economic stimulus « Citizen Economists

Yes Florida, The Economy IS On The Mend

By Eldon Mast, on January 31st, 2012

I happened across this article today and wish I could claim that I wrote it. Here is the opening…

Sen. Marco Rubio (R) of Florida delivered his party’s weekly address on Saturday morning, and made a provocative claim about President Obama.

“The bottom line is this president inherited a country with serious problems,” Rubio said. “He asked the Congress to give him the stimulus and Obamacare to fix it. The Democrats in Congress gave it to him. And not only did it not work, it made everything worse.”

What a crock!

So have a look at the full article here and see the Rubio claim debunked soundly.

Not only has the U.S. economy grown for the last 10 quarters, but the workforce has ADDED jobs for the last 22 months straight.

Can we do better? Sure. Did Obama policies make things worse?

I don’t think so!

Household behaviour that counteracts fiscal expansion

By Ajay Shah, on October 24th, 2011

Suppose a government tries to boost demand in the economy by boosting the deficit.

A fascinating feature of the situation is: Households are not wood, households are not stones, but men. And being men, they will look forward, they will optimise. Households know that all government expenditure requires taxation: all that is achieved by running a deficit today is postponing taxes to tomorrow.

India’s fiscal stance is now likely to lead to increased taxation in the future. We have a nice wide deficit today, but it’s increasingly likely that fresh taxation will come up in the future.

A core feature of human beings is that we do not like to deal with fluctuations in our consumption. So faced with the prospect of taxation tomorrow, we are prone to cut back on consumption today.

Through this, when a government raises the deficit today, some of this effect is counteracted by households that pull back on expenditure. Raising the fiscal deficit is less expansionary than some would think.

Economists have a fancy name for this: it’s called Ricardian Equivalence. This was originally thought up by David Ricardo, but made famous by Robert Barro. It is one of the many ways in which forward looking households are of essence in thinking about macroeconomics. “You are not wood, you are not stones, but men; and being men, you will optimise”.

The Fallacy of Stimulus Plans

By Simon Grey, on September 28th, 2011

I’d like to revisit and expound upon a thought I had in yesterday’s post on forgiving student loans:

Can we get rid of this whole nonsensical stimulus thinking? All money circulates. Ceteris parabis, the money will be spent at some point.

I wanted to explain this more thoroughly yesterday, but I was pressed for time so I couldn’t explain, to the degree necessary, what I meant by this. Fortunately, Dom Armentano has already done this for me:

Can government spending create jobs? Governments can certainly create jobs in the public sector; they do it all the time and Obama’s bill will do more of it. Governments can hire school teachers, social workers, and millions of other bureaucrats to administer its thousands of programs and regulations. Importantly, however, the funds for these jobs must be provided by either taxation or by borrowing from the private sector. Thus as almost all economists recognize, public sector employment comes (in some real sense) at the expense of opportunities for private sector employment.

To see why this is so, assume that $1million dollars is raised by taxation to, say, fund new staffing at the Environmental Protection Agency. No debate; public sector jobs get created. But note that the very same $1million cannot be spent by taxpayers on new washing machines or trips to Las Vegas or newspaper subscriptions. Thus for every job created by government spending there must be a tradeoff of jobs NOT created (or maintained) in the private sector of the economy. In economics, there is no free lunch.

Private sector jobs, on the other hand, are created in an entirely different manner; if they are sustainable, they are self-financing. Private employees are hired with the expectation that their wages will be paid by the additional revenue or value that they generate for the employer. Individuals that work for washing machine retailers or for a travel agency or for a newspaper must generate a stream of benefits for the company that compensates for the wages they are paid (or they will be fired). In short, private firms can hire workers – that is create jobs – if and only if it is profitable for them to do so.

In essence, the unspoken assumption of all arguments for government-provided stimulus is that money can only circulate if it goes through the government, and that money will fail to circulate if it does not go through the government. Ultimately, the problem is that too many economists ignore Bastiat’s warning and focus on that which is seen while ignoring that which is unseen.

Jubilee?

By Simon Grey, on September 26th, 2011

Freakonomics asked if forgiving student loans en masse was a good idea. Here was their conclusion:

1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts.

I guess it would help to define “high income.” Everything I’ve seen suggests that college grads generally start with relatively income when joining the workforce and that it eventually increases over time. And, once you adjust for inflation, grads today are earning less than grads of, say, thirty years ago, on the average. The only way the above claim is true is if one compares the college grads to those with less education. Also note that income growth, though a trend, is not promised to continue indefinitely. Also note that going to college is the recommended course of action, while dropping out of high school is not. In essence, those who have played by the rules, so to speak, are in a tough bind because they have played by the rules. It is cruel to argue that they don’t deserve consideration because they are still better off than those who didn’t follow the rules.

2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.

Can we get rid of this whole nonsensical stimulus thinking? All money circulates. Ceteris parabis, the money will be spent at some point. The only concern is over timing, not necessarily net effect. And there is no objective reason to prefer immediate results to delayed results. This point, though technically true, is irrelevant.

3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?

This is simply asinine. No one thinks that forgiving loans makes education more desirable. People think that the student loan system is fraudulent (i.e. people were talked into loans under false pretenses). The reason most people support loan forgiveness is because they see it as a reasonable redress to the outrages of the system. Also, note that the current system does a remarkable job of subsidizing marginal students, which is the problem in the first place.

