Johnstown forever

So if there is any doubt what drives the stats behind this article today: Full home ownership here is nation’s best, it really is pretty simple.  Of those who did not leave Pittsburgh, we have not had many folks move around.  Likely for many depressed home values prevented the type of equity appreciation that fuels normal real estate markets. That along with the lower number of people who have moved into the region translates to fewer newer mortgages out there. I know that sounds a lot less folksy than we just love our neighborhoods, but it really is hard to dispute.

So what has been true a long time is that Pittsburgh, (city, region, or something in between) has long ranked near the top in the percentage of householders who have lived in their current home the longest period of time. It follows that more folks have paid off their current mortgage as a result. The question is why.  Is Pittsburgh an anomaly?

So to check that out, I pulled the data on the median year householders moved into their current homes for each and every MSA in the nation. I am getting 366 total MSAs currently defined.  Here is the very low end of that ranking.  Johnstown PA has, by this metric, the longest tenured folks who have not moved.  Pittsburgh last the longest tenured residents among large metro areas, thus the ranking in the article today.   But notice the whole Cleveburgh thing going on? Maybe it is just a greater rust belt pattern.  In this bottom 11 list  is Altoona, Pittsburgh, Youngstown, Cumberland, Wheeling, Steubenville-Weirton and Johnstown.  We have moved past the rust belt history in lots of ways, but there should be no doubt the impacts linger.

MEDIAN YEAR HOUSEHOLDER MOVED INTO UNIT
2007-2011 American Community Survey 5-Year Estimates

356 Altoona, PA 1999
357 Barnstable Town, MA 1999
358 Bay City, MI 1999
359 Danville, VA 1999
360 Pittsburgh, PA 1999
361 Youngstown-Warren-Boardman, OH-PA 1999
362 Cumberland, MD-WV 1998
363 Scranton–Wilkes-Barre, PA 1998
364 Wheeling, WV-OH 1998
365 Steubenville-Weirton, OH-WV 1997
366 Johnstown, PA 1995
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Chen Lin: How My Portfolio Gained 63% in 2012

Chen Lin Chen Lin has gotten so much attention for his investment success, new subscribers to his newsletter, What Is Chen Buying? What Is Chen Selling?, have to line up on a waiting list. Luckily, he sat down with The Energy Report to share some of the investment ideas that helped his portfolio climb 63% in 2012. Learn how Lin played price differentials and dividends to create outstanding gains in a challenging year, and what his moves for 2013 may be.

The Energy Report: Chen, what’s your economic and market outlook for 2013?

Chen Lin: In the past few months, China seems to have turned the corner as its real estate market started to turn up, and so goes its economy. I believe the U.S. will likely do well. I don’t see the EU breaking up in 2013, and Japan is going to be printing a lot of money this year to try to jumpstart its economy. So although I see slow global economic growth, it’s still growing, especially in China and the U.S. I believe the stock market can do quite well as investors have been piling into bonds and cash in the past a few years.

TER: Oil prices have recovered from their lows of last year, but Brent is much stronger than West Texas Intermediate (WTI) and closer to its March peak than WTI. What’s your forecast at this point?

CL: I see relatively stable oil prices. There will be a lot more oil coming from U.S. shale plays. However, the pipeline to the Gulf will be limited and the United States has a ban on exporting oil. We are likely to see a lot of oil coming from Oklahoma to the Gulf Coast. However, the oil has to be refined at the Gulf Coast because it cannot be exported, so the new pipelines will likely push down Louisiana Light Sweet until it sells at a sizable discount to Brent, which could create some interesting opportunities for refiners on the Gulf.

TER: How do you view the domestic versus international production arenas in terms of investment potential? Where do you see the best investment opportunities in 2013?

CL: I’ve been really focusing on international onshore plays in the past few years and will continue to do that. International companies can get the Brent price. Domestic producers are usually shale or offshore plays with high capex. Capital is very hard to get, especially for small companies, so that’s why I’m focused on international onshore players. The geographic area I’m mainly looking at is Southeast Asia and onshore Africa, because those are areas in which China is likely to make more acquisitions.

