establishing today’s very uncivilized “fiat money” system. In an uncivilized society, where the value of your labor is stolen through inflation (made possible by an unsound money system) long- term planning and investment become much more difficult, if not impossible. If you accept that we live in civilized monetary times where productive labor is actually rewarded, your brain has been tranquilized by the Big Lie of our times. Munger wants you right where you are. The less you think about how uncivilized the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie). But if you live an era that subverts accurate valuation of productive businesses — an era that subverts the productivity of the economy itself by encouraging debt and consumption, owning gold seems prudent, not wacky. Uncivilized times call for uncivilized investments. Regards, Dan Denning for The Daily Reckoning Editor’s Note: If Charlie and Warren want to shun our favorite yellow metal, that’s fine by us. That just means there’s more for us to buy at cheaper levels... Of course, that might not always be the case... We were just alerted to a new presentation, where America’s #1 ranked gold expert predicts that gold is likely to soar this year...to as high as $5,000 per ounce! Click here now to see this eye-opening presentation for yourself, before it’s too late. Dozens of Congressmen have used “inside information” to make a fortune on stocks... But did you know that there’s another way Congressmen pile up personal wealth while they’re in office? Senator John Kerry did this recently and took home at least $92,723. But what’s really surprising is that you and I can use this “trick” as well. Learn about the full story here. Bill Bonner Bracing for a Greek Exit Bill Bonner They say that breaking up is hard to do Now I know that it’s true — Neil Sedaka What’s the Greek word for ‘chutzpah’? We don’t know either. But the leader of the communists/socialists, Alexis Tsipras, has it. He must have heard that old saying: “When you owe your bank $100,000, you can’t sleep at night. When you owe your bank $1 million, your banker can’t sleep at night.” Since the Greeks owe money all over town, he figured he could thumb his nose at his lenders. He told the Germans that they were trapped. They had no choice. They had to keep the money flowing to Greece. Otherwise, the Greeks would default...and cause Hell to all of Europe. What’s the word for “oh yeah?” in German? We don’t know that either. But surely the Germans have a word for this occasion. A word that means... “We’ll show you what a moron you are...” In the event, the Bundesbank did the talking. As to the possibility of the Greeks’ departure: “The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.” Or, in the words Gerald Ford used in responding to New York City’s request for a loan: ‘Drop Dead.’ Yesterday, the Dow was down as much as 170 points as investors wondered what would happen next. The dollar rose to $1.25 to the euro. By the close of trading, the Dow had managed to pull itself up to only a 6-point loss. Everything else was down, down, down...and it keeps going down. Watch out...investors could panic! In Europe itself, things seem to be coming to a head. It looks like the Greeks might finally leave...or be pushed out of the euro. Bloomberg continues: Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro. That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics. But switching currencies is not an easy thing to do. Bloomberg continues: It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin. Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans — or those suspected of being German — being assaulted in apparent anger over EU-enforced austerity. Greece’s leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive... The commentariat still insists that it would be against Germany’s interest to push the Greeks out of the euro. One says Germany would be “shooting itself in the foot” or perhaps the head. Another says it would cost a fortune, $1 trillion, according to a report in the Telegraph: The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”. Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output. Yes, breaking up is hard to do. It would be costly. But money isn’t everything. People do bad things for money, it’s true. But they do worse things IN SPITE OF money. Where was the money in WWI? In starving the Ukrainians? In Hitler’s ‘final solution’? In the extermination of the Armenians? You might find a money motive...but few mass murderers are bottom- line oriented. They’re usually world-improvers... There are some things more important than money. National pride is one of them. Here’s our point. At some point, people stop counting the costs...they go ‘off their heads’...and begin doing things that don’t really benefit anyone in a financial way. So, it may not matter whether it “makes sense” to kick the Greeks out of the European monetary system or not. Greece was still in it as of yesterday. Today, anything could happen. But at this stage, the Germans may prefer to blow off a toe or two in order to get rid of them. And more thoughts... We went to Toronto yesterday to visit an old friend who made a lot of money in the mining business but now works in bio-tech. Why did you get out of mining, we wanted to know? “It just got too crowded. You know what they say about the ‘crowded trade.” Get out. Well, I guess it was the big run-up in commodities a couple of years ago that caused it. Suddenly, everyone was starting up a mining company. And they were getting a lot of investment money. Everybody thought he’d get rich in resources. “But it doesn’t work that way. The mining business is extremely cyclical. Prices go up. It draws in the marginal players. And the good deals disappear. Everything is too expensive. There’s too much production. Too many projects. Too many promoters. And then prices collapse. “We’ve already had a good pullback. I’m starting to see some good deals again. But I’m waiting a little longer. I think we’ll get some better deals before this is over.” Our guess, here at The Daily Reckoning, is that Facebook’s IPO represented some kind of high water market for the virtual economy. It was like Blackstone’s IPO in June 2007, which marked the top in the financial economy. Now, the economy will shift back to the real things...oil, and copper, and precious metals. It could take years. But heck, we’re not in any hurry either. Regards, Bill Bonner for 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