4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.

Don’t or can’t? How many grads have to take on subpar jobs because they can’t afford to wait for better jobs or undertake risky ventures? These kids have been sold a lie, and many they have no recourse (and I mean this literally as they can’t even default out of their loans). The government guaranteed repayment of student loans, and, in order to prevent getting hit in the shorts, has made it impossible to discharge this debt through bankruptcy. As such, banks have little incentive to ensure the loan’s recipient’s ability to repay. In short, the government has created the mess, under the guise of helping the underprivileged. They have turned the underprivileged into slaves. Shouldn’t the slaves be able to lobby their master? Or is that too much to ask?

5. Politics: Notice the political rhetoric? Give free money to us, rather than “corporations, millionaires and billionaires.” Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative. Instead, they’re comparing it with the worst alternative. So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?

This is simply stupid. The 15% of the population in poverty already receives money. To the tune of billions of dollars per year. How much more do they need? You’d think hundreds of billions of dollars would be enough to cure poverty, but apparently the federal government sucks worse at charity than it does at disaster relief in a chocolate city after a hurricane.

This is nothing more than a grossly ignorant appeal to emotion. The poor already get money from the federal government. And why are corporations more deserving of billions of dollars? The government has already lined the pockets of their Wall Street cronies through student loans. Shouldn’t this be redressed?

Conclusion: Worst. Idea. Ever.

More like: Worst. Rebuttal. Ever.

However, I don’t find the idea of student loan forgiveness all that appealing, in part because students still deserve to face the consequences of their (admittedly stupid) decision to go to college instead of getting a real job. In order for a lie to work, one party must tell it and another party must believe it. If you believe a lie, you need to live with the consequences. But if you take advantage of those who have believed a lie, then you deserve the consequences thereof as well.

My proposal, then, is very simple: allow grads to default on their student loans. Grads’ credit scores will take a hit, which is a reasonable consequence t their decision to essentially waste four years of their life. And banks would be forced to write a bunch of bad loans, killing their profits, which is a reasonable consequence to their decision to loan money to people that didn’t deserve it.

The current system is broken and remarkably unfair to those it purports to help. Correcting this problem doesn’t require forgiving all students of their loans. Allowing grads who find that a college degree is worthless to default on their loans should be sufficient to clear the market.

Chris Marchese and Jason Burack: Mine Precious Metals Investments

By The Gold Report, on September 12th, 2011

The exciting tech sector of yesterday will pale in comparison to the precious metals sector of tomorrow, say Chris Marchese, portfolio strategist with a hedge fund under Vishni Capital, and Jason Burack, independent investor and creator of Wall Street for Main Street. In an exclusive interview with The Gold Report, they share their analysis of one last solid-gold—and silver—investment frontier.

The Gold Report: Whatever form the Federal Reserve’s economic stimulus takes, do you believe it will prove to be a boon to the junior resource sector, much like it was in late 2010?

Chris Marchese: It’s going to be exponentially more this time around. With gold at $1,800/ounce (oz.), it is taking the reserve status away from the dollar. And with the announcement of Quantative Easing 3 (operations twist, etc.), we could see $2,500/oz. or $3,000/oz. gold very quickly.

Jason Burack: People who have courage and conviction and are willing to continue to average into their positions over the next 12–18 months will benefit. Established producers of gold and silver have humongous cash flow, and they’ll add more juniors. They are going to want to add near-term producers. The juniors are where the majority of wealth is going to be created.

TGR: A few weeks ago, precious metals expert Eric Sprott said silver will be “the investment of this decade.” Did that spur a change in your investment strategies?

CM: Artificially suppressing a commodity for a prolonged period, which in this case has been 30 years and counting, leads to shortages. So Sprott just reaffirmed what I was thinking, which is definitely a good boost of confidence.

JB: The Silver Institute projects industrial demand to grow by 35% by 2015. Investor demand now is really starting to rocket, especially in the developing countries. You are seeing tremendous amounts of investor demand in China and India, where normally they would have bought more gold. Sprott’s been tracking the capital inflow of each dollar of gold relative to each dollar of silver invested and they are equal on a dollar for dollar amount for both metals in most cases; for some bullion dealers a lot more money is being invested into silver, and there is no way the gold:silver ratio is going to stay this much in favor of gold if this continues.

TGR: Are you more bullish on silver or gold junior equities?

JB: I like the companies that are hybrids, like Minefinders Corp. (MFL:TSX; MFN:NYSE) and Coeur d’Alene Mines Corp. (CDM:TSX; CDE:NYSE).

CM: The quality just isn’t there in the primary silver juniors. Of the ones that are, most are 60%–70% silver. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) are over 90%. The hybrids are a good way to play it. The gold:silver ratio will go into the single digits. That will also help control byproduct cash costs for a lot of the hybrids, such as AuRico Gold Inc (AUQ:TSX; AUQ:NYSE), Minefinders and Gold Resource Corp. (GORO:NYSE.A; GORO:OTCBB; GIH:Fkft).

TGR: What did you make of AuRico, previously Gammon Gold Inc., and its CAD$1.4 billion (B) bid for Northgate Minerals Corp. (NGX:TSX, NGX:NYSE.A)?