Last year was very difficult and many juniors were hit very hard—it reminded me of 2008. I see potential on the other side of the trade, where most investors are going to cash and bonds and avoiding risk. Maybe investors are getting ready to take on more risk. That’s got me quite excited for 2013 and I’m continuing to watch the market for opportunities to arise.

TER: What are the global implications of China’s aggressive oil and gas acquisition plans?

CL: I think China’s acquisition strategy is twofold. One is its focus on North America, mostly in Canada, where the primary goal is to understand fracking technology and see if it can be applied in China or elsewhere. The other focus has been on Southeast Asia and Africa, which can be very beneficial to juniors. We’ve seen some M&A activity there and I expect to ride the wave and hopefully take advantage of that.

TER: Has your investment strategy changed at all as a result of developments over the past six months?

CL: Not much, but I have started to look a little at some more risky junior plays because investors have been extremely risk-averse. This is a good time to start looking at them more closely.

TER: You recently closed your newsletter to new subscribers. What was the reasoning behind that?

CL: My newsletter has been getting a lot more popular lately and I really hate to see stocks swing a lot on my recommendations. In an ideal world, stocks should only rise and fall on their own merits and not on my recommendation. So I decided to close it to new subscribers so our existing subscribers could have a better chance to make profitable trades. We are allowing people to go on a waiting list if people drop out.

TER: Do you feel that investors need to be more trading-oriented in order to profit in the energy market these days?

CL: Personally, I’m a pretty long-term oriented investor, but recently the market has been so rough I’ve been forced into taking more of a trader approach. I really enjoy working on long-term winners and energy companies that can be self-funded are extremely attractive. I have quite a few very long-term plays I’ve been in two or three years and still holding. I’m hoping the market will stabilize a little so we can have longer-term trades, but I do short-term as well.

TER: When you talked with us, midyear 2012, your portfolio was up somewhere between 40% and 50% for the first half of the year. How did you do overall for 2012?

CL: My partner, Jay Taylor, tracked it at about 63%. There’s a retirement account without any leverage or option trading, which was intentional. I was fortunate to do very well over three main areas in 2012: energy, mining and biotech. Actually, my biggest winner in 2012 was in biotech. Sarepta Therapeutics (SRPT:NASDAQ), which I discussed in The Life Sciences Report not long ago, has actually returned 15-fold in the call option trade. We also made a few very profitable trades in metals and mining; for example, we bought gold and silver stocks and ETF call options just weeks before QE3, which we sold on the QE3 news market swing. I also did quite well in the energy sector.

TER: What were your best performers last year in the energy sector and are you going to be sticking with them?

CL: I was heavily invested in Mart Resources Inc. (MMT:TSX.V) and Pan Orient Energy Corp. (POE:TSX.V) at the end of 2011. I will continue to be bullish on both stocks and those continue to be my heavy holdings. In terms of Mart Resources, we will likely see dramatic increases in its production when it finally builds out its pipeline. Oil production could easily double, if not triple, after the pipeline is built, so I expect the dividend increase to follow. Right now it’s paying about a 13% dividend. I would expect to see a much higher dividend after the new pipeline goes in.

TER: And when do you expect that will be built?

CL: The company guidance is for the second half of 2013.

TER: And where is Mart trading these days?

CL: It’s trading at $1.76 in Canada, $1.80 in the U.S. It paid $0.20 in total dividends in 2012 and it’s been a big winner. I started buying the stock at $0.15–0.16. I expect the dividend should be relatively stable because the cash flow is just incredible. The risk is that it’s in Nigeria and subject to some political risk. But if you can look beyond that, the stock has a very bright future. China recently made an acquisition in Nigeria paying about $23 per barrel (bbl) oil, so you can see that the upside is very significant. Most recently, Mart announced initial results for the UMU10 well. These new discoveries at deeper zones will not only increase the reserve and production, it may even carry an additional tax holiday that can be very beneficial to Mart shareholders.

