Wealth International, Limited

Finance Digest for Week of June 26, 2006

Note:  This week’s Offshore News Digest may be found here.


What a difference a month makes. Last month, we were cautioning about that hyperbolic spike in gold and silver and an inflation scare. We wrote at that time, “Hyperbolic moves like these simply are not stable. We prefer not to play them. There is no telling how high they can go or how fast or how far they may fall when they turn.” One of our goals that we mention frequently is to provide safe entries into stocks and commodity plays. We also look for plays that we can hold for months, if not longer. For the last couple of months, gold, silver, and copper did not meet our criteria, and we were rewarded for our patience. Gold has now given back nearly 100% of its 2006 gains.

What happened to gold? What happened to gold was the same thing that happened to various equity markets worldwide: A shift away from risk in the wake of tough inflation talk from Ben Bernanke, and the end of quantitative easing in Japan. It was a blood bath in many places and the U.S. got off relatively easy, as shown by the following chart. Last month, we cautioned that “a steepening yield curve is a good environment for gold and precious metals, so if and when the yield curve starts to flatten again, it will not be a favorable factor for gold.” With the tough talk from the Fed, the yield curve inverted once again and the carry trade began in gold, commodities, and equities. We believe that a second inversion within six months is a very strong signal. Indeed, the bond market is worried about something other than inflation, and that something is a recession.

The housing bubble has just begun to burst. Home prices are reported to be still rising – although we disagree. What will happen when it is clearly understood and reported that home prices are actually dropping? What happens when interest rates reset and mortgage payments skyrocket? The answers to those questions should be obvious. Unlike stocks, people cannot just sell to get out. Many are trapped already. Homeowners get trapped when they owe more money on their house than they can sell it for. Unless they bring cash to the table at closing, they simply cannot sell, which means they cannot move. Home sales will plunge further, which will throw more people out of work, which will put more price pressures on homes. The cycle will feed on itself until it plays out. The important thing to realize is that the Fed will be powerless to do much about it. Think of housing as a supertanker. Once it turns around and gets a full head of steam, it will be very difficult to turn back around, especially when investor psychology has changed.

According to the Bureau of Labor Statistics, nonfarm employment rose in May by 75,000. Given that it takes 150,000 jobs just to keep up with the birth rate and immigration, 75,000 was a terrible number. Unemployment numbers will skyrocket in a prolonged housing slump. So far, things have not fallen apart, because homebuilding is still robust. Yet massive building is unlikely to continue in the wake of rising inventories and falling prices. Note too that much of the politics surrounding immigration such as the proposed building of a wall along the Mexican border are a result of a tightening labor situation. If everything were fine, it is unlikely that Congress would be considering such legislation now, instead of after 9-11. As housing slows, look for more talk out of Washington.

No fewer than five Fed governors, as well as members of the European Central Bank and Bank of England, have raised concerns recently about inflation. Bernanke himself has even been blamed for the stock market “crash”. A 6–10% decline in the U.S. is hardly a crash. Bernanke’s sin, if you would, is not so much what he is doing now, but his supportive role under the Greenspan Fed. He willfully went along with all of the bubbles Greenspan blew. Greenspan was able to dump the problem onto Bernanke’s lap, no doubt hoping Bernanke would take the blame for anything that went wrong. Unfortunately for Greenspan, history will not be so kind. Regardless, the Fed has signaled that more hikes are coming, and the odds of a June hike are now up to 75%, with odds for an additional hike in August close to 30%.

The latest CPI numbers came out on June 14. The Yahoo! Finance headline was, “Gas Prices Spark New Shot of Inflation”. In response, Treasuries sold off, which perhaps puts us temporarily on the wrong side of the trade. One day later, there was a huge stock market rally, as if further hikes by the Fed were a good thing. Rest assured they are not. It does not make much short-term sense, but then again, short-term fluctuations seldom do. We repeat the theme we stated last month: This is an inflation scare. Bernanke has already overshot and is driving this train by looking in the rearview mirror. That is the nature of the Fed, and that is why the market, and not the Fed, should set interest rates.

The big news this month is the absolute pasting of global equity markets, as reported earlier. We believe the U.S. markets will eventually follow suit. The question is, why the downturn? While cautioning against making determinations about cause and effect, the Bank of Japan drained ¥20 trillion from its monetary base over the past two months. That is roughly equivalent to $175 billion, a significant amount for such a short period of time. Others may disagree as to why, but regardless of the reasons, it is important to react to what is happening. It is now clear that various carry trades are unwinding, and we resolve to be on the correct side of those trades. In response to equity meltdowns, including the Nikkei, the Bank of Japan lost its nerve to end its ZIRP (zero interest rate policy) and voted unanimously to leave interest rates unchanged.

Carry traders rushing back in on this news will likely come to regret it. At some point, the market will force Japan to hike. As odd as it may seem, our view is that refusal by the Bank of Japan to carry out normal policies has likely prolonged the Japanese deflationary period. The ECB hiked its interest rates on June 8 to 2.75%. It was the third hike in six months. Given the ECB dropped the word “vigilant” from its latest statement, it is possible the ECB will pause at its next meeting. The UK stood pat once again and rates have held at 4.5% for the 10th month in a row. Most expect the next move in the U.K. will be a hike in light of commentary from inflation hawks at the Bank of England. We remain unconvinced that will happen and, in fact, caution against it, primarily on account of stagnant wages and rising unemployment. But neither the Fed nor the BOE is likely to be reading our thoughts. In China, M2 is increasing at an annual rate of over 19%. In the EU, M2 is increasing at 8%. And in the U.S., it is increasing at 4.5%. Those numbers should give some cause for concern to U.S. dollar bears.

The Templeton Russia Fund (TRF) rose from 50 in January to 90 in May. From the May peak, it gave back 100% of those gains, but in the last two days rallied from 50 back to 65. Long term, this fund may interest us, but for now, it looks like every other horror story on catching falling knives.

The U.S. announced that it was dropping opposition to an Asian currency unit on June 15. We have no doubt that some people will be making big news out of this story. Our view is more or less it just does not matter, at least for now. For starters, the U.S. has no role to play in such decisions, and even if it did, the U.S. clearly cannot dictate world policy on such matters. More to the point, the finalization of any such currency bloc will be 10 years down the road at best, and hardly a concern for either equity or currency markets today. This will not signal the end of U.S. dollar reserve status anytime soon, nor will it cause a prolonged spike in gold, commodities, or anything else anytime soon. At some point all of these “attacks” on the U.S. dollar will eventually add up, but will likely be 10 years from now. Remind us to start worrying about this in around seven years.

Much more significant news from China that is off nearly everyone’s radar is the fact that China’s central bank raised the reserve ratio for commercial lenders by 0.5 percentage point, effective July 5. That will bring China’s banking reserve requirement up to 8%. In addition, the People’s Bank of China said it will target the most active lenders by issuing them bills, in an additional attempt to reduce liquidity in the interbank system. In effect, China is reducing the ability of commercial banks to lend money as liquidity is reduced. As opposed to the previous news item, which is meaningless for now, this is very significant news. If the policy sticks, it will help unwind the carry trade, especially in commodities.

This new trend in equity markets is truly a global downturn, and in the following market summaries, we will show you why looking for a bottom now – as many seem to be doing – might prove disastrous to your portfolio in the long run. Our first goal is to keep you out of the way of potential train wrecks, and this global downturn in equity markets has some ominous signs of being one. We will show you a gallery of global equity indexes that all suggest the reflation rally from the 2002-2003 lows has likely come to an end. In addition to the equity markets, we will touch on Treasury bonds, review the meltdown in gold and commodities to see why we are going to remain on the sidelines, and take another look at oil and oil stocks (they are bearish).

The speculation risk in both emerging markets and commodities remains enormous. With various carry trades blowing up, we are now concentrating on the relative safety of U.S. Treasuries, in addition to shorting some major stock market indexes. Those of you who want to play the short side with a defined risk may do so with index puts in the October–November time frame 2–3 points in the money (to reduce time premium). Short weakness, not strength. The Nasdaq has been the weakest of the indexes, and will likely remain so. Volatilities are still low enough that such trades are likely to be winners.

If metals and energies behave well, on a sustained pullback, we will look to re-enter those sectors later this summer or early autumn. In the meantime, we are concentrating on the short side of the market and will continue to do so as long as the trade makes technical sense. For those of you that are leery of the short side, there is nothing wrong at all with a high cash position at this point. Yields on 6-month Treasuries right now are close to 5%. On average, we feel it will be tough for the major U.S. indexes to beat those yields. That cash will provide a means to put on future positions that we recommend or that you find on your own. This is not the time or the place to be “all in,” regardless of what Wall Street or anyone else tells you.

Some of you might argue that with yields at 5% and true inflation running higher (ignoring the CPI), 5% is not an acceptable return. However, if equities and commodities remain in their downtrends (quite likely in our viewpoint), a positive 5%, even if one is losing to inflation, sure beats a negative 10% or 20% if the markets collapse.

Link here. PDF version here.


The most interesting combination of speakers, at the Conference of Monetary Research and Education, held in New York this May, had to be Glenn Hubbard, Dean of the Columbia School of Business, and Jim Grant, editor of the well-known Grant’s Interest Rate Observer. As I listened to these two, their diametrically opposing views about the future of the U.S. economy became apparent. Yet, rather than give way to my obviously biased review of their presentation, I will defer to my wife. She is a great musician and an avid reader, but economics is not her cup of tea. When I asked her what she thought, she said, “Well, Jim Grant just sounded more believable.” Grant sounded more believable because he went below the surface aggregates that so many speak of and he spoke in easily understandable terms about circumstances that we can see in our day-to-day lives, and he pointed out cause-and-effect relationships that were more realistically believable and, therefore, easy to follow. On the other hand, though Hubbard presented a “feel-good” message that we would rather believe, his presentation, heavily reliant on impressive sounding eco-speak, seemed to fit better in the ethereal halls of academia than the world in which you and I live.