CM: I love the acquisition. It gives the company some geopolitical diversity. It’s in Australia, Canada and Mexico now. Starting with the acquisition of Capital Gold Corp. earlier in the year, AuRico set itself up so that it won’t have to acquire any more property or smaller companies for the rest of the cycle.

TGR: Has AuRico worked out all the issues with its Ocampo silver-gold mine in Mexico?

CM: There was a nine-month strike at El Cubo, but it will be at full capacity next year. Ocampo is doing phenomenally. The preliminary economic assessment for Guadalupe y Calvo, its next flagship (excluding Young Davidson—pending the close of the Northgate acquisition), is due in September. It has a nice blend of gold and silver. It is one of the better turnaround stories for this year.

JB: For the gold production companies right now, this is a perfect storm–type of scenario. The energy prices are staying in a relative trading range or they’re trending downward, so their energy input costs are under control. The price of the gold they produce is going up, so their profit margins are expanding rapidly. Pretty much in every other sector of the economy, everyone’s trying just to maintain profit margins and keep their heads above water. Maintaining current profit margins in this current macroeconomic environment is the goal of most companies; this is not the case for gold and silver producers. In the silver and gold sectors, there is a rapid expansion of the profit margins, which is super bullish.

TGR: Do you think that gold and silver hedge their production too forward, given that a number of analysts are looking at long-term gold prices of around $1,000/oz.?

CM: I think companies should do that if they don’t believe in their product. As opposed to the 1960s and 1970s, it is not just the U.S. this time—it’s the whole Western world. So I can understand something like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) hedging because it doesn’t seem to believe in its product that much. That’s why it went out and bought Equinox Minerals Ltd. (EQN:TSX; EQN:ASX), a copper company instead of one of the numerous gold companies trading at gross undervaluations.

TGR: Barrick spent $6B to dehedge.

JB: I think it did start hedging its silver. And Equinox is a primary copper company. So Barrick has some tremendous issues there. I’m not buying stock if the company is hedging its primary production. If it is a primary gold producer and it is hedging gold, it’s not a gold company. The reason for buying these shares is to get the leverage to the higher gold prices, and if a company is hedging its gold production, then you’re not getting that.

CM: Junior miners can hedge to ensure that they’ll have the funding to bring on more projects, that they’ll have the necessary capital requirements. I have no problem with that, going one or two years out.

JB: That’s what Revett Minerals Inc. (RVM:TSX; RVMIF:OTCBB) did to keep itself alive 18 months ago.

TGR: A couple of companies mentioned in your report “Treasure Hunting for Precious Metal Stocks” have forward-sold their production. One is Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A), which sold 25% of its silver production to Silver Wheaton.

CM: That’s a different case. Silver Wheaton is almost like a bank. It provides financing in exchange for a certain amount of the production at a given price. Alexco (one of my personal favorites) was in need of capital and went that route, avoiding shareholder dilution and taking on potentially dangerous amounts of debt, making it the most logical choice at the time.

TGR: It was the earliest stage that Silver Wheaton had bought into a precious metals play.

JB: The grades for Alexco are spectacular. It has the highest grades of any primary silver production company that we’ve looked at.

TGR: Do you expect those grades to continue at the Bellekeno mine?

CM: Definitely. It’s starting to rehabilitate Lucky Queen and Onek. This district is great because Alexco can bring on these other deposits in about 12 months with very low capital expenditures. I was talking to a geologist and he was estimating $13 million (M) for one of them, which is nothing, especially given Alexco’s cash on hand of more than $40M coupled with positive operating cash flow. This whole district is filled with numerous, very high-grade deposits. There are six identified so far.

TGR: The AuRico and Northgate deal comes on the heels of Trelawney Resources Inc. (TRR:TSX.V) taking over Augen Capital (AUG:TSX.V). Are we seeing the beginnings of a fresh wave of consolidation in the small- and mid-cap resource sector?

CM: Prior to the Northgate proposal, Northgate was going to acquire Primero Mining Corp. (PPP:NYSE; P:TSX). Goldcorp Inc. (G:TSX; GG:NYSE) acquired Andean Resources Ltd. (AND:TSX, AND:ASX), Kinross Gold Corp. (K:TSX; KGC:NYSE) acquired Red Back Mining Inc. (RBI:TSX) and then AuRico acquired Capital Gold. So there’s been a constant flow. It will accelerate once the whole market is convinced that higher precious metal prices are here to stay.

JB: Coeur d’Alene made lots of acquisitions in a short time span to get the Palmarejo mine, and it took on debt, it diluted shareholders and it struggled when the markets collapsed. The other companies look at Coeur d’Alene as a cautionary tale. They don’t mind paying a little bit higher price for the assets that they’re bringing in as long as their producing mines are actually cash flowing a good amount more. Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) is buying private companies. Fortuna Silver Mines Inc. (FVI:TSX; FVI:Lima Exchange) bought Crocodile Gold Corp.’s (CRK:TSX; CROCF:OTCQX) silver property in Peru. Some juniors over the next 12–36 months will get taken out by the really high-quality juniors, producers looking to replace depleted reserves and/or expand their production profiles and growth pipelines, like Argentex Mining Corp. (ATX:TSX.V; AGXM:OTCBB) and Revett Minerals.