TER: What’s going on with Pan Orient?

CL: This year will be the most exciting in the company’s history. It’s a producer in onshore Thailand. It has prepared for the past five years to explore some big targets in Indonesia as well as Thailand and will start drilling this month. There was an excellent article written by Malcolm Shaw, a retired Canadian fund manager. Seldom in my trading career have I seen this kind of risk/reward, and if you ask me which stock I think would have the greatest chance of becoming a tenbagger in 2013, I would say, without a doubt, it would be Pan Orient.

The beauty is it has so much cash on the balance sheet and no debt. It has fully funded all its exploration and doesn’t need to dilute shares. By the end of the year, it should still have a lot of cash left. Management consistently bought shares in the past. Even in the worst-case scenario, the downside is very limited and the upside is very big. Also, I want to say that the Chinese company, Hong Kong and China Gas Co. Ltd. (3: HK), bought the Pan Orient legacy oil field last year for $170 million ($170M), and has been looking for more assets. If Pan Orient makes new discoveries, we have a natural buyer right there to buy them and reward shareholders. That’s why I’m very excited about this one. I purchased the stock a year ago and it has much more room to run. I believe the run for Pan Orient has just started because it takes many years to prepare that groundwork, get approvals, do the seismic and then finally start drilling this year. I’m very excited about the stock.

TER: What other names have been good performers in the last year?

CL: Another stock with a nice return that is still undervalued is Coastal Energy Co. (CEN:TSX.V). It’s offshore Thailand so development is always slower than onshore; fortunately the wells are inexpensive to drill. I wouldn’t put it in the same category of Mart and Pan Orient. I’ve been trading it in and out since the stock was trading at a few dollars. Last year when an Indonesian company proposed to buy Coastal, I sold out all my shares. I told my shareholders to sell on the surge and then when the takeover failed, I bought back, at a much lower price. I’ve been trading in and out of this one.

Another stock I’ve been trading in and out of, so far successfully, is PetroBakken Energy Ltd. (PBN:TSX). It pays about a 10% dividend right now on its Bakken play. It’s quite undervalued if you compare it with its peers. I just bought it back recently after making a 50% return in the last round a year ago. Hopefully, it will rally from here. Many traders like to trade by the chart, which sometimes ignores the fundamentals. I often put “opposite trades” in place to take advantage of market swings.

TER: Do you have any sleeper names that are maybe due to take off?

CL: Porto Energy Corp. (PEC:TSX.V) was probably my major loser in the energy portfolio last year. Porto is an example of my risk-taking. When George Soros closed his position of Porto at $0.07 last summer, I decided to take advantage of it and told my subscribers that I became one of the largest shareholders. My calculations at that time were if its ALC-1 well were successful, the stock would be a tenbagger. If not, it’s still worth a lot of money. But the well was a failure. The stock is still trading at $0.06, so it’s really verified my calculation. You can see the risk/reward was in my favor and, in the future, if this kind of situation arises, I would do it again. But right now, looking at a $0.06 stock, I think it’s still very undervalued.

I had a long discussion with management not long ago. As a large shareholder, I proposed to management to take a look at the current tax-loss carryforward situation. Porto spent over $100M in Portugal and has over $100M in loss carryforward in Portugal. That could be worth a lot of money to its partner, like Galp Energia, which is a $10 billion Portuguese national oil company. Galp can take advantage of that loss and could translate easily to $0.20–0.30 per share. Management told me that they would take that into consideration and they are still in the middle of discussions with Porto to drill two or three wells this year. Those wells will be critical to the company’s future. The silver lining is that if all the wells fail this year, Porto may still have the option to sell to its partner, which may be able to use the loss carryforward on the balance sheet. I like this kind of a situation.

TER: So it may still be a winner for investors.

CL: Possibly. The risk/reward is in my favor, which also tells you how undervalued many resource plays are. The market has been in extreme conditions and Porto is just one example. There are so many undervalued plays out there that I am looking at right now.