It may be too late to say that my aim is not to bash Hubbard. His position and his intellect are certainly worthy of respect. My intentions are more as follows: I hope to present three propositions that are easy to understand that will benefit investors immediately and for years to come. Most of us have already formed strong opinions, and conclusions, as we come across others’ ideas. Yet, if the reprieve of 2003 to the present is over and we are about to resume the strong bear market that began in 2000, careful consideration of the following will prove extremely helpful.

Proposition # 1 – Don’t Buy the Hype. The easiest way to convince an investor to buy something is to show them an investment that has just gone up in price. As a matter of fact, the faster that product has climbed, the easier it is for Wall Street to tout and the more investors want to pile in. After all, for some legitimate sounding reason or another, “It’s obvious that this thing’s headed to the moon.” Whether the argument is bullish or bearish, the faster the price changes the easier it is to rationalize why this must be right thing to do, and that “This is just the beginning.”

No matter how many times science and history make it so seemingly apparent that parabolic rises are unsustainable, by its very existence, there will always be investors who buy the parabola. When prices start moving rapidly and change from moving upwardly horizontal to moving more vertically, bullish sentiment always seems to move to extremes as well. While the noise of the crowd, saying, “You missed out again,” can trigger our adrenal impulses, we had best quell this natural response. Gravity eventually takes over, and unsustainable price movements up give way to steep corrections that become the spikes on which the latecomers land. We need look no further than the last few weeks to illustrate this painful lesson.

Though we could as easily look at emerging markets, gold, oil stocks, or small caps, let me illustrate with the recent activity in silver. Once again, investors were reading all the reasons why this most recent parabolic rise was/is sustainable and why silver is early in its next upward move, and again, with a 27% decline (so far) in less than a month, science and history are showing latecomers a more painful reality. This is not an academic discussion in an investment textbook. Rather, it is a current holding in many investors’ portfolios – maybe even your own. As such, we must now ask ourselves some hard questions. At what price did we enter silver? How long will we need to stay? None of us will know the answer definitively until the future has passed and the time to act will have come and gone. If we are investors, then we need to remember that there are other markets to trade and taking losses is part of life. If we are married to silver, our choices are more limited, and we may have to endure greater losses and longer timeframes before we will profit. While we may get a fast rebound to new highs, the lessons from the March 2004 top, as well as other parabolic spikes, does not support that probability. All of this, of course, leads us to our second proposition.

Proposition # 2 – Have an Exit Strategy. In the Bible, the author of Ecclesiastes states, “There is a time to plant and a time to uproot … a time to search and a time to give up, a time to keep and a time to throw away.” Clearly, to those who aim to profit in the markets, entry and exit points matter. With so many investors holding to a “buy-and-hold strategy”, we will focus on the need to sell. Having an exit strategy means that we buy with selling in mind. Hopefully, we arrive at the party early with a mind toward leaving, and as such, we continuously keep our eyes on the door.

The best trading managers have their exit strategies set up well in advance of a given trade. This is nothing new. In his book, Hedgehogging, Barton Biggs notes the exit strategies of legendary traders Bernard Baruch and Jesse Livermore. In his book, My Own Story, Baruch notes, “In the stock market the first loss is usually the smallest. One of the worst mistakes anyone can make is to hold on blindly and refuse to admit that his judgment has been wrong.” In Trend Following, Michael Covel echoes Baruch: “The problem we have with accepting a loss is that it forces us to admit we are wrong. We human beings just don’t naturally like to be wrong.” In Edwin Lefevre’s book, Reminiscences of a Stock Operator, Jesse Livermore says, “Never make a second transaction in a stock unless the first shows you a profit. Always sell what shows you a loss. Only suckers buy on declines.”

The traditional approach to the markets, with the “buy-and-hold” approach, got it partially right. We, on the other hand, suggest that a “buy, hold, and sell” approach would be more financially profitable. Consider this. We have just experienced the largest expansion of credit and liquidity in history (which has led to the belief that liquidity never contracts), and that enormous amount of money has been chasing returns with reckless abandon and no concern for risk. The sharp moves lower of the last few weeks have brought us to a watershed moment. If the ever-expanding credit continues unabated, then the markets should move back to newer highs, and once again, the resumption of the bear market will have been averted. If credit contracts, then the losses will likely match, or exceed, the effects of the excesses it has created. As such, if there were ever a time to have exit strategies in place, it would be now.

Proposition # 3 – Volatility Can Be Your Friend. Still, we must be cautious not to sell solely because we are experiencing some downside volatility because volatility can be very beneficial. While this statement may appear to be at odds with what I just wrote, the fact is, recognizing and harnessing the benefits of volatility (easily the most difficult emotional and intellectual challenge investors face) is the only way that any investor can grow their capital over time. The conventional school of thought teaches that higher volatility means higher risk. Biggs points out that institutional investors are no exception. In speaking about a specific money manager: “Institutional investors apparently can’t tolerate his volatility, which is crazy because what they should care about is long-term performance.” As Michael Covel puts it, “Of course, some markets and traders are more volatile than others, but degrees of volatility are a basic fact of life. To Trend followers, volatility is the precursor to profit. No volatility equals no profit.”

Many, who manage money from a strictly technical view, may exit a position too quickly because it has reached a predetermined percentage loss. While speaking of managers who advocate this practice and defending his 1973 purchase of The Washington Post, Warren Buffet quipped that if the stock had fallen by half before his purchase of it, it would have been considered more risky, but that he had never figured out “why it’s riskier to buy something at $40 million than $80 million.” On the other hand, there are times when prices have not declined much at all, that we would have good reason to sell. Livermore observes, “It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for is to say ‘Get Out!’ and not wait for it to submit a legal brief for his approval.”

As you can see, blindly equivocating risk and volatility can be very misleading. We must look at the herd and decide where we are in regard to the trend. If we are in front of the trend and we are experiencing losses, we need to study to make sure that we are positioned well and anticipate the possibility of losses. If we are with the trend and are late in it, we should tighten the parameters on how much loss we are willing to take. Ironically, our April newsletter, “Losers: Why We Invest With Them”, shows that managers who position themselves in front of the next trend, often lose clients for being perceived as too cautious or, more often, too aggressive. In the long run, these managers have often significantly outperformed the markets. Clients, who wish to avoid a premature and costly departure, will only achieve this by asking questions that do not pertain to current prices.

If you are an average investor, then I strongly encourage you to heed the words of Robert Prechter: “Well, my advice to the average investor is stop being an average investor. You cannot survive as an average investor. The pros will beat the pants off of you, and the markets will too, because what seems logical is exactly what will not happen. That is one of the first keys to understanding how not to lose money in markets. So step one is: stop being the average guy or gal. Get a foundation. And the only way to do that is to start reading.”

The recent declines in dozens of markets the world over are signaling a trend change. Money managers, who have understood and practiced these proposals for decades, have not been surprised by the painful turn of the last several weeks. Give careful attention to the three propositions I have presented in this article. If your managers and investment tools reflect these ideals, then share you ideas with others. If they do not, consider stepping aside until you are more confident about the managers and investment tools you are using.

Link here.


Mutual fund grand master Marty Whitman has a well-deserved rep as an obstinate and cantankerous cuss. For the fidgety Whitman, sitting still in a chair while a subordinate delivers a subpar financial analysis is impossible. Failing to follow Whitman’s value-investing dicta would earn the poor slob a humiliating dressing-down. No one dared to second-guess Marty. Whitman’s ability to out-think anyone has long been a fearsome thing. No one to this day can keep up with his lickety-split ability to read and analyze a company’s 10-K. But Martin J. Whitman has mellowed. At 81 he is cutting back somewhat. He says he will keep working as long as he is physically and mentally able, but he has finally chosen a successor, Curtis Jensen, 43, his co-chief investment officer and manager of one of his funds. The question for investors: Does this unique value manager have in place talented apprentices who can carry on after him?

The answer, from David Barse, 44, chief executive of Whitman’s Third Avenue Management, is yes. Barse says Whitman today is “comfortable” that his 17 managers and analysts have learned the Whitman Way. Indeed, the boss’s emboldened lieutenants have changed him, moving him into areas he had ignored, did not understand or disdained – into real estate, tech and international stocks. So Whitman has added three funds to be wingmen to his storied Third Avenue Value Fund. All four Whitman funds have beaten the S&P 500 since their inception. Whitman’s flagship and oldest fund, Third Avenue Value, was begun in 1990 when he was 65, and he still manages it. Third Avenue Value has returned 12.2% annualized over the past five years, when the market, with dividends reinvested, was close to dead even. Forbes rates Third Avenue Value Fund a B in both up and down markets.

Jensen’s Third Avenue Small-Cap Value has clocked a near-match 12.1% over that period, and Michael Winer’s Real Estate Value has dazzled with 18.6%, amid a surge in property stocks that finally is cresting. The newest portfolio, International Value, another hot area of late, has been around for four years. With Amit Wadhwaney as manager, it has, at 32.7% annually, done the best of the quartet over three years. The funds are no-load, with below-average costs. Alas, not everyone can take advantage of these offerings. Only the flagship is open to new investors. The rest, beset with a rush of new investments, closed over the past year, although they still can be bought if offered via a 401(k) plan. The Real Estate Fund will reopen July 1.