CM: Consider Seabridge Gold Inc.’s (SEA:TSX; SA:NYSE.A) KSM project. That’s an enormous gold deposit in Canada, but it’s going to cost $3B–$5B just to construct. I’m surprised Barrick or someone else hasn’t come in and bought it yet. That’s telling me that the seniors don’t have that much conviction at this point in time.

TGR: One of the issues there is Pretium Resources Inc. (PVG:TSX).

CM: I would assume it would be a joint deal.

TGR: So you wouldn’t just be taking out Seabridge—you’d have to take out Pretium, too. There’s a study under way as to whether or not it is feasible to combine these projects.

CM: Another example being Detour Gold Corp. (DGC:TSX), which has the ability to produce upwards of 1 million ounces (Moz.) annually. Someone like Newmont Mining Corp. (NEM:NYSE) or Barrick could easily acquire a company such as Detour, allowing it to both increase production growth profiles and replace reserves.

TGR: Detour seems to have pretty much the same plan that Osisko Mining Corp. (OSK:TSX) had. I wouldn’t be surprised if it pulled it off without a takeover, if it actually made it into production without a major coming into play.

CM: Yes, because I’m guessing Detour will acquire Detour Lake Block A, owned by Trade Winds Ventures Inc. (TWD:TSX.V). It’s adjacent to the main deposit. That could become well over 1 Moz. per year after all the mill and optimization.

TGR: In your research report “Treasure Hunting for Precious Metal Stocks,” you list what you consider to be the top 15 undervalued precious metal stocks.

JB: We issued the report a couple of months ago, but there are still a lot of amazing values. We really like Aurcana Corp. (AUN:TSX.V), because we think it’s going to be the next Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) in terms of the momentum play and the pop, over the next 18 months as the Shafter mine comes on-line. If management can deliver the construction of the mine and production starts on time and hits the numbers, Aurcana is going to have a humongous amount of production growth, more than any other silver junior in the next 18 months, and that is going to translate into large earnings growth. Management is planning on up-listing the stock to the regular TSX and then to a major American exchange. That is going to create a big pop in the stock for Aurcana. Longer term, Shafter also has a really good exploration upside and a lot of silver relative to the base metals.

In terms of the other juniors in the report, Revett Minerals and Argentex Mining are two of the top. Revett has a pretty large institutional interest, and it has an equity position from Silver Wheaton. Silver Wheaton owns about 15% of the total shares outstanding for Revett. The reason that Silver Wheaton is interested in the stock, and the reason that pretty much everyone is interested in the stock, is because of Rock Creek. It is one of the top 10 undeveloped silver projects left in the world, and it is arguably the best undeveloped silver project left in the U.S., and in North America for that matter.

For those not familiar with Rock Creek, this deposit has been in the legal process since the early to mid-’90s, and it is almost through that. There’s already some production there from Revett Minerals, through its Tory Mine, which produces about 1 Moz./year silver production and 11 million pounds (Mlbs.)/year copper production. That is hedged right now, but those hedges are expiring at the end of the year. The local government, the state government and the people there all want the jobs that the mining would create as long as it is done environmentally responsibly. Rock Creek already has an NI 43-101 resource of well over 200 Moz. of silver and a couple billion pounds of copper resource. That is for a project that it hasn’t been fully explored yet. If the company were to spend another year or two fully drilling out the property and then add the expanded resource into a new mining production plan for when Rock Creek gets built, it is not out of the realm of possibilities that the silver resource could double.

Mines Management Inc. (MGN:NYSE.A) has its massive Montanore deposit right next to Revett’s Rock Creek deposit and the Montanore deposit already has a similar-sized resource to what Rock Creek is listed at. Revett has a large land package to still explore at Rock Creek, too.

For someone who is willing to let things play out while Argentex releases the new resource estimate upgrades and all the preliminaries—the prefeasibility and the feasibility—I think Argentex is going to be a potential tenbagger in three to five years with patience. The Pinguino deposit is a complicated deposit, but in a good way. If Argentex fast tracks things, it can put a near-surface, open-pit mine into production in the next three years for its lower grade silver and gold part of the deposit. It already has a nice preliminary economic assessment on 5 Moz. of silver resource that the market is not valuing anywhere close to fair value. It also has and a little bit of gold. It is obviously expanding that resource quite a lot by the end of the year. The resource calculations are going to be a significant expansion. That is going to get cash moving quickly. But the real home run for the company is in the polymetallic, the sulfide, part of the deposit, although that will take more time to get into production.

It is quite a bit deeper, so production costs are going to be quite a bit higher. But with these grades on the silver, there will be a massive amount of more than 2,400 grams/ton (g/t) in a 250 meter (m) long x 400m deep x ~6m thick ore shoot. Since it is polymetallic and there are great grades of indium along with solid grades of gold, lead and zinc mixed in with the high grades of silver and indium, it’s very valuable rock. There is a lot of indium in there with the silver at good grades. The U.S. Geological Survey is saying there is only 10 years left of indium supply at current production and demand levels. Indium is primarily used in thin-film solar panels and flatscreen TVs. So there could be growth in demand for indium as long as this current technology continues to expand.

