Curried Wealth Building
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December 6, 2009
Issue 73  -  What Else are You Going to Buy?
When investing, there are only so many things to purchase:  stocks, bonds, real estate, cash, your own business, or commodities.  I thought I'd briefly review each of these in the context of present conditions to determine the suitability of each.  This will hopefully lead us to the proper positioning of our assets.
This would include CDs, treasury bonds and corporate bonds.  Remember that a bonds value fluctuates with the current interest rates.  If interest rates move down, the value of the bond goes up, while if rates move up, the bond loses value.  This is real easy to remember if you just imagine owning a bond paying 5% and trying to sell it to someone if rates had risen to 10%.  You probably wouldn't get too many takers.  On the other hand if rates dropped to 2%, your bond would be much more valuable. 
Right now interest rates are at multi-generational lows.  In fact the Federal Funds rate, the rate charged to banks by the Fed, is effectively zero.  This means that for bonds to go up in value would be nearly impossible.  At the very least, the potential increases in value are very small.  Nix the bond purchase.
Personal Business
This has the highest rate of return of any asset class.  Unfortunately, it also has the highest percentage of complete losses of any asset category.  The average return of 20% a year is the result of the averaging of a small number of very successful businesses with many complete failures.  So is it a good time to start a business?  Let's look at a chart:

First things first, NFIB stands for National Federation of independent Business.  The NFIB is predominantly small businesses (as opposed to the ISM survey results you often hear on CBNC which focuses on large companies) .  This chart shows the results of their latest survey of pricing power against 3 months ago.   As you can see this has plummeted in the last 2 years.  Pricing power is THE critical element for small business success.  If you can't charge enough to make a decent profit, especially when you are starting the business and have spent a lot to get things going, you have a very small chance of success.  So starting a business now, seems like a low probability of success at this point.  When the economy starts to really pick up this will be a better option, but for now, with a real unemployment rate around 20%, I'd hold off on this one.
Real Estate
Real estate has produced more millionaires than any other asset class.  Not just buying a house and waiting for it to appreciate mind you, but actually buying and renting houses and/or commercial real estate.  So should you invest here?  Again, even though the market has picked up, this is only a short term effect of the lessening of resets on mortgages.  This will pick up dramatically over the next year.  This will lead to a second down wave in real estate prices that will be devastating.  Now is the time to SELL a house, not buy one.  Renting houses now is no bed of roses either:

In case you think commercial rentals are better, you obviously haven't driven by any new strip malls this year as they are 1/3 or more empty.  No, real estate is not the way to go now either.


This is one asset class that has done very well this year.  I expect it to do well into next year as the massive liquidity injections of the (Not really) Federal Reserve kick in.  However, there is a tremendous risk in this asset class.  There is a very good chance that sometime over the next year that the market crashes.  Earnings are terrible and the outlook is grim:


Early promotions fail to deliver in November

Same-store sales contract as retail squanders its tailwinds

By Andria Cheng, MarketWatch

NEW YORK (MarketWatch) -- Retailers, hurt by unseasonably warm weather that damped demand for coats and sweaters and consumers holding out and delaying purchases, failed to deliver November same-store-sales improvements, setting the stage for a highly competitive December.

Digesting November's Sales Results

Sales results for November come in on the soft side, as the industry contends with the key holiday selling season. Charles Grom, retail analyst at J.P. Morgan, talks to MarketWatch's Andria Cheng about what the data all mean for retailers.

The misses came despite a barrage of holiday-sales promotions leading up to the Black Friday weekend and easy comparisons against the year-earlier doldrums.
There are no REAL green shoots and everything is being judged by a very low bar.  The crash could be swift and John Hussman, founder of Hussman Funds, thinks there is a high chance of a crash, very high:

Hussman: 80% Chance of Big Market Crash

Friday, December 4, 2009 8:31 AM

By: Ellen Chang

The likelihood of a large market crash is 80%, said investor John Hussman, Bloomberg reported.

Additional amounts of debt not being repaid will cause the stock market to reverse itself, said fund manager Hussman.

Although the S&P 500 Index catapulted by 64 percent from March, the Federal Deposit Insurance Corp. reported 4.94 percent of loans and leases being overdue by the end of the third quarter, reaching an all-time high.