The Whitman Way means a reverence for deep-value investing in unappreciated names with strong balance sheets and good long-term potential. Whitman treasures a generalist’s approach, which weds him to no one industry. Another hallmark: He likes purchasing bonds in distressed companies with rebound potential. Stocks or bonds, Whitman keeps securities for a long stretch unless they go irretrievably sour. He owns up to losers by taking the hit and getting a capital loss useful at tax time. Winners ride. With low turnover (and the occasional realized loss) comes relatively low capital-gains taxes for Third Avenue investors. The low turnover takes some of the sting out of the fund’s tax bills. Still, with all those embedded gains, the flagship fund rates a poor five on our tax-efficiency scale of one to five. Whitman maintains large wads of cash, 5% to 10% of assets.

Whitman, sure of himself on matters great and small, has a professorial manner on constant display. With little provocation, he will launch into a learned disquisition on finance. For the past 34 years he has been an adjunct business prof at Yale. These days Whitman still presides over weekly staff meetings where portfolios and possible buys and sells are weighed. In the firm’s midtown Manhattan conference room Whitman listens to underlings with his customary restlessness. One young analyst, Ian Lapey, tentatively touts a small oil-and-gas company with good fundamentals. Since $70 oil is not something a value investor can count on, Lapey genuflects to the Whitman philosophy by suggesting that the firm wait to buy until the soaring stock dips. Whitman sits jittering in his chair, his reaction inscrutable. Then he surprises the young man by saying they should start buying the shares. The funds already own even pricier energy stocks, he reasons. Lapey had been even more conservative than his mentor.

Nine years ago, when the firm only had Third Avenue Value, Jensen convinced Whitman that they needed to start a separate small-cap fund since Jensen had done well with small stocks in the past. Jensen detected a special energy in small-scale semiconductor-equipment makers. His picks – with their large cash stashes, solid balance sheets and low price/earnings multiples – were in accord with the Whitman Way. This took some convincing of Whitman, who admits tech is not his strong suit. “At the time Marty didn’t even know what a semiconductor company did,” says Chief Executive Barse. Today tech stocks make up a mere 4% of Third Avenue Value, while Jensen’s Small-Cap Value has 10.5% in tech. Right now Jensen has a robust presence in low-P/E energy stocks. Similarly, Whitman resisted overseas companies, whose accounting he found suspect. Wadhwaney, 52, who ran his own international hedge fund, showed Whitman that good outfits could be found if analysts traveled to them for some on-the-scene sleuthing. He convinced Whitman to buy Japanese insurers in the late 1990s. Now Toyota is Third Avenue Value’s largest holding.

Winer, 50, used to manage distressed real estate in California on behalf of Cantor Fitzgerald. He wanted to launch a Third Avenue real estate portfolio, but Whitman was leery, arguing that running a sector fund was contrary to his generalist approach. Winer countered by analyzing Third Avenue Value’s holdings back from its beginning to show that real estate had long dominated the portfolio – and that a property fund would be a good exception to the Whitman Way rule. “I proved to Marty he’d always been a real estate investor,” says Winer. It is a tribute to how Whitman has evolved that he can admit he “steals shamelessly” from his lieutenants. “I get half my ideas from them,” he says.

Link here.


At the end of another week, we reiterate our simple investment formula for your benefit, dear reader, but this time, with a new twist: Buy gold! Sell Goldman! Goldman Sachs stock slumped again last week even though the company had just announced record profits. Goldman is top dog in the “dog and pony” show. But its latest profit report establishes not only a new record for Goldman, but also a record for the whole breed. Net income doubled to $2.31 billion for the second quarter. Based on results for the first half of the year that makes Goldman the most profitable firm in the history of the financial industry. And yet, its stock fell.

We are keeping an eye on Goldman these days, because we think it will tell us something – about the economy, and something about the times we live in. Every dog has his day. Goldman has had a month of them. We wonder: What kind of world is it that Goldman would be on top of? It is one that rewards money mongers. Previous American economies rewarded people who drilled for oil, built bridges, or made mattresses. This one gives its blessings, its honors, and its profits to people who deal in money itself. Goldman deals in money like a Vegas card dealer. Its shuffling is so smooth and so sure that the White House has invited its top shuffler to Washington, hoping he would bring some of that financial razzamatazz along with him.

Laboring as always to better serve our dear readers, we happened to travel to Germany, where we ran into an old friend who is a professional investor and a heavy user of hedge-fund products. We put our conundrum to him. “Here is a question,” we began. “Trading is supposed to be a zero-sum game, right? Well, how is it possible that a company like Goldman – with thousands of traders – can make 75% of its revenues from trading? You would think their lucky trades would be balanced out by their unlucky trades. They cannot all be lucky. And they cannot all be geniuses. As Buffett says, there are not that many geniuses around. … Who is on the other side of these trades? Where does the money come from? How is it possible for so many traders to have a result that is so far beyond equilibrium … It seems to defy gravity.”

“Yes, it is a curiosity,” said our friend. “You are right about hedge funds. I mean, what you wrote about them. The average person will do no better in hedge funds than in mutual funds. In fact, he will do worse, because of the fee structure. As you noticed, if he gets lucky, the manager will stand right there beside him, with his hand out, when the payoff comes. If he is unlucky, and the fund loses its bets, he will be in line alone. The manager won’t share the losses.

“You are right, too, that there are not 8,000 geniuses running hedge funds. The average return will not be very good. But you are wrong to tell investors to stay away from them. I am invested in several hedge funds. In every case, the manager has figured out some special little sweet spot in the market. Usually, it is some little thing that most people do not know about. For example, one fund I am in is run by a guy who just makes a point of catching the “earnings surprises” before Value Line. Value Line figured out that you can do well by buying companies whose earnings are better than forecast. After the earnings come out, it takes Wall Street a while before it adjusts its view of the company to the higher earnings. But it also takes a while for Value Line to get the news and update its rates. This manager uses the same simple idea. He just moves faster. And he consistently beats the market.

“There are anomalies out there. Good hedge fund managers find them and exploit them. And good investors find the hedge funds that do that and negotiate their own fees to a reasonable level. But the average investor has no idea. He picks up a hedge fund like he buys a bottle of wine – because someone told him it was good. And then, he pays fees that are so high it is almost impossible for him to make any money.”

“But what about Goldman?” we asked.

“Goldman is said to be the largest hedge fund in the world, but in fact, it is, the largest collection of hedge funds in the world. It has hundreds of them. It has a great reputation … and it has its hands in more deep institutional pockets than anyone. So, it has got so much money under management that it makes a fortune, even when its results are not spectacular. And in a sense, it is also the bank. It is not just playing in the casino; it is the casino. Goldman is trading so much money for so many people, it makes money no matter which way the markets go.”

The question for investors is this: Is the casino getting bigger, or is business falling off? Investors answered yesterday. They sold Goldman. For once, we think they were right. And what about our favorite metal? Will we have to live through another long, dark teatime of the soul, when gold falls for 20 years as it did from 1980 to 2000? Or, are we merely enjoying a correction in a major bull market? Gold is now officially below our buying target. We are not too sure where we left the last buying target, but wherever it was, gold is comfortably below it. Buy. If the price drops below $500, buy more. But wait. How do we know that this is not a trap? Why cannot gold just slide back down to $250?

As usual, we can give you no sure answer. We know no more than you do. All we have is faith. And a theory. We have faith in our fellow human beings. Given enough temptation, they will yield to it. That temptation, for a central banker, takes a predictable form. It is the temptation to create “money” out of thin air. In this, the U.S. Federal Reserve has led the way for the last four decades. Tossing off the last vestiges of gold-backing in 1971, it has sprinted toward temptation like a dipsomaniac to a free drink. Vast increases in the world’s supply of money and credit have been registered, while the world’s supply of gold barely increased at all.

You can easily forget to notice … amid all the noise of share prices, Fed policies, economists’ apologia, analyst reports, charts, graphs, and new headlines. The essential truth is hard to hear. You have to hold your hands over your ears and let it whisper to you: all the world’s paper currencies have been inflated. But if paper currencies are to lose value, they must lose value against something. That something, by tradition as well as convenience, is gold. A few weeks ago, we yearned for a substantial correction. Now, we have one. We guessed that the bottom would come between $550 and $650. We gave ourselves plenty of room, but maybe not enough.

In the bull market in gold, so far, the yellow metal has risen along with its base metal cousins. In the bull market still ahead, it will shoot up like a plume of vapor. Investors have been shocked by how much gold can fall at this stage. In the next stage, they may be shocked by how much it can rise.

Link here.


“Trees do not grow to the sky,” say the old-timers. They do not. They grow about as high as they are supposed to grow. Then, they rot and fall down. Just as trees, markets have to do what they are “supposed” to do. When things are out of whack, they have to get back into whack one way or another. When they are far beyond the mean, they must revert back to the mean. If not, there would be no mean to revert to. There would be no “normal”, no usual, no ordinary, no common, no standard, no regular. That is to say, there would be no familiar patterns to life. Everyday would be a surprise.