TER: Does Porto have enough money to be able to do exploration work on its own?

CL: The two to three wells it plans to drill will be completely on the partner’s money, so it’s kind of a win-win situation for both.

TER: So it doesn’t have to go out and try to raise more money in the foreseeable future.

CL: Exactly. Management owns a lot of the stock and has been very careful about dilution.

TER: Do you have any other situations that look particularly attractive?

CL: A couple of weeks ago I took a position in a refinery play, which is a recent IPO called Alon USA Partners LP (ALDW:NYSE). Its parent is Alon USA Energy Inc. (ALJ:NYSE). Alon USA Partners is a master limited partnership that’s based on a single refinery in the Permian Basin. The Permian Basin right now has huge oil production and there’s a big spread between the local oil—West Texas Sweet—and Brent. Management is guiding about a $5.20 dividend for 2013. Right now the stock’s trading about $22. That means the dividend will be over 20% in 2013.

People wonder what happens if, in the long run we have all the pipelines built in the next 5-10 years. Alon USA Partners LP should still have an advantage because it would be more like a pipeline company. Why? Because it can take oil locally instead of piping all the way to the Gulf Coast and then it can refine that into gasoline and sell locally instead of piping the gasoline from the Gulf Coast. Basically, its margin will be the pipeline cost to pipe oil over and then pipe gasoline and diesel back. It should have a double-digit dividend, even after everything’s settled. Right now we’re looking at a huge dividend, more than the guidance by the company, which is $5.20 for 2013. It hasn’t announced yet, but some analysts are expecting over $2 in dividends for Q4/12—just in one quarter for a $22 stock.

TER: That’s pretty amazing.

CL: It’s a very nice dividend play. Also, Alon U.S.A. Energy owns about 82% of U.S.A. Partners. If you calculate the value of the shares it owns, it’s more than U.S.A. Partners’ whole market cap, which is absurd. Alon U.S.A. Energy also has another refinery in Louisiana that can take advantage of Louisiana Light Sweet, which will go down to the Gulf of Mexico later this year or next year, when the pipeline is built. So to value the rest of the assets to negative is really absurd. I own both companies.

TER: There’s hardly been any refinery capacity built in this country in many years so any company with a refinery is in a pretty good position.

CL: Plus, refineries are closing down on the East Coast and in California because they’re not making money because Brent is so high. The U.S. has the Jones Act, which forbids foreign tankers from shipping oil from one U.S. port to another. After Hurricane Sandy, they had to suspend the Jones Act. All the light sweet going to the Gulf of Mexico cannot go anywhere, which is just absurd under the existing laws.

TER: You’ve given us some really good ideas and follow-up, Chen. Thanks for joining us today.

CL: Thank you.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

Rent R Us

Of note in Bloomberg today: ”…Pittsburgh, where rents are at their highest in more than a decade.”  Anyone have the underlying report?

In itself the writeup is curious in what it omits, but it raises the spectre of a bigger conundrum.  Most benchmarking of cost of living differences between regions mostly come down to housing costs.  Similarly, real estate costs are a big part of business costs.  So does this all mean Pittsburgh’s advantage in cheaper real estate has its days numbered?

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Porter Stansberry: Gold and Real Estate Are My Hedges for the Fiscal Cliff

goldWith nary a glimmer of hope that economic sense will supplant political expedience, Stansberry & Associates Investment Research Founder Porter Stansberry expects rampant inflation to roar in once the cost of capital rises. How is he preparing himself? Stansberry tells The Gold Report he continues to buy and hold gold and also discusses how real estate can cushion against the fiscal cliff.

The Gold Report: Not a day goes by that we don’t hear or read something about the fiscal cliff. To what extent are you worried about the fiscal cliff? Or do you foresee a resolution?

Porter Stansberry: You can be sure of a couple of things from Washington. One is spending will not slow down. The increase to spending in 2013, 2014, 2015 will be the same kind of increases we have seen in previous years. We will continue to spend 24% of GDP at the federal level.