“There is still close to an 80 percent probability that a second market plunge and economic downturn will unfold during the coming year,” Hussman wrote on his Web site.

He noted that bank earnings and capital ratios “have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010.”
Yeah, that stock investment has a little too high of risk for the average investor.  Most people don't realize the great risk they are taking.  They listen to CNBC and think all is well.  Oh, and remember those high frequency trades I was talking about a couple weeks ago?  They account for over 70% of ALL trades on the New York Stock Exchange.  Here's a pretty good explanation if you want to know more:
I wouldn't have a very high percentage of my net worth anywhere near stocks come next year.
There is always the choice to hold cash.  This can be in short term treasuries, which are not as susceptible to interest rate changes, can also be held.  There are a couple of problems here.  Unless you hold the cash at home, the banks are at risk.  The FDIC is, after all, broke: (from GATA)

FDIC Deposit fund had negative $8.2B balance in Q3

That's broke.  Bankrupt.  Kaput.  Gone.  Poof.  Dead.  Rotting.  A corpse.

Yes, yes, I know, Treasury has their back.  But let's not forget - The FDIC does not have a legal "full faith and credit" guarantee from the US Federal Government and Treasury.

It has a "sense of Congress" resolution, but not a formal, legally-binding guarantee.

I am not, by the way, predicting an actual FDIC failure to pay.  Should such an event happen it would be tantamount to a declaration of revolutionary war (by the government about to be deposed!) as if there is one thing that would cause Granny to reach for her shotgun, it would be getting screwed out of her life savings after Sheila Bair and everyone else in our government has trotted out how their money is "fully safe" and that "nobody has ever lost a penny of insured deposits and never will" for more than 20 years, including lots of pronouncements of exactly that mantra over the last year.

Nonetheless this outlines the underlying problem the FDIC has - it has willfully and intentionally ignored the fact that banks have mismarked their "assets" to overstate their values, it has refused to demand that accounting be done on a strict "mark to market" basis by bank examiners, and indeed, it has backed the "extend and pretend" commercial real estate "rollover" provisions of recent months, all of which is manifestly unsound, intentionally misleading, a consequence of willful refusal to enforce 12 USC Ch 16 Sec 1831o ("Prompt Corrective Action"), and has led to enormous losses being absorbed by the Deposit Insurance Fund that should have never happened.

The result? 


Let's put this in common-man terms:


Congratulations Sheila - is that your resignation I see in your hand or is that your promotion from Obama - after all, we all know that in Government the more you screw up and screw the taxpayer, the better the job you're offered.

One final question: Is the only thing preventing panic and bank runs the sheer stupidity of The American People?
This could be a problem.  Maybe not next year, but sometime after that, there may actually be bank failures with NO reimbursements.  To stop this, the Fed would print money like there was no tomorrow.  What else could happen to your cash?  How about a 99% devaluation...overnight:
North Korea revalues currency, destroying personal savings
Wednesday, December 2, 2009

TOKYO -- Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.
Imagine having $100,000 in the bank one day and the next day when you wake up, it's worth $1,000.  That would be a disaster.  Nope, I'm not going with cash, either.  (except for my emergency stash)
This takes us back to real things.  The problem with most real things like wheat or oil, is storage.  Not really practical, most of the time.  Except for our old friend, metals.  Gold and silver are the only life boats that I can come up with.  It has had quite of run of late.  It did take a pounding on Friday, but I take that as opportunity to buy.  The price is still cheap and with prices still near all time highs, it seems that the US mint is having problems supplying product:

US Mint Gold Buffalo Bullion Coins Sold Out, Other Gold Coins Suspended or Limited

2009 Gold BuffaloYesterday, the United States Mint announced that their American Gold Buffalo bullion coins have sold out. The Mint also announced the continued suspension of the remaining one ounce gold bullion offering, and the limited availability of recently released fractional gold bullion coins.

As it stands, all gold bullion offerings from the US Mint are currently either sold, out, suspended, or limited.

In fact, I think gold in general is VERY difficult to find.  Look at this where the COMEX is settling contracts for gold with shares of the GLD ETF:
More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With Paper

By Duncan Davidson|

More Evidence Gold is Being Hoarded as Comex Fulfills Gold Contracts With PaperMy bet that by 2020 we will return to some form of gold standard is looking better. Something is up when gold is being hoarded to such an extent that the futures exchanges cannot fulfill with metal but have to try to stiff the contract holder with paper. Now, they have done this in the past, and gotten away with it, but according to this story, never so aggressively.