But there are patterns. When markets reach an extraordinary peak, somehow they have to fall down to an extraordinary valley. But they do not have to do it in a way that suits us. Or even a way we can anticipate. If we could anticipate it, we could take advantage of it. And if we could take advantage of it, we could stop it in its tracks. If the book would be open to everyone, everyone would be trying to sell earlier and earlier than the next person, to avoid the rush … until they had all sold before the big bull market even began. In fact, there would be no bull market. If everyone knew what the future would bring, no one would bother living through it. History would stop.

Fortunately, we live in a world of perpetual darkness, at least insofar as tomorrow is concerned. All we know is that the fundamental patterns of the past will probably repeat themselves. We just do not know how or when. Many gold bulls, for instance, expect an exact replay of the late ‘70s, wherein rising inflation rates led to a soaring price of gold. In this, as in so many things, we are less than sure. We are a gold bull, too, of course, but we have a feeling this bull market in gold may not take the anticipated course. The real danger to the U.S. economy remains deflation, not inflation. Not too much money chasing too few goods and services, but too little money to keep up with the load of debt.

It is not the size of the U.S. debt load that really matters. It is the ability of the debtors to pay it. As debt payments increase, interest rates are rising everywhere. And as they rise, so does the need for cash to make payments. That is why the dollar is not likely to be worthless. Not soon. That is for the next stage … when Bernanke’s back is to the wall. For the present, what we are seeing is the need for more cash, and a demand for dollars to keep the system going. Yes, the dollar is inherently worthless. And yes, it too will eventually do what it is “supposed” to do. It will go away, but nothing happens as simply as you expect.

Link here.

Markets are from Venus. Market commentators are from Mars.

A large headline in the Financial Times proclaims, “Global economy heads towards a soft landing.” How do we know it will land softly? 240 economists have said so. “Economic growth is set to slow this year and next amid rising interest rates, weaker house prices, high commodity and energy prices and fresh geopolitical tensions,” the FT summarizes. “The global liquidity bubble, which propped up global growth for so long, is now being pricked by central banks desperate to stem surging consumer price inflation.”

We watch the markets, too, and even more, the market commentary. Ms. Market, we have found, is like a woman – coy, changeable and contemptuous of our efforts to understand her. Will she be perky and charming today? Or will she be sulky and distant? What is bothering her now? Oh my, my … she seems frisky today, does she not? We will never fathom what moves her. We might as well be a golden retriever trying to decipher the Tokyo train schedules.

But market commentary is another thing altogether. It is more masculine, which is to say it is more logical, more understandable, more reliable, and more thoroughly imbecilic. Just read the papers. You will find analyses there that even a 10-year-old could grasp. Are they correct? No more correct than a man trying to dope out his mistress’s moods. Are they useful? Yes, of course. Mainly because they are almost always wrong. Commentators, it seems, are from Mars. Markets are from Venus. And like Mars and Venus, they move in separate orbits.

We say that, mind you, in earnest admiration. Not of the financial media nor of the pundits, but of the elegant way in which the world is designed to deceive the mass of men. In order for the markets to function as they do, most investors must be wrong most of the time. Otherwise, they would look ahead and thwart the trend. A developing bull market requires that most people distrust it. Otherwise, they would jump in right away and bring the whole thing to a premature conclusion. Likewise, a market peak needs a preponderance of bullish investors at the very moment when bullishness is the most unprofitable sentiment one could have. The financial media, amplifying popular sentiments rather than filtering them, helps investors arrive where they should not be exactly when they most should not be there.

As near as we can tell, the league of extraordinary economists is right so far. They have only to look out the window. The sky is so dark with inflation hawks, it looks like a scene out of The Birds. German producer prices are rising at the fastest rate in 24 years. The European Central Bank is tightening up to fight it. In Japan, the ZIRP – or zero interest rate policy – is set to end “without delay,” says the country’s top central banker. China, meanwhile, has begun taking liquidity out of the market as quickly as its own central bankers can manage. And, in America, a further rate increase next week is said to be a “done deal”, with another one now expected in August.

“By curtailing the rate of growth of liquidity and making it more expensive for companies or individuals to borrow,” the FT continues, “central banks are hitting share prices, bond markets, commodity and precious metal prices as well as the international housing market.” Again, we see nothing to argue with. We have seen what has happened in the financial markets. If houses are not marked to market every day, we suspect we would see a decline there, too. No, it is not the landing we doubt. That is a known and well-reported fact. It is the qualifier “soft” that we wonder about. How do 240 economists know we will have a landing that is soft rather than hard? How do they know what mood Ms. Market will be in tomorrow or the day after? How does a Martian understand what a Venusian is up to?

They do not. They have no more idea than we do. But their unanimity gives us a clue about where the money will be made. With so many people betting on a soft landing, the long odds on a hard one are bound to be attractive.

Link here.


It seems that billionaire and Microsoft cofounder Paul Allen has had enough of the Portland Trail Blazers. His holding company, Vulcan, has effectively put the NBA team up for sale. The owner of the Blazers’ arena has also erected a for-sale sign. Both can be yours for $300 million or so, with the team accounting for 75% of the combined price. That is a mediocre return on Allen’s $70 million purchase price in 1988 – far less, at any rate, than he could have made investing in additional Microsoft shares. What can we all learn from his disappointment?

Stick to a budget: The Blazers spent wildly on players beyond what their small-market revenues could support. Operating losses were $200 million over the past five years, probably setting a record for a sports team. Avoid criminals: The NBA’s most supportive fans (a league record of 814 consecutive sellouts ended in 1995, after 18 years) got tired of seeing the “Jail Blazers” more often on the police blotter than at All-Star games. Don’t give away the store: When Allen gave up ownership rights to the Rose Garden in 2004 he forfeited arena revenue streams from luxury suites and ad signage. A sports franchise cannot survive on ticket revenue and TV contracts alone. Sell at the top: The Blazers were the NBA’s fourth-most-valuable team five years ago. But the $227 million estimated value today is down 20%, ranking the Blazers 29th in the 30-team league.

Link here.


Gauging inflation is a tricky business. Each month economists wade into the alphabet soup of CPI and PCE, trying to discern whether the economy is overheating or simply robust. And as recent economic activity shows signs of slowing as the Federal Reserve Bank considers a third year in a rate-hiking campaign, the exercise has taken on more importance lately. My suggestion is for Wall Street to look southwest to the Dallas Fed’s trimmed-mean personal consumptions expenditures deflator, or trimmed-mean PCE.

Developed a little under a year ago by Jim Dolmas, a Dallas Fed senior economist, the trimmed-mean PCE actually paints a clearer picture of inflationary trends in the economy. First of all, he includes food and energy prices. I have always found economists’ reliance on core inflation – that is, without food and energy prices – counterintuitive. Yes, they can be volatile and would therefore skew the overall inflationary picture. Mr. Dolmas instead sorts PCE data – doctor visits, lawn and garden tools, bakery products – according to how quickly their prices rose or fell and excludes a certain fraction on each end. Rather than just ignoring all food and energy prices, the most volatile price swings each month are excluded, regardless of sector. It is a matter of separating the “signal” from the “noise”, as engineers say.

“There are some food [expenditures] that aren’t noisy and have some signal value,” he said, such as food eaten away from home, which is always in the middle of the pack of prices, he said. On the other hand, “the price of baby clothes is the most volatile. The month-to-month swing is huge, but it gets included in the usual core measures that get produced because it is not food or energy.” The result is a more finely tuned analysis of inflation that gives Wall Street the information it needs – and also rings true to Main Street.

Dallas Fed president Richard W. Fisher is certainly a fan. He talks it up both around the Federal Open Market Committee table and in speeches around the globe. “I find it to be a very useful indicator,” he said. “I personally find it to be a better inflationary device.” He said recently that the trimmed-mean PCE of 2.4% is showing “unacceptable” price pressures. Other economists are not seeing the red flag. Julie K. Smith, a Lafayette College assistant professor who has also done much research on inflation indicators, said the data tells her the Fed should take a break. “I would hold the rate constant,” she said. “We need to let the rate hikes take effect on the economy.” Whether the Fed hikes rates or stands down, the trimmed-mean PCE is likely to be part of the discussion. And it will build up its track record at a time when inflationary pressures are even more high-profile than usual.

Link here.


You already know that too many people owe too much. Everyone knows it. My question is, How many people understand why? Easy credit is as American as blue jeans. Everyone wears it almost anyplace. But why? Man-on-the-street answers would likely run the gamut – credit cards, clever advertising, greed, status, lifestyle choices, impulse purchases, existential philosophy, hedonism, atheism, and, if all else fails, Wal-Mart. There is something to all of those (most, anyway), but let’s be serious. There are countless secondary causes of record debt, but one primary reason: Record debt requires record optimism.

Yes, it is that simple – insofar as you cannot truly understand the issue apart from its primary cause. Creditors are optimistic about getting paid back, and debtors are optimistic about making those payments. This is more than stating the obvious – remember, we are talking about RECORD levels of debt. It is not about the numbers. It is about the psychology behind those numbers, and where the psychological trend goes from here.

Link here.


I recently called Jack McCabe of McCabe Research & Consulting for an update on Florida housing. McCabe told me he is now bracing for a “litigation nightmare” over the next several years in the wake of the housing bust. Following are some of the items we discussed.