TGR: And what else can we be sure about?

PS: Some actions will be taken to increase the tax rates on some taxpayers, but they will produce no material change in revenue. The government will continue to take in far less than 20% of GDP in taxes, probably only 16% or 17% of GDP. Further, those changes also will narrow the tax base, which is to say that fewer people will be asked to pay more in taxes.

“People should fear not going over the cliff.”

Those two things—more spending and higher tax rates for some taxpayers—will happen because they’re the only politically expedient things that can happen. That’s been driving politics and the budget since 30, 40 years ago, and will continue to do so because voters demand more from the government and voters demand that they not pay. That will continue until the system completely collapses.

TGR: The fiscal cliff was set up a couple of years ago in theory to force Congress to do something. There’s a lot of fear about it, but at what point will there be enough fear that voters say we can’t proceed in this fashion anymore?

PS: People should fear not going over the cliff. If we go over the cliff, the tax base will greatly expand. The payroll tax cuts will be done away with and the broad middle class—the people who have benefited from the tax cuts—actually will have to pay taxes again in America. There’s no other way to generate the amount of revenue that is required. You cannot finance the federal government on the backs of the top 5% of wage earners because even if you charge them 100%, it wouldn’t come close to being enough money.

Right now the U.S. takes in something on the order of $1.5 trillion (T) a year in income taxes, but we have an annual deficit of $1.6T. Even doubling the amount of income tax collected would leave a deficit. Taxing the rich cannot solve this problem. It can be solved only by freezing spending and broadening the tax base. That will never happen because it’s unacceptable politically.

TGR: Eventually something will happen.

PS: Yes, it will. Our trading partners and the people who finance our debt finally will say, “We’re not doing this anymore.” But look at the Treasury bond market. It’s not happening yet.

TGR: It’s amazing that the U.S. hasn’t been downgraded just on the basis of all the political bickering.

PS: That’s partly because the Federal Reserve keeps buying up all the excess Treasuries. People have no idea how dangerous this is, but they will find out when inflation goes crazy. Another big reason is that there’s not a really viable alternative. What would the Russian Central Bank or the Chinese Central Bank do with their trade surplus? Buy British paper money? Or European paper money? Where’s the hard dollar alternative? There isn’t one. No government-backed money is any more secure than the dollar. Even the Swiss have turned on the printing presses to equalize exchange rates with the Europeans. There’s nowhere to go. That’s why these central banks are buying all the gold they can get. And that’s why gold prices are going to absolutely go higher.

TGR: China particularly has been buying a lot more natural resources such as copper or iron ore.

PS: I have been following the strategic buying of the Chinese and you’re right, it has been buying up lots of resources, especially in Canada. That will continue for sure, but it is also buying lots and lots of gold. I think Russia and China have been neck and neck in gold purchases since the 2008 crisis, spending almost half of their current account surpluses on gold every year.

“I do believe we’re still in a global finance crisis.”

Some folks have been critical of my prediction that the U.S. will lose its world reserve currency status, but I think it has already happened. When two of the world’s largest economies would rather buy gold than Treasury bonds, you’ve got a big problem.

TGR: When do you suppose the gold price will start climbing again?

PS: I don’t have any timetable. I can just tell you that I haven’t sold any of my gold and I won’t until there is a gold-backed, well-financed national currency that offers me a reasonable yield for the risk I take to finance the government. There’s nothing like that in the world and I don’t see any prospects like that.

TGR: The last time we chatted, you discussed the pros and cons of returning to the gold standard. One of your observations was that the U.S. dollar has lost something like 20% of its value since 2008 and you projected it losing another 20% in 12 months. Do you still see the dollar value decreasing at that rate?

PS: I actually think it is but it’s not reflected yet in consumer prices. Manipulating the bond market is so greatly reducing the cost of capital that so far companies have been able to maintain profit margins without raising prices. As a result, we’ve been exchanging capital cost for commodity costs but you can only do that for so long.