AngloGold Ashanti Ltd.’s (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) Cerro Vanguardia mine is right next door to Argentex, and it is in production. The Pinguino deposit shares the Tranquilo trend. Anglo is exploring their deposit further and now hitting drilling hole results at this deposit at more than 3,000 g/t silver and more than 9 g/t gold at pretty good strike lengths. Pinguino shares the same fault line. The polymetallic part of the deposit, the sulfide part, shares the same fault line.

TGR: So it is a long strike?

JB: Yes. The fault line is pretty massive around there. Anglo used to own the Pinguino deposit and the land package as well but it realized that there wasn’t going to be enough gold for it to turn Pinguino into an economic primary gold deposit. But Anglo realized there would be enough silver there for Pinguino to be a primary silver deposit so it sold the property off to a junior like Argentex to develop as a primary silver mine.

TGR: Are there any other names you want to talk about?

CM: I’ll talk about a few larger ones. I am really into the streaming and royalties companies because of the fixed cost structure, which will prevent margin contraction should input costs start to rise. One is Silver Wheaton. Another is Franco-Nevada Corp. (FNV:TSX), which is trading on the TSX. It’s larger than Royal Gold Inc. (RGL:TSX; RGLD:NASDAQ). The federal government just accepted a refilling for the necessary permitting of one of its streaming acquisitions, Prosperity, that didn’t get permitted initially. It will be run by Taseko Mines Ltd. (TK:TSX; TGB:NYSE.A), and it will add 66,000 oz./year attributable to Franco, which is pretty large for a streaming company at a $400/oz. ongoing purchase price. It’s up-listing on September 8. The good thing about it is it has a monthly dividend, so you get the compounding effect as opposed to the quarterly dividend.

Fortuna is also a good play. Its San Jose mine just came on-line. One of my favorites for the last two years has been Sandstorm Resources, which split into two companies: Sandstorm Gold Ltd. (SSL:TSX.V) and Sandstorm Metals & Energy Ltd. (SND:TSX.V). Sandstorm Gold is headed by the former chief financial officer of Silver Wheaton. It spun out a sister company with metals (base metals) and energy, so it is the first to apply the streaming concept into the base metals and energy sector. In one year, it has already managed 10 legitimate streams.

TGR: Is that fraught with more risk, given the base metal crisis?

CM: Sandstorm Metals & Energy only has one base metal stream to date, but its purchase price is $0.80/lb. of copper, and if the price of copper drops below $2.75/lb., the purchase price per pound drops to $0.55/lb. Sandstorm has guaranteed minimum cash flows negotiated in several of its streaming agreements. It has met coal, thermal coal, oil and gas, copper and natural gas streams, and is looking to add uranium, iron-ore, geothermal and other base metals. Sandstorm Metals & Energy recently did an equity offering, and is currently suffering from the equity offering hangover, but it gives it plenty of ammunition if lucrative deals present themselves. Nolan Watson was the one who pioneered the streaming concept (along with Peter Barnes and others at Silver Wheaton), so this management is just incredible. Sandstorm Gold and Sandstorm Metals & Energy both have fewer than 15 people working. They have low selling, general and administrative expenses and pay minimal income tax. They have found high-quality assets that have already shown a lot of exploration upside. Sandstorm Gold is the only 100% gold royalty/streaming company aggressively seeking additional gold purchase agreements on top the seven already in place. In other words, they have figured out how to create companies highly involved in capital intensive industries without the heavy capital requirements, making them free cash flow machines, which will translate into dividend juggernauts within a few years.

TGR: What are your parting thoughts on the precious metals sector as we head into the fall?

CM: I think it is going to be typical, another bullish run in the metals. This time I’m actually expecting the miners to play catch-up instead of lag bullion.

JB: Gold will touch $2,000/oz. probably, at least test $2,000/oz. by the end of the year, and then it will correct a little before blowing through $2,000/oz. For silver, we are going to see silver at least test $50/oz. in the next two to three months, and $50/oz. is a very tough resistance point for silver. It is the old nominal Hunt Brothers high. It might not pass through $50/oz. on the next try, but once it does, we’ll see it make a run pretty quickly into the $66–$67/oz. range.

If people take a longer view, two to three years out, it is really not going to matter if the miners underperform bullion in the short term. I hear a lot of people complaining that “my mining stocks haven’t done this or that.” But if you hit a couple tenbaggers or 400% gains on say two to three stocks out of every 10–15 stocks you pick, and you are doubling your money every 18–24 months on some of these stocks, you can’t complain if they are lagging for six, seven or eight months. I’ve been investing in this sector for quite a few years now, and it is just not something that you can worry about in the short term. It might definitely underperform in the short term, but the numbers are going to be so good. The profit margins are expanding. The fundamentals are there, and they’re improving. All we are waiting for now is the psychological, fundamental paradigm shift when more fund managers, more mutual funds and more pension funds say, “Hey, these gold stocks are all raising their dividends. Profit margins are expanding rapidly, production and earnings are rising and we see increasing potential for both capital gains AND dividends from producers. We’re going to buy and hold more of these. We’re going to continue to add positions and accumulate these shares because this sector is going to outperform the rest of the market in a major way for the next few years at the very minimum.” We are nowhere near the late stages of this secular, bull market for mining stocks, but we will be in a couple of years. This is going to make the tech bubble look faint once things are finally up and running, because many of the producers will actually have the earnings to justify much higher valuation multiples.