  1. Buyers suing developers for nonperformance.
  2. Developers suing speculators for flipping properties in violation of contracts.
  3. Subcontractors suing developers for nonpayment.
  4. Subcontractors suing general contractors for non-payment.
  5. Class action lawsuits against single-family homebuilders and condo developers for faulty roofing, HVAC, electrical, and plumbing systems.
  6. Lawsuits against inspectors for not catching code violations.
  7. Condo boards and individual homeowners suing developers for shoddy work.
  8. Lawsuits against appraisers for inflated values.
  9. Lawsuits against banks when project fundings are halted.
  10. Lawsuits over completed condo units being substantially different in size, interior finishings, and quality from how they were represented pre-construction.
  11. Lawsuits by anyone and everyone against anyone and everyone over various fraud allegations.
  12. Of course, we cannot forget countersuits by anyone and everyone against anyone and everyone over anything and everything.

I think those 12 points pretty much sum it all up. McCabe is telling me that speculators have totally vanished from the market, which, of course, means there has been an enormous shift in the supply-versus-demand ratio. To make matters worse, there are “approximately 25,000 condo units currently under construction in Miami-Dade County alone. Another 25,000 condo units have received building permits, and about 50,000 more units have been announced.” Financing has now dried up, but those 25,000 units under construction will likely be completed along with 75-80% of the units with valid building permits. The vast majority of unapproved but announced projects will be canceled. Even so, “the completion of 75,000 units or so could make for a 5-10 year supply of condos at normal sales rates, and sales rates are far below normal.”

In addition, McCabe is expecting to see a “sharp increase” in prosecutions for mortgage and real estate fraud as well. Indeed, bubbles have a way of exposing all kinds of fraud that people happily ignored as long as prices were rising. When the party ends, the lawsuits begin (and you can quote me on that one). We saw the same thing when the dot-com bubble burst. We will see it again over housing. “What is happening in Florida, can and will happen in other markets, such as Washington, D.C., Las Vegas, San Diego, Phoenix, and many other bubble markets with rising inventory,” said McCabe. I am sure of that, and I am sure McCabe is correct about the “litigation nightmare” as well.

In another nightmare of sorts, The Associated Press is reporting, “Foreclosures May Jump as ARMs Reset”. As more hybrid adjustable-rate mortgages adjust upward and housing prices dip, many Americans cannot refinance out of this squeeze. They are finding themselves trapped in too high monthly payments, and some face foreclosures. Notice that the ARM time bomb is just now going off. The explosion will be over three times as big in 2007, with over $1 trillion in loans resetting to much higher rates. Yet merrily we roll along with more and more rate hikes. With traffic crashing, inventories soaring, holding costs jumping, Bernanke hiking, rates resetting, and an economy slowing, it is very unlikely that stubborn sellers can hold on for their price much longer.

Link here.


Many of the best things in life are achieved simply by not doing anything. Queen Elizabeth II, has ruled with charm, wit, and integrity largely by refusing to get involved in the arguments and follies that have brought so many of her family and her ministers to ruin. She has outdone them all by remaining aloof, doing her duty, and conducting herself with such a dignified restraint you would hardly know she was part of the government.

“Lethargy just shy of laziness,” says Warren Buffett, describing his investment style. He is willing to wait … and wait … and wait … until he finds something he likes. This is not baseball, he says. You do not have to swing at every good pitch. Instead, you can wait for the perfect pitch. The queen waits. Once, she went unannounced into a clothing shop to have a look around. A fellow shopper turned to her and remarked, “You look just like the Queen.”

“How convenient,” Her Majesty replied.

Investors rarely show that kind of calm. They cannot seem to wait. It is as if their money were contaminated with leprosy, so eager are they to get it out of their pockets and into someone else’s. And they are not entirely wrong. Money these days – in the form of dollars – has a lethal disease, like leprosy. Day by day, parts fall off, and little by little, it dies away. There is the rub. You hold your money in short-term Treasuries. You make no mistake. You do nothing, and still the dollar can sink 20%, 30%, or more. You thought you were 100% insured against loss, but you had not counted on the money itself wasting away. The dollar, it is a faith-based currency. It floats on a sea of faith. When faith goes down, so does your wealth.

But what can you do about it? If you put your money into gold you still have a problem. As we have seen in recently, the price of gold can drop, too – by more than 20% in only three weeks. Doing nothing is not easy. The ancient Chinese knew this when they spoke of wu wei, or the path of non-action. It was not really inaction that they were describing, but a kind of flow … spontaneous with no striving, no hard edges. “The Tao abides in non-action, Yet nothing is left undone,” wrote Lao Tzu.

And in much the same way, the secret to investment success is not simply doing nothing at all, because you are always doing something with your money, even when you are trying your hardest not to. But the secret is you do not have to do much, because unless you are doing a lot of investment research, unless you are very lucky, or unless you have inside information, you are not likely to be able to find the one stock that goes up while the others go down. Nor are you likely to buy commodities when they are at a 3-month low and sell them when they are at a 3-month high. There are a few traders who can do that. Maybe. But for most people getting in and out of an investment with good timing is a matter of luck. And few people are lucky enough to do it very often.

That is why most people are probably better off believing “you cannot time the markets.” It is like believing that you cannot get away with cheating on your wife. It is not necessarily true, but you are probably better off thinking it is.

Link here.


Most investors like to talk about the stocks they are buying. Carlo Cannell likes to talk about the stocks he is not buying. Cannell is a very successful hedge fund manager, whose main fund, Tonga Partners, has earned 25% annually since 1992. Unlike most hedge fund managers, Cannell is not just an outstanding stock-picker, he is also an accomplished short-seller. In other words, he is very good at identifying the stocks that investors should NOT buy. He explored this exact theme at last month’s Value Investing Congress in Los Angeles.

Cannell, an easygoing, West Coast kind of guy, stood up there in his khakis and casual shirt and talked about short selling – a way to make money when stocks go down. He started his presentation by showing how various market indexes have gone up a whole lot over time. And he used a short selling index devised by CSFB/Tremont that shows how shorts have lost money since 1994 (the earliest data available for this index). Basically, he was recognizing one of the key arguments against short selling: Don’t fight the tape. But here is where it gets interesting. Cannell then chose several industries that have not made money for investors, on average, for years. These are the opportunities you want to short, if you are a short seller. If you are a typical long-side investor, you should tread very carefully here. The charts tell the story quite well.

Airlines stocks have been horrible investments. Since 1983, investors have basically lost money. There are 14 companies in this index, and the compound annual growth rate (CAGR) is about minus 6.5% annually. By the way, all these charts say “average number of constituents” because some companies go to zero. The index drops these names. So these charts are making things look better than they actually were for most investors. These losses – incredibly – do not include the big zeros. Computer hardware manufacturers are another graveyard of investment returns. 68 names make up this index. Again, the results are horrible. Semiconductor equipment manufacturers and restaurants are also industries have cost investors money for over 20 years running. These businesses represent areas that have been very tough places to make money since 1983, a stretch of time that covers one of the best bull markets in stocks in history. If a business cannot generate a positive return for investors over that stretch, when will it?

After Cannell concluded his presentation, Mike Sellers, of Sellers Capital, took the podium to deliver an entirely different message: Buy the Blue Chips, based it upon the fact that Blue Chip stocks are downright cheap at this very moment. Many of these stocks are in top-quality, “wide-moat” businesses. (A wide-moat business is one that possesses a unique, well-fortified competitive advantage.) And they are seldom cheap. Today, however, many of these kinds of companies linger near their 52-week lows. Sellers thinks they are good bets. He provided the chart “Wide-Moat Stocks Within 5% of 52-Week Low”. A cursory review of this list reveals some quality businesses – Johnson & Johnson, Dell, Wrigley, Intel and others. At a price, you would love to own these great American brand names. Sellers’ favorite was Dell Computer. The draw-bridge to blue chip value is down … for the moment.

Link here.


Two Princeton University psychologists, Adam Alter and Danny Oppenheimer, have shown that a stock’s performance might be linked to – of all things - its name. This psychologist team did a study of initial public offerings on two major American stock exchanges. Their results show that people are more likely to purchase newly offered stocks that have easily pronounced names. This effect also applied to how easy it was to remember a stock’s symbol. “This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational,” said Oppenheimer. “These findings contribute to the notion that psychology has a great deal to contribute to economic theory.”

“Don’t laugh,” says trader and market expert Charles E. Kirk. “I’ve made plenty of money through this stupid strategy!”

Link here.


The setting: a private gathering that included several leading lights on Wall Street and the heads of some of America’s biggest companies. The topics of conversation? The extraordinary power of hedge funds, and the unnerving liquidity of the markets. But most of the talk – the most animated part – was about CEO pay. “Executive compensation was out of control to start with, and now it’s way out of control,” one boss admitted. “The problem is, we’re living in a world where .220 hitters make $10 million, so look at what you have to pay when you finally find a .300 hitter,” said another. “It’s not an excuse to say, ‘Hey, the board gave it to me.’ CEOs should be responsible too. That’s leadership!” said a third.

There were modest proposals, and there was high anxiety – “My worry is that the more Americans perceive unfairness, the greater the risk government is going to impose a one-size-fits-all solution.” Then the most senior figure in the room summed it up. “We’re not living in a world,” he concluded, “where we can afford a lot of unnecessary ill will either between nations or within nations. That’s why dealing with CEO pay and bad accounting is so important.” They hear you, America, loud and clear.

CEOs are concerned about the uproar over excessive executive compensation – backdating stock options to boost some bosses’ pay, golden parachutes for world-class nonperformance, retirement packages that defy economic logic. In fact, the outrage has grown so intense that the country’s top CEOs are now vigorously debating the problem in private. What are they saying publicly? That is a different story. When Fortune set out to find leaders prepared to talk for the record, only a handful of the nearly two dozen prominent executives we contacted would do so.