Imagine what your purchasing power would be if you’re going to go buy a new home today. If you have $10,000 for a down payment, you could buy a $100,000 home with an FHA mortgage, and you’d only pay something like 3% for the mortgage. But could you afford that if mortgage rates were actually market set? If you had to pay 7.5%? No. Your purchasing power, your standard of living, would be completely destroyed without reasonably priced financing, and that’s absolutely what will happen.

“I’ll continue to buy gold on a regular basis and I’ve never sold a single ounce.”

Look at other markets. General Electric Co. (GE:NYSE), for example, has $600 billion (B) in debt on its balance sheet and its combined annual cost of finance is less than 2%. That makes no sense. Imagine what GE would charge for turbines, light bulbs and appliances if it had to pay a market rate of 9% on that debt. The price of capital is so low that it is retarding the impact of ongoing inflation, but sooner or later all this debt will have to be financed at real prices. When that happens, the impact to the economy will be both a weaker dollar and higher prices for everything.

TGR: But you are making it sound as if the actual financing costs now are artificially low. When interest rates increase, wouldn’t it be more like 4% than 9%?

PS: Look historically what high-yield debt has traded for—9% isn’t even aggressive. Over the last 20 years, I think average yield on a high-yield bond has been 14%. People don’t think of GE as a high-yield credit but they ought to.

TGR: So many of these large companies have a tremendous amount of cash on the balance sheets. They could double their interest payments.

PS: All I am saying is that 9% is a reasonable cost for a GE bond, given its cash flows and given that it owes $600B and still owns all kinds of dicey real estate mortgages. GE is a huge American business. It employs 160,000 people. It is an example of how the Fed’s manipulation of interest rates affects the real cost of things. GE can afford to charge low prices for its goods because it pays so little for its capital. And across our economy, companies have been exchanging capital costs for commodity costs. GE’s commodity costs have gone up, but it has not passed it along to the consumer because it has been able to save so much on financing.

But as I said, that game can’t go on forever, and the minute the game ends it’s going to end badly. The shock to the consumer will be amazing. It’s not just inflation devaluing the purchasing power of wages, which is going on continuously. It’s going to be that suddenly consumers will have this huge price impact. It could reduce the purchasing power of the average consumer by 20% or 30%.

TGR: The way you’re explaining it, it sounds as if it could happen almost overnight.

PS: It will be extremely quick. Nothing particular changed in Greece, Italy or Spain between 2006 and 2009. No significant catalyst caused people to all of a sudden wake up and realize these sovereigns were bankrupt. They’ve been bankrupt for decades. All that changed was the realization that others were unlikely to continue to finance them. There’s no real credit analysis being done with GE. One investor buys the bonds because he’s convinced the next investor will do so, but that’s all based on faith. There’s no real critical thinking going on. All of a sudden, if some investor loses faith, it can happen very quickly.

TGR: Isn’t playing the markets all about faith and what you think the general population is going to do? Markets aren’t always based on fundamental economics. They’re based on fear and greed.

PS: Of course they are, but with the Fed skewing the bond market the way it has, people have become convinced that the yields will always go lower because the Fed will not let them increase. So far that’s been a great trade, but you cannot print your way to prosperity. Sooner or later these policies will destroy the credit of the United States and send interest rates soaring in our domestic economy. That will absolutely happen, no doubt about it.

TGR: Aren’t the Europeans—even the Chinese—in the same game of artificially low interest rates?

PS: China’s not in the same game, nor is Europe to the extent that the U.S. is. Germany has been very reluctant to monetize the European debt. It has certainly increased that greatly this year so maybe there will be runaway printing, but paper money has always been this way. Show me the paper currency that lasted for more than 100 years and was worth anything at the end. Paper money gives human beings the illusion that they can get something for nothing. They believe in it until it falls apart.

TGR: Until we get to a gold standard, we as investors need to be doing something to retain our wealth. You can put a certain amount in gold, which some people are doing, but we also have other types of investments, which for people in the U.S. is based in U.S. dollars. Until it unravels, isn’t the U.S. dollar the best bet?