TGR: Thank you for your insights.

Jason Burack is an investor, entrepreneur, financial historian, Austrian School economist, and contrarian. Jason co-founded the startup financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. You can also find Jason’s work at his blog website at http://www.jasonburack.com.

Chris Marchese is currently a portfolio strategist for the Vishni Fund LP of Vishni Capital and as a contributor to the Morgan Report. For anyone interested in learning more about the Vishni Fund, which is entirely focused in the precious metals industry, visit Vishnicapital.com or email him at marchese.chris@gmail.com.

Since you asked…

By Doug Gentry, on August 22nd, 2011

This is a time of the year when I meet new people or get reacquainted with old friends, and once we run out of the usual “status update” conversation, someone often asks about the economy and the current crisis about the debt ceiling. I’m going to break a self-imposed guideline for this blog, and actually represent my opinions in a pretty straightforward manner. Usually my goal is to help students reach their own, informed opinion. This time – straight to the punch line…

1. The 2011 deficit (estimated at $1.5 trillion) and the accumulated national debt (over $14.3 trillion) are not the most pressing economic issues facing the country right now. They are important, but several notches down from the top of the list. This year’s deficit is just over 10% of GDP, which is high, but not crushing. There are ways to deal with these issues, as I’ll share further down. They are presented as a crisis only because the Republican Party and the Tea Party are using them to push a small government agenda. While I don’t agree with that goal, it’s fine for some to support it, but holding the economy hostage by manufacturing a crisis tied around the debt ceiling makes no sense.
2. Investment in economic growth has slowed dramatically. This is particularly true in education – at all levels. It is also true in basic research. Up until the last 20 years or so the U.S. has surfed the wave of economic change, by investing in new thinkers, and making infrastructure and other investments that will improve productivity. These seem left out of current debate options.

3. The slow recovery and weak demand for goods and services is the number one problem facing the country. The Federal stimulus is winding down, the Federal Reserve has decided that they don’t need more quantitative easing, and government at all levels is cutting employment. All the while personal consumption dropped in the most recent quarter, along with the fixed asset portion of Investment (inventories increased as a partial offset.) The uptick in unemployment and the very slow growth in employment drags down demand for goods and services. We are sliding down the same hill that the U.S. economy did in 1937-38, when Congress and President Roosevelt worried more about public concern for the debt than about sustained growth. Then we slid into a quick, nasty recession. That’s a danger now, too.
4. Inflation is not a pressing problem. The inflation we have seen this year is in food/commodities and energy. The food price spiral might well continue for awhile – I don’t have an independent sense of the true drivers. Even if food prices rise there are other elements of the Consumer Price Index that are holding steady. The rising energy prices are probably related to uncertainty about political conditions in the Middle East. Those concerns should soften soon. Inflation is something to watch out for, particularly with all of the money created by the Federal Reserve in the last three years – money created to help stabilize the economy. It is important that the Fed watch for signs of incipient inflation, driven by very high money supply, but I am confident they will act correctly and aggressively when that happens. That point is not now.
5. Bond investors are not abandoning US Treasuries for fear of default. US bonds respond to typical market forces, though they have an element of future gazing in them. If you hold a 10 year bond, and a potential buyer thinks the US might default on that bond, then the buyer will expect a higher yield (lower price/higher interest rate). That isn’t happening now. The bond market for US Treasuries is not showing signs of investors being worried about US debt.

So, what to do….

1. To tackle the most pressing problem – the slow recovery – the Federal government should be stimulating demand, through more government spending (on the part of Congress) and more quantitative easing (on the part of the Federal Reserve). Tax cuts can be part of this but they should not be across the board. The most effective, stimulative tax cut on the Federal level is the payroll tax for Social Security and Medicare. Those funds need help, and there are ways to fix them, but a payroll tax benefits mostly working people who will use the increased take home pay to consume.
2. To help with the deficit, we should remove the Bush tax cuts, and speed our exit from Iraq and Afghanistan. The Bush tax cuts disproportionately benefited higher income families, who use the extra money for non-consumption activities. When some politicians complain that raising taxes on the wealthy takes money away from job creators, there is no empirical evidence and scant theoretical basis for that claim. Along with repealing those tax cuts there are plenty of opportunities to strengthen the tax code and reduce the dreaded loopholes. Despite what many politicians say and the media parrot, this is not hard. It just takes clear headed thinking and political courage.
3. The real budget deficit challenge, at the Federal and State levels primarily, is the cost of healthcare. Increasing costs and inefficient uses of services put pressure on Medicare, Medicaid (which impacts states as well), the VA, the Dept. of Defense, and government employment costs at all levels. We should be strengthening and extending the healthcare reform efforts beyond just extending coverage – to include incentives for cost efficiency and efficacious treatments.

4. Restore and enhance funding for education at all levels. Resist the temptation to make education accountable on a short term basis, while hobbling it from producing the long term benefits derived from basic research and liberal arts education. This is an area in particular where Federal spending, even if they result in deficits, is a good investment. Cutting taxes on the wealthy is not a good use of a deficit. Deficit spending should support short term stimulative needs and long term productivity enhancements.