We agree that most CEOs work very hard at extremely demanding jobs and deserve to be paid well. The best deserve to be paid really, really well. We agree, as Pfizer CEO Hank McKinnell says, that “Nobody has any idea what the right level should be.” The last thing we need is for government or a concerned collective of citizens to make that decision rather than boards of directors. That said, put us squarely in the camp that has no doubt that the system by which McKinnell, Home Depot CEO Bob Nardelli, and their fellow CEOs collect enormous pay packages remains deeply dysfunctional and overly generous, despite extensive recent reform efforts. Too many incentives are wrong – most do less than they should to align managers with the interests of long-term owners by setting high hurdles and insisting execs keep skin in the game. Too many companies continue to pay the top brass a king’s ransom merely for doing decently – or for seriously screwing up.

How bad are things? “About half of American industry has grossly unfair compensation systems where the top executives are paid too much,” says Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway. Florida governor Jeb Bush – a pro-market conservative – is even more blunt. Out-of-control compensation, he believes, is “a threat to capitalism. … Large rewards for great results can still be attacked, but they’re very defensible. But if the rewards for CEOs and their teams become extraordinarily high with no link to performance – and shareholders are left holding the bag – then it undermines people”s confidence in capitalism itself.” The governor, whose $120 billion Florida pension fund is the 5th-largest in the country, is hardly the only appalled “owner”. Some 90% of institutional investors think top execs are “dramatically” overpaid, according to a Watson Wyatt survey last fall. In fact, ill will over excessive compensation is fast turning into a giant political problem for corporate America.

One highlight of the hearings that Congressman Barney Frank (D-Massachusetts) held on this issue in late May came when compensation consultant Fred Cook stepped forward to defend his clients at the Business Roundtable – not to mention justify his industry’s handiwork. The standard methodology for calculating the pay gap is deeply flawed, Cook argued. Use medians, not averages, compare executive pay with all workers’ (white-collar as well as blue-collar), and most important, ignore actual realized annual gains from options grants and instead substitute Black-Scholes valuations. All are reasonable points. But what is the bottom line of this festival of prestidigitation? The median CEO-to-worker pay ratio in 2004, announced Cook, falls from a commonly cited figure of more than 400 to 1 to … a mere 187 to 1! Guys, trust us. This is not a road you want to go down.

What connects popular anger against CEOs as the new robber barons to more technical arguments over how best to yoke pay to performance? This simple truth: Despite its great strengths, this country is up against huge challenges. Unlike the lucky crowd at the top of the income scale – hedge fund managers, media superstars, lawyers, strategy consultants, rock stars, sports heroes, and, yes, CEOs – a majority of Americans have not been reaping the rewards of globalization. Even as benefits shrivel, real median wages have stagnated since 2000, while real median family incomes have fallen four years running. When all income levels prosper, as they did in the mid- to late 1990s, few mind if the rich get richer. When the vast middle falls behind, suddenly you get today’s ugly politics: hysterical attacks on illegal immigrants at the low end, and at the high end, mounting assaults on greedy executives and feckless boards. What is at stake, in short, is nothing less than the public trust essential to a thriving free-market economy.

As Charlie Munger puts it, “The CEO has an absolute duty to be an exemplar for the civilization.” But the real action has to come at an even higher level: the board. Warren Buffett has long believed, as he told Fortune, that “the only cure for better corporate governance is if the small number of very large institutional investors start acting like true owners and pressure managers and boards to do the same.” While the CEO runs the company day to day, directors hire, supervise and, if needed, fire the CEO. In theory. In practice, for most of the postwar era, the CEO ran the show. Directors were little more than boardroom decoration – “like the parsley on fish,” as an ex-CEO of U.S. Steel described them. In the wake of the post – Enron/WorldCom reforms, power has been shifting back to boards – but perhaps not fast enough. In a true Pogo moment (“We have met the enemy and he is us.”), 75% of outside directors agreed in a PricewaterhouseCoopers poll last fall that “U.S. company boards are having trouble controlling the size of CEO compensation.”

The truth is that fixing this mess will be plenty hard. Many of the worst aspects of today’s executive pay – insufficiently high incentive hurdles, “golden hellos” that ensure constant streams of stock far into the future, obscene severance deals – all get baked into employment contracts long before CEOs and boards really get to know each other. By the time they fall out of love, it is too late. And it is not valid to insist, as some critics do, that market forces play no role in this process. Bob Nardelli got such a sweet deal at Home Depot in part because he was among the hottest would-be leaders in the land six years ago. “[Y]ou’d never hire somebody in the first place if you thought they were going to fail. The key is to strike a fair and reasonable balance at the outset,” says investment fund superstar Eddie Lampert, who now owns Sears and Kmart. In those negotiations, Lampert notes, “there’s no substitute for having board members act and think like owners – and ideally be owners.”

Speaking of thought exercises, here is one more. “Can you recall a single instance where a CEO has walked because the board refused to pay him enough?” asks a money manager with $3 billion in long-term assets. No, we cannot. (But if we have missed one, volunteers are standing by to take your calls.) In real markets, some negotiations just do not work out. When that starts happening, then you will know we really are getting somewhere on CEO pay.

Link here.


You have heard of a false dichotomy – when someone gives you an either/or choice, but you know you have more than those two choices available to you. In the world of the economy, one of the choices we have been given lately is more like a false monochotomy – only one choice being given, as in, Is the economy facing inflation or inflation? Where is the discussion of deflation? It seems to be missing from most publications, particularly since a survey of five major daily newspapers in the month of May showed 165 references to inflation and zero mentions of deflation.

A prominent deflationist throws in the towel. Another looks for “good deflation”. Bears on commodities expect the economy and stock market to boom. Bears on the stock market and the economy expect gold and silver to soar. A flood of articles insists that the stock market is being “spooked by inflation” even as silver crashes 30%, gold 20% and copper 25%. The Fed agrees and vows to “fight inflation” with higher interest rates. Economists are looking at lagging indicators such as gasoline prices and warning of more inflation to come. But rising commodity prices are typically the result of past inflation, not gauges of future inflation. The question is what the major event will be, and as far as I can tell Elliott Wave International is the only firm that houses analysts warning of an inevitable, full-scale, economically devastating deflation.

You can bet that when it is in full swing, dozens or hundreds of commentators will claim that they warned of deflation, and our voice will be lost in the clamor. But unless we have missed some important names somewhere, it appears that we were the only ones still making this case – strenuously – right through last month’s top in the speculative complex and since. In fact, at the peak of the frenzy in April and May we were issuing sell signals on metals and the stock market. These were not our first, we readily confess, but neither are we capitulating to the force of the crowd. The opposite is true. The further the credit balloon inflates, the surer we are that it will pop.

For a long time there have been signs of an impending deflation. Now there are signs that deflation has arrived. Japan is leading the way. Its monetary base has fallen dramatically since the beginning of the year (15% in the past two months according to USA Today). Stock markets around the world have suddenly fallen 10 to 50%. Commodities that were soaring have reversed violently. Real estate is now in a “buyers’ market” … when there are buyers. The investment binges of the past three years are not the story. They are the precursor to the story. The big story is in the subtitle to Conquer the CrashHow To Survive and Prosper in the Coming Deflationary Depression. The biggest event that the history books will record is not the jumps in investment markets from 2003 to 2006 but the across-the-board collapse that is about to follow.

In 2004, Pete Kendall and I wrote an article for Barron’s in which we argued that all investment markets had begun moving together, not contra-cyclically as they had in the past. We theorized that late in the credit and economic cycle, liquidity is the motor of all investment markets. We showed a graph of the major markets, including stocks, junk bonds and precious metals, and called them “all the same market”. Of course, two years ago people thought that our claim was crazy because markets would have to be crazy to move all together. But markets are crazy, and predicting such events requires understanding that markets are impulsive and patterned, not rational, and that they go through similar expressions of the same cycle of psychology over and over. The extent and duration vary, but the essence is always the same.

The flip side of markets going up together is that when the reversal comes they all go down together. We have been predicting this event for way too long, but it finally seems to be upon us. The wild speculation supported by the expanding, inverted pyramid of credit is exhausted.

Link here.

Inflation, deflation, or bust!

Finally came the news we already knew: the Fed raised rates an 18th time – to 5.25%. Inflation will be tamed! Deflation, be damned! Concerning the U.S. economy, and by implication the entire world, there are two major currents of thought. There are, on the one hand, those who believe in the perfection of man and those who do not. The first group thinks the science of central banking has made amazing strides. In the 1980s, the Volcker Fed learned that it could tame inflation. Then, 20 years later, the Greenspan Fed found that it could avoid deflation, too.

Central bankers now have at their command whole armies of statisticians, number crunchers, and economists. When their forward listening posts hear the sounds of oncoming inflation, for example, the feds set the range on their heavy artillery and begin firing away. On the other hand, if it is deflation on the march they know what to do – blow up the dikes! Open the sluices and floodgates! Flood the paddies and lowlands with liquidity!

In the view of the first group, the Fed has finally got the hang of it, and the latest GDP figure, 5.6% growth in the first quarter, proves it. The experts have become so good at fighting both inflation and deflation that neither poses any further real danger. The U.S. economy is impregnable, a citadel of growth that will continue expanding forever and ever, amen. Nay, say the naysayers; it does not work that way. The influences to which a central banker is subject is not one easily brushed aside. What can a man do but bend a little when the president of the United States of America leans on him? And when his cronies and future employers on Wall Street come into the bar and ask for more liquidity, can he really say no? And there are the voters themselves. Faced with rising interest rates, falling house values and $2.7 trillion worth of adjustable rate mortgages that will be reset in the next 24 months, it is no wonder they want lower rates. Under these conditions, consumer price inflation should increase steadily, and the price of gold should climb.