Prof. Antal Fekete has been on this story for several months, and has set forth in some detail how the gold basis is being manipulated, perhaps because of hoarding. (The basis is the delta between the cash price and the next futures price.) Yves has had several posts on Gold Panic, and it is consistent with the good Professor’s analysis.

Another aspect of this story is the collapse of Barrick’s hedging strategy. Barrick Gold (ABX) is the largest gold mining company and had been following a really dumb hedging strategy which had been to take naked short positions (shorting gold they did not possess). In a world of gold hoarding, they may not be able to cover, even at a loss. The strategy was so risky that a conspiracy theory had evolved that Barrick was front-running the US government to keep the gold price down. Lending support to this is the question: why would a gold production firm try to cap the gold price? An answer which does not require the conspiracy is that Barrick had less gold in the ground than it wanted to reveal, and so was engaged in a confidence game of the first order. The weak Dollar (driving gold up) and the hoarding has called their bluff.

Gold-backed currencies, unlike fiat currencies, have the irreducible endpoint of debts being paid in gold, which has retained value throughout history. Fiat currencies have no such endpoint. You can make the argument that fiat currencies are backed by the productive capacity of the issuer, and that they have some irreducible value based on taxing that production. History has tested that case, and found it wanting. You see, fiat currencies tempt countries to over-extend.

What happens when the debts of the issuer are vastly beyond their productive capacity? Well, the country defaults, and the fiat currency is forcibly exchanged for scratch. A 2008 paper by Harvard Professor Rogoff and Prof. Reinhart, both members of the NBER (which calls recessions and recoveries) entitled This Time Is Different demonstrates that instead of fiat regimes making good, they have defaulted over and over throughout eight centuries of financial crises:

We find that serial default [repeated sovereign default] is nearly a universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

Before we take comfort in the US being already an advanced economy, the imperial power of its day has typically defaulted after over-extending. Rich European countries have defaulted, including Austria, France, Portugal Spain and Germany. The reunified German defaulted in 1873, bringing the whole world into a long depression, including the United States. In the last century, Germany defaulted twice: 1932 and 1939. Russia three times, beginning in 1918. England in effect defaulted in 1931.

So now the gold hoarding makes sense: other sovereign powers are preparing for - or at least hedging against - the inevitable sovereign default of the US. The more Obama buries the US in ever more present deficits and future commitments, the closer this becomes.

Niall Ferguson’s piece in Newsweek, which I discussed yesterday, fits into this context. He was talking about Imperial powers getting over-extended, and the first thing that falls is to pullback on excessive defense spending and foolish Imperial wars. Even as Obama pitches tonight a three-year vague commitment in Afghanistan, the hand writing is on the wall. Sadly, the US is so over-extended the wars are but a small pullback in the vast future deficits from social commitments. This won’t end well.
So we have a PHYSICAL entity clearing out their contracts with PAPER.  This should raise all types of flags for the casual observer.  If they had the physical gold, they wouldn't have to settle in paper would they?  They have even made it more difficult to settle in metal versus paper.  This just shouldn't be.
You may be thinking that gold has gotten so high that it might be finished rising.  This Friday plunge is the start of a collapse.  This guy disagrees:

Precious metals manager believes gold prices "long way from the top."

Gold bullion has reached record highs recently, and precious metal stocks have seen triple-digit gains over the past year. Nevertheless, Robert Cohen sees continued upside.

We're a long way from the top," says Cohen, 40, manager of the $568.5-million

Dynamic Precious Metals and vice-president at Toronto-based Goodman & Co. Investment Counsel Ltd. "We only make [economic] forecasts for about five quarters. But we're still bullish on gold as an investment proposition for the next eight to 10 years."
This week, gold bullion was trading at around US$1,200 an ounce. Cohen notes that the gold rally began in 2001, when bullion bottomed at around US$265. "There will be times of trace-back. But we are in a major structural up-trend that will last years.
 I agree totally with this guy.  The gold bull has a LONG way to go.  Feel confident in a purchase now.  If you've never bought before, now is the time to ease on in.   If you need help, let me know.  703-791-6066.  Have a great week!