Random Shots - All Back to Square One?

By Claus Vistesen, on August 4th, 2011

Starting a new job and settling in a new city/flat has proved a little more unsettling for my blogging efforts than I had expected. Anyway, what better time to return to the fray when the SP500 completes its worst run in a long time returning to levels not last seen since March where we thought we had to write off the entire Japanese economy as a nuclear wasteland. So, is it all back to square one for the already weak recovery?

Arguably though the catalyst this time is more sinister in that it cannot really be pinned on any single event. Surely, the debt ceiling charade and the prospects of Spain and Italy spiralling further into the arms of what ever bailout that might be on offer are catalysts in themselves, but the underlying economic data is getting increasingly sour.

All the leading data we are looking at, both in terms of the global breadth of economic momentum and specifically on the US economy have rolled over in a dangerous fashion and a recession in the US cannot be entirely ruled out. Indeed, on some measures we would even be calling one. Elsewhere, the slump in the July Australian PMI also suggests that one of the hitherto strongest economies in the global recovery may be about to embark on its own homegrown downturn.

It was also interesting to see the SNB finally cave in (yet again) to the relentless rise of the CHF despite the bank’s efforts both communicative and with hard money to starve off the beast. As I have remarked before, safe haven flows hurts and can be akin to holding Old Maid. Indeed, it may turn interest rate decisions on their head as rates will be lowered going into a melt up of economic activity to attempt to deter speculative inflows.

Generally, one of the most obvious consequences of the recent bout of weakness will be that more stimulus is in the pipeline, at least in the US economy whereas the ECB will probably need a little time before the reality dawns on them. However, the underlying inflection point between an economic recovery that is clearly turning out much weaker than expected and the reality of too much debt is starting to hurt. In that vein, it is difficult to see a viable way out of the obvious need to cut spending and reign in excessive public spending with the simple fact that what has largely driven GDP in the recovery has been government consumption and investment.

We can consequently expect that the Krugmans of the world to get another big chunk of the discourse as the call for further and bolder stimulus packages increases. In this respect, the Squid had nice note out on Monday on the possible avenues a new round of QE would take where the main message seems to be that the Fed will try to further cement its position of low rates for an extended period. But more interestingly is the widespread expectation that if the Fed engages in further asset purchases it will be on the long end of treasury curve and thus to flatten the curve on the long end. Surely, this makes sense in so far as goes the idea that the housing market remains in an extremely poor condition. Mortgage rates are thus likely to be driven more by long term rates than rates on the short end or at the middle. Coupled with outright targeted asset purchases of MBS using the proceeds from its securities portfolio the Fed would be signalling that the size of its balance sheet will remain inact.

Sufficient on to the day and all that but with the current sinister backdrop of market currents and poor economic data we can expect Bernanke to step up any time now.

It has occured to me here that what we might be facing in the developed world is a mirror image of the situation in the emerging world and that the combination is not the best of mixtures for the global economy.

Consider then the situation e.g. in India where the RBI is trying frantically to weigh against excessive government spending not to mention China where you get the distinct feeling that at least some part of the inflation problem comes from the central authorities’ credit policies (or lack of tight standards). Conversely, in the developed world austerity is the name of the game quite simply out of necessity and faced with extremely fragile economies it is largely up to the central banks to attempt giving the economy some tailwind. On a personal note, this is also why I consider the ECB’s recent hiking campaign as the biggest policy failure since, well, they raised just before a recession the last time. The very best we can hope for in Europe is then not a recovery but simply that we might end up back at square one.

Broken Window Fallacy

By Doug Gentry, on July 21st, 2011

The country pulled together to fight in WWII – stimulating economic growth

When we study the Great Depression, and the double dip recession of 1937-38, the class discussion inevitably ends up with the role that World War II played in bringing an end to a decade’s worth of poor economic performance. Which leads us to the question – is going to war good for economic growth, and if it is should we adopt war as an economic growth strategy?

The simple answer is, “no” - war just diverts a nation’s scarce resources from one activity to another. Even if some resources are idle, the gain is short-lived and a poor investment in long term growth. (Think of a tank burning in the Iraqi desert versus a fleet of trucks hauling freight for 20 years.) In the case of the Depression and World War II, the threat of Nazi Germany and, later, Japan, gave Congress and the President political cover to use deficit spending which in turn stimulated the economy. Ultimately, though, the country’s economic growth came from private investment and private demand after the war.

No worries about the government borrowing money (through the sale of bonds) in the face of an enemy

This brings us to the “Broken Window Fallacy”. With a hat tip to econ major Ryan Chaddock, there’s a nice summary of this parable here. The fallacy poses a similar question – should we go around breaking windows in order to generate more work for glaziers?

Bastiat’s point, in a way, is about opportunity cost- unless resources are idle, they must be shifted away from one activity in order to be shifted toward another.

[...] Even if breaking the window were to increase production in the short run, the act cannot maximize capital or wealth in the long run simply because it will always be better to not break the window and spend resources making valuable new stuff than it is to break the window and spend those same resources replacing something that already existed.