Today’s little reflection suggests that both groups – optimists and pessimists – are wrong. While the Fed engages in mock battle with inflation, its real enemy takes the field hardly noticed. Here is where we part company with economists, kibitzers, and commentators on both sides of the argument. The naysayers argue that the Fed’s inability to fight inflation guarantees a higher gold price. That may be, but it is not the fight against inflation that is likely to be lost first. When push comes to shove, the Fed will fall over. Just as it is unable to fight inflation, it is unable to fight deflation, too. It has spiked its own guns. Welcome to cruel irony. Welcome to sweet revenge. Welcome to Tokyo!

The risk of consumer price inflation is more consumer price inflation. People see the value of their currency dropping and rush to get rid of it. Prices rise even more. The the most spectacular case in modern history was in Weimar Germany. But it is not consumer price inflation that the U.S. economy most has to fear, it is inflation in a more agreeable form: asset price inflation. Houses, in particular, have gone up. And the risk from this kind of inflation is different. It is less inflation – or deflation. House prices have already begun to go down. Meanwhile, high energy costs are draining cash away from American consumers. The demand for dollars is increasing, even as their intrinsic value goes down. But Bernanke still believes he is fighting the first kind of inflation, not the second. He trains his cannon on consumer price inflation, and makes noise. Kapow! Kaboom!

But out on the vast plain of Middle America, the flowers begin to wilt. Where will the money come from to pay the mortgage? How will the tank be filled? And by the time Ben Bernanke has his helicopters gassed up and loaded with 20’s, it may be too late. The nation may already be in deflation’s grip – like Japan in the ‘90s or America in the ‘30s – with declining property prices squeezing the juice out of consumer spending. If prices for houses fall, who will borrow to buy another one? How can the feds push their debt when the nation finally goes on the wagon? Why will people spend now, when they can get a better deal next month?

A pullback by American consumers, caused by declining house prices, would put the whole world into the dryer. Liquidity would disappear. Even the hint of declining liquidity, given out a few weeks ago by central bankers themselves, caused cracked lips and parched throats. Commodities fell 20% or more. Gold lost $100. Emerging markets shook and quavered. Imagine what a real deflation would do!

When the debt-soaked U.S. householder dries out, the whole world goes into a slump. Chinese factories would go quiet. The demand for raw materials would collapse. Unemployment would increase. Wage progress, feeble as it is, would go negative. Even the debt pushers would have to look for other work. Refinancings could turn brown and curl up like an old leaf. Defaults and bankruptcies would soar. Gold, the ultimate safe haven, may be the only thing to go up. As for the dollar, it might fall in the currency markets, but still be in demand at home. Instead of finding themselves with too many dollars, Americans would find they had not enough.

Link here (scroll down to piece by Bill Bonner).

Gold is sniffing deflation.

Is Gold Schizophrenic? Based on the action since May 2005 I think the answer is definitely a resounding yes! We saw Gold rise higher than forecasted to $725. The excitement was electrifying! Then we saw Gold become a manic depressant and Dive to $540 in the twinkle of an eye. The fact is, this is normal action for Gold. Gold is without doubt an unstable schizo!

To be honest, I have been a little concerned with Gold’s schizoid nature. You see if we are accumulating gold and gold stocks as a hedge against financial chaos then we should not be overjoyed to see gold rally with the market. In fact, the latest move in gold was accompanied by almost no fear. Zip, nadda. Now I am well aware of the liquidity theory. Rivers of money causing all assets classes to float up in price. I am happy to explain away the latest move in gold to a rise in liquidity. But it is the absence of fear that worries me. It is fear that is really needed to blast gold Stocks into Orbit. I am certainly NOT looking forward to that day. But I feel it is inevitable.

Talking about fear, I was curious to see whether the move in gold alongside other commodities was not actually a red herring. Is something else going on behind the scenes to raise the blood pressure of the market? The HUI Gold Bugs index had formed a 2-year base before breaking out in December 2005. Interestingly, the breakout coincided with a bottom in the Japanese Yen. My first instinct is that a rising Yen kills the Yen carry trade draining away liquidity. But would a reduction in liquidity not be a signal of a slowdown in monetary growth, which would be bad for gold? Hmmm. The next thing is that the VIX S&P stock options volatility index broke out of from a near 2 year triangle formation in May. The easy explanation for this breakout is that the stock market is tumbling and fear is rising. But the VIX breakout coincided with a spike in the Yen. Is the Yen carry trade reversing?

Furthermore, a breakdown in the Yen carry trade is causing long term yields to rise faster than short term yields. The reason? Yen Carry trade players were long bonds in order to capture yield. Now they are liquidating bonds causing yields to rise faster than the Fed is raising short term rates. The result is a steepening yield curve since the beginning of 2006. A rising (steepening) yield curve should cause liquidity to flow back into the market because monetary conditions are easier. So why isn’t this inflow offsetting the Yen carry trade outflow?

Finally, we can now answer our original question. Have gold stocks been rising with the rising tide of liquidity or has there been another more sinister factor? Believe it or not, the rise in gold stocks is signaling that there is not enough monetary INFLATION. In other words the unwinding of the Yen carry is sucking too much liquidity out of the system and the Fed is not providing enough easy money to compensate. So yes, gold stocks have been rising because of FEAR. The fear of deflation!!! The Fed is not helping either. By continuing to raise rates they are causing the yield curve to flatten even more and choking off all liquidity.

Here is the kicker, if the Fed started dropping rates they may cause the dollar to drop and the Yen to strengthen even more – unwinding the Yen carry further. Putting rates on hold and asking the Bank of Japan to engineer a weaker Yen will only slow the process, not stop it. At some point asset prices will need to correct! Unfortunately, there is one alternative I think the U.S. will take to engineer inflation – a bigger war. Not as far fetched as it sounds. Gold now has a tailwind of fear gathering behind it.

Link here.


While some investors view precious metals as a short-term cyclical speculation, there are actually three important reasons for including precious metals in every investment portfolio: strategic asset allocation, hedging and tactical asset allocation.

Strategic asset allocation is a method used to fully diversify investment portfolios by properly balancing asset classes of different correlations in order to maximize returns and minimize risk. While many investors believe their portfolios are diversified, they typically contain only stocks, bonds and cash. Real estate, commodities, precious metals and collectibles rarely form part of most investors’ portfolios. Such portfolios are clearly not adequately diversified. A recent study carried out by Ibbotson Associates, “Portfolio Diversification with Gold, Silver and Platinum”, noted that, since 1969, stock and bond correlations have increased and, contrary to popular belief, a mix of these will not result in a diversified portfolio.

The Ibbotson study, which examined the years 1972 to 2004, showed precious metals are the most (and only) negatively correlated asset to all other asset classes. The overall performance of precious metals during the 32-year period was close to fixed income investments. Even through the long bear market of 1980 to 2002, precious metals outperformed both cash and inflation during the entire period. From 1973 to 1984, a high inflation period, precious metals were the top-performing asset class, and the study concluded that precious metals provide an effective hedge against inflation. The study concluded that by allocating from 7 to 15% of a portfolio to precious metals, returns would increase while risk decreased. These conclusions were not based on assumptions of a continuation of the returns and levels of inflation that have been prevalent recently.

Hedging is a strategy used to offset investment risk. The old Wall Street saying, “Put 10% of your money in gold and hope it does not work,” succinctly summarizes the hedging attributes of precious metals. And in today’s economic climate, there are plenty of risks to hedge against: currency exchange declines, loss of purchasing power and “Fat Tail” events – sudden, unexpected financial crises such as war, terrorism, health pandemics and systemic financial risks such as a derivatives accident, bankruptcy of a major bank or a major corporation, defaults on bonds, derivatives contracts, insurance contracts and disruption of oil supply. When any of these occur, traditional financial assets often suffer while the price of precious metals tends to rise dramatically. While most investors regard insuring their homes an absolute necessity, their investment portfolios are often completely exposed and, in effect, uninsured – lacking any precious metals allocation.

Although using strategic allocation or a hedging strategy is enough to justify a 7% to 15% allocation to bullion, tactical strategy justifies much higher allocations. Broadly speaking, tactical asset allocation means actively seeking out strategies that will enhance portfolio performance by shifting the asset mix in a portfolio in response to the changing patterns of return and risk. With rising oil prices and increasing inflation, precious metals are likely to outperform traditional financial assets in the years ahead. There are several reasons why precious metals are a good tactical asset strategy today.

Hedging and tactical allocation to precious metals can only be achieved through investment in bullion itself, and not from mining company stocks. While stocks can be good trading opportunities during bull markets, they have a completely different risk/reward relationship than bullion. During the stock market crash of 1987, for example, mining stocks declined by a greater amount than equities in general, while the price of gold increased. Mining companies are exposed to many operational risks and can decline to zero. Bullion cannot. During a currency crisis, bullion outperforms mining stocks because global investors as a whole will seek to hold bullion rather than invest in paper. While mining stocks are popular in North America, people in South-East Asia, South America, Europe and other parts of the world that have already experienced a currency crisis would rather have gold, silver and platinum bullion than anything else.

One of the most important things to consider when investing in bullion is whether it is fully allocated, segregated and insured. Unless this is the case, there may be multiple claims against the bullion, or it may not even exist. Many precious metals investments are nothing more than promises to deliver bullion at some future date. Bullion investments must precisely track the price of bullion, and not be influenced by the equity markets. If the form of investment is dependent on a counter-party and the counter-party defaults, all the benefits of holding precious metals could be lost at precisely the time when they are needed the most.

In summary, a portfolio allocation of 7 to 15% in precious metals is justified simply from the strategic and hedging points of view. If you take into account current vulnerabilities in the global financial system and the implications of peak oil, a much higher allocation is appropriate. The Dow/Gold ratio is an accurate indicator of the trend toward precious metals, and clearly confirms the need to be overweight in that sector at this time.

Link here.

Silver and Gold Cornucopia

Although it is still several months until Thanksgiving, all of us can pause and be grateful for this wonderful opportunity to once again buy silver and gold at prices that are incredibly low. It was only weeks ago that many of our more bullish brothers thought we would never again see a buying opportunity like this. Now we hold that opportunity in our hands, and it is each investor’s decision about what to do with it. For this Optimist, the decision is easy. Almost all of my available capital is now invested in silver and gold on a fully paid basis. Since my positions have no leverage and no possibility of margin calls, I can simply sail through short term turbulence that would be caused by additional market price dips, and patiently wait for irresistible profit taking opportunities on a portion of my positions at much higher prices ahead. Who could have guessed it? The century old market adages of “buy low, sell high” and “the trend is your friend” really are good and worry free ways to prosper.

Some pessimists are concerned about the possibility of a deflationary debt collapse. If the U.S. dollar increases substantially in purchasing power, that would be very bad for investments in silver and gold. The good news viewpoint from the Optimist, however, is that the Fed can (and will) print enough fiat paper to prevent the dollar from gaining purchasing power so there will be no deflation. Fortunately for investments in silver and gold, this time it really is different. Even as persistently rising inflation drags nominal rates higher, silver and gold will continue to prosper because real interest rates will remain steadily bullish for precious metals.

Link here.


This paper looks at some kind of estimate of the economic losses/damages the world would incur if the USD went to zero next week. The conclusion is that it is inconceivable that any world central bank would ever even think of allowing a total USD collapse because of the financial and economic Armageddon that would follow for every nation in the world regardless of how much they like or hate the U.S. and the USD.

Since World War 2, the USD has become the de facto world reserve currency. Right after WW2, the U.S. had accumulated well over half the total world gold because of WW1 and WW2 arms sales to allies much of which were paid for in gold initially. After WW2, the world economies were destroyed and the USD was allowed to become the de facto world currency because we had accumulated so much gold. The other nations decided in the Breton Woods agreement to fix their currencies based on a “gold dollar”. Until 1970, this was a de facto gold currency until Richard Nixon closed the gold convertibility of the USD. The effect was, and is, that most of the world’s wealth today is inextricably tied to the USD. At that time, the penetration of the USD worldwide was so vast that the world economy continued to base all prices of commodities, and prices, on the USD. Basically, even though the US had taken the USD completely off the gold standard, the financial mass and utility of the USD in the world economy was so powerful that the USD remained the de facto world reserve currency. This means that world central banks will not willingly permit its uncontrolled collapse. But an unforeseen or accidental financial meltdown could destroy the USD anyway.

A U.S. treasury official in the 1970’s talked to a world central banker about the banker’s complaints that the U.S. had a free ride, and was taking advantage of the de facto USD world currency standard. The Treasury official’s response? “Hey, it’s our dollar, but it’s your problem!” Wow. No doubt the world is reliving that conversation at this time. China, Japan, Russia, the Middle East oil kingdoms, Korea, Taiwan, and all the other major industrial powers of the world today are locked in a no-win situation of having to take USD’s for all their goods, and having to allow the U.S. to run ruinous fiscal and trade deficits.

So what would happen if the USD system collapsed? Would every industrial process, banking transaction, retirement fund, manufacturing process stop dead for a time? Would that mean that the world economies would have to endure a major depression and financial collapse because the oil in the world financial machine (the USD) ran dry? Would there not be massive shortages, as just in time manufacturing for everything under the sun stopped cold because the USD financial payments for everything from commodities inputs to worker paychecks, to truck drivers, to fuel payments for trucks became worthless? Would the world have to find out how to clear the entire mass of USD transactions that encodes every thing that is made, paid, invested – every second everywhere. Consider the fact that just in time manufacturing means that the entire supply of every thing has about 3 days inventory, and if factories have trouble making payments to suppliers for example, the factories have to stop, and 3 days later, there just are not any more critical “XXX” (fill in the blank).

Imagine every USD denominated bank account becoming worthless. Imagine trillions of dollars of retirement funds becoming worthless. Imagine China losing 2/3 of its trillion dollar foreign reserves – and Japan, and Russia, and Taiwan, and Korea. I have tried to guesstimate the total amount of USD denominated wealth in the world, i.e., the total amount of everything that has become irreversibly tied to a USD since Breton Woods. I get a grand total $2200 trillion of USD denominated and irreversibly connected world assets and money. If the number makes your eyes glaze over, imagine what it is doing to the world central bankers! “The USD is our currency but it is your problem” indeed.

Let us put this whole thing into perspective: If the USD collapsed to zero tomorrow, the entire world economy would stop cold, and the total loss to world wealth would be something like $2200 trillion over a period of 10 years. I think this is a low estimate actually. This may all sound preposterous – the idea that so much world wealth would disappear if the USD were to go to zero like that. However, there is an event we can look at that has comparable type factors in my calculations, not due to a currency collapse but in terms of the economic losses incurred: the Great Depression of the 1930’s. In that depression, the U.S. and most financial markets lost about 90% of their entire market capitalization. They lost about 10 years of GDP, in the case of the U.S. alone the lost GDP was about 30%. Many other trading nations with us in that time lost more than 50% of their yearly GDP because so much economic activity stopped. Hundreds of millions of people world wide literally starved for 10 years, and also did I mention that WW2 cost the world about 100 million casualties, and that war had lots of its causes directly related to the Great Depression and the social and international stress it created?

Then calculate the hundreds of trillions of USD losses of capital, plants, and destroyed cities from that war, and we have a definite analog to the kind of scenario I just played out in my estimate of the economic damages and losses that would come from a USD collapse. In short, literal and real world financial Armageddon. The U.S. would not be the only loser. Losses of such magnitudes happened less than 80 years ago, so do not think this is so way out there.

People think that world central banks would be the ones to sell/kill off the USD, i.e., that is the only way it can be wiped out. The scary reality is that they may not be able to stop it from happening if they wanted to stop it. The fact is, a financial accident of market dominoes could easily cause a panic rush out of the USD. In the great depression, there was flight into the USD. This time, if there is a big worldwide financial collapse/panic, there will likely be flight OUT of the USD. The central banks might easily not be able to stop a real USD panic even if they tried concertedly. I have written again and again that your retirement funds and investments are probably mostly in USD assets, and are subject to vaporization if a major world financial accident happens, central banks or no central banks. This might not happen for years. But we are definitely on the precipice of it.

Link here.


John Williams is an economist. Not the academic sort, mind you. He works in the real world. Imagine how valuable accurate economic forecasts would be to a large company. Business decisions would be so much easier. Thinking about a new factory? Here is what your sales and profits are going to look like next year. Want to borrow $10 million? Here is a chart of next year’s interest rates. You would save a fortune. This is what John Williams does. Companies hire him to predict economic statistics like interest rates, inflation and growth. Tough job. Williams is a private consultant with his own business. If he gets his forecasts wrong, he does not eat. Simple as that. His reputation is everything. There is no academic theory in Williams’s work. It is being right that counts. Lucky for Williams, he is good at what he does. He has been in business for 25 years now. Be warned – what you are about to read may shock you. We present this view to provoke thought and to challenge mainstream opinion.

Government stats are an economist’s bread and butter. The thing is, according to Williams, you cannot take them at face value. Governments massage their statistics for political reasons. So in order to make accurate predictions, you have to know how the government puts its numbers together. John Williams has dedicated 25 years to this dismal task. Over time the methodologies employed to create the widely followed series – such as GDP, the CPI and the employment numbers – all have had biases built into them that result in overstating economic growth and understating inflation. “Real unemployment right now – figured the way that the average person thinks about unemployment, meaning figured the way it was estimated back during the Great Depression – is running about 12%. Real CPI right now is running about 8% And real GDP probably is in contraction.” Williams says the adjustments occurred in very tiny steps over the years, and have showed up in every administration since Kennedy’s. “If the same CPI were used today as when Jimmy carter was president, social security checks would be 70% higher.”

At the end of everything, Williams comes to two conclusions, one good and one bad. The bad news is that the federal government is absolutely broke. And not just broke, but on the hook for trillions of dollars it will never have. So far they have managed to hide the problem by selling the debt to foreign investors and massaging the numbers. At some point in the next 10 years he says – when enough people realize what happened – the whole smokehouse will go up in flames. When it does, investors will dump their U.S. securities. Financial institutions will fail. The Fed will print more money and the market will spiral into some sort hyperinflationary depression the likes of which has never been seen. The good news is that if we are able to protect our assets through the rough times ahead, we are going to see some of the greatest investment opportunities in history.

We take Williams’s warning with a pinch of salt. Others may take it more seriously. It does not matter. The investments Williams would use to protect himself from the financial armageddon he predicts are the exact same investments we write about every day: natural resources, rare collectibles and precious metals. He sees a financial meltdown. We see a young bull market in real asset investments. Same result.

Link here.
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