Stimulus May Have Added 3.3M Jobs

By Eldon Mast, on August 25th, 2010

The economic stimulus package may have added as many as 3.3 million jobs to the economy during the second quarter of this year and according to the independent Congressional Budget Office (CBO) may have prevented the nation from lapsing back into recession. The report was released by the CBO on Tuesday.

The details of the CBO report said that the stimulus lowered the unemployment rate by between 0.7 and 1.8% in the second quarter and increased the number of people employed by between 1.4 million and 3.3 million.

The budget office said the act also increased the nation’s GDP by between 1.7% and 4.5% in the second quarter of the year.

Divergence

By Claus Vistesen, on July 30th, 2010

I am a great believer in divergence when it comes to the talking about the economy and her markets because it allows you to take a slightly more nuanced perspective than the risk off/risk on debate that has dominated the discourse for the past two years now.

The Global Economy

Still, there is much to suggest that when it comes to global economic discourse whatever your take on things is it follows an easily identifiable framework (click for better viewing).

It is my bet that whatever your position is on global growth, markets, the future of the Eurozone, the prospects of a bubble in China, inflation in India, the price of base commodities (etc etc) you will find yourself comfortably positioned somewhere in the matrix above. In fact, it is hard to form an opinion today on the global economy and its sub-components without taking a decisive stands along the spectrums above. Naturally though, there is more than meets the eye.

Note in particular that I take “excessively” loose monetary policy as given since here we find another case of divergence. Essentially, the debate is currently raging between those who advocate fiscal austerity as a precondition to securing future growth and those see it as a repetition of the same mistakes that were made in in 1937 as policy makers in the US assumed that the recovery was already a reality. Yet, when it comes to monetary policy it is taken as given that rates will stay near zero in the G3 for at least the next 8-12 months. Again, we have divergence here; divergence between policy positions and debates, but also divergence between global monetary policy regimes since you can just ask Reserve Bank of India Governor Duvvuri Subbarao what he thinks of loose monetary policy as he recently headed a 0.5% upward move in the base rate which widens the spread to the G3 even further.

Divergence here of course plays to the disadvantage of both monsieurs Trichet/Bernanke and Subbarao since the money created by the former won’t stay to help their ailing economies but, in stead, race off to India (and elsewhere) fuelling an already raging inflation bonfire. Recently, the IMF downgraded its forecast for global growth (relative to pre-crisis levels) and thus in some sense lowered the bar for the natural speed limit of the global economy. It would however be too pessimistic to interpret this as secularly bad news since divergence will be the key word going forward on the macro level. Especially, the divergence between those economies with sufficient domestic demand capacity to reach “escape velocity” and those whose domestic economic momentum is essentially deflationary is a key theme.

To Pick or not to Pick

Another case of divergence which I recently picked up on is the growing discomfort among value investors that the gains from stock picking is being traded away. This is a long running theme on FT Alphaville and this week it is running two stories which push this point of view. The first is the coverage by Izabella of this piece in which Toronto-based money manager Friedberg Mercantile describes the pain of seeing its long time old and faithful market neutral strategy collapsing due to the correlation of everything. Of course this is not a cry-baby defence piece and it tracks its issues to a lack of dispersion between stocks due, in part, to the rise of exchange traded funds (ETFs) designed to mimic an index or specific asset class.

But this is not all and Ms Kaminska continues her coverage on this by pointing to a piece from Barclays Capital equity research people which lays out the same story. I especially like the point that while equity correlation remains a function of volatility the increasing run to index traded products increases the base level of correlation.

To summarize, in our opinion, while equity correlation continues to be highly dependent on volatility, the rise in indexation has led to a permanent increase in its “base” level. Thus while we do believe that the current high levels of realized and implied correlations are unsustainable, the eventual drop is not likely to be as high as some market participants might expect.

I think this is a very interesting point.

I do also find it almost ironic since one could arguably point to the fact that an increasing focus on buying the market (or a specific asset exposure/class) would mean that value investors got better prospects of carving out niches for them to excel in.

As for the divergence in all of this, you should by no means think that the value investor narrative is dead and buried. Today, Greg Donaldson (the director of Portfolio Strategy of Donaldson Capital Management) has penned a story over at Seeking Alpha in which he specifically suggests that retail investors go for single stocks and not “the economy”.

What retail investors may be missing is that they are not investing in the economy. They are investing in companies. And, some – even many – companies can do quite well even during weak economies.

This point was recently given a run in the always excellent research from BCA (no link available) where they made a classic analysis of the SP500 sectors adjusting weightings based on valuation metrics and thus that positive returns were to be found in a market which traded sideways or even corrected downwards. Of course, they did talk about sectors but still the message was very much one of divergence based on fundamentals despite overall head winds to the economy. Similarly and despite the almost non-event of the recent Eurozone stress test one theme which emerged was indeed that investors could now discriminate between banks based on on their disclosure of sovereign debt holdings. Intuitively, this makes sense too I think, but if everything is correlated should you willingly allocate funds to such a strategy?

Where do you belong?

As ever, picking the right strategy or formulating your own and informed opinion on global economic and financial matters is just as much a question of where you don’t fit in as where you fit in. Be it a question of the main fault lines of the global economy, the right between loose/tight monetary and fiscal policy or the right investment strategy divergence is the name of the game and choosing the right side of the fence is not only important for your own intellectual satisfaction, but also may be important for your portfolio.