PS: Yes. I think that’s fair. But it doesn’t mean anything to me because it’s similar to going on death row and asking who is the best guy.

TGR: But we’re looking at an unfortunate situation where individuals need to put their money at risk in equities or the bond market at this point.

PS: I disagree. I don’t believe people have to put their money into bond markets or stock markets. For the last 24 months I’ve been buying real estate almost exclusively. I might have bought a couple of small gold stocks along the way but miniscule positions compared to my net worth. I’ve been buying real estate because it’s an asset I can control, that I could finance extremely cheaply if I chose to. I do not choose to; I buy my real estate in cash. I’m not interested in making money on it. I just want to keep my money safe. I’m happy to make returns of 4% to 6% a year on my real estate portfolio. If inflation comes along I’ll be able to increase rent and have capital appreciation roughly in line with inflation. For me that’s all there is.

Porter Stansberry is intense when it comes to investing and recreation. His Atlas 400 Club brings together intelligent, successful people from all over the world for adventures that last a lifetime. See a video from his travels, including a recent trip that included racing Porsches in Germany.

I do believe we’re still in a global finance crisis. Things are not right with the world. In a situation like this, I think your goal as an investor should be to keep what you’ve got. It’s going to be very difficult to survive this with your wealth intact because so many forces are aligned against you. I just button up and I’m super-conservative.

By buying off the bottom in the real estate markets, I’m doing the best I can to protect myself from any future calamity. Time will tell whether it will work. And if there’s just ongoing inflation instead of a calamity, I’m going to make a lot of money with my real estate.

TGR: Absolutely. Any other insights you’d like to give to our readers of The Gold Report?

PS: I’ll continue to buy gold on a regular basis and I’ve never sold a single ounce. So if you’re buying gold I think you’re going to do very well. And I will continue to be cautious. I don’t believe it is a time to be aggressive, especially in the bond markets around the world.

TGR: Thank you very much, Porter. Have a happy—and I hope prosperous—New Year.

Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry’s Investment Advisory, deals with safe value investments poised to give subscribers years of exceptional returns.

Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world, independent research. They’ve visited more than 200 companies in order to find the best low-risk investments in the world.

John Mauldin’s Prescription for Avoiding Economic Catastrophe

John Mauldin Best-selling author John Mauldin of Mauldin Economics says the EU is only left with choices that range from bad to disastrous. Meanwhile, Republicans and Democrats will have to hold hands and walk off the cliff together to solve U.S. economic problems. In this exclusive Gold Report interview, Mauldin expands on his comments at the Casey Conference, “Navigating the Politicized Economy.” Read more about the consequences of those choices and necessary compromises—and how he would reform the U.S. tax code.

The Gold Report: Back in January you said the European Union (EU) would have to make serious political decisions with “major economic consequences” in 2012. Is the EU making those decisions and what is your prognosis?

John Mauldin: It is doing its best to avoid making decisions, but is being forced to make them, ad hoc. The EU allowed the European Central Bank (ECB) to print money to monetize debt. The ECB is buying time for governments to achieve structural reform.

Structural reform, not the debt, is the problem. The debt is a symptom of bad policies, of a system set up for failure. The EU translated a theory into fact, and the theory did not work.

TGR: Is that theory the EU itself?

JM: The theory is the monetary union. If the EU had just left the trade union alone without trying to layer the monetary union on, it would have been just fine. But the EU wanted a single currency. It was part of the Europhiles’ dream. The EU thinks the monetary union is the sine qua non and it is not.

Today, computers do not care about lira, pesos, drachmas, pounds, marks or francs. Computers just say, this is what this unit is worth, click, click, done. Exchange rates become pointless in an age when we are moving to an electronic currency.

TGR: What is the structural problem as you see it?

JM: The structural problem is a fundamental difference in the labor markets of northern Europe and southern Europe. There is a 30% differential over the last 10 years in the productivity costs in Germany and the countries in the south of the EU. That creates trade deficits in the southern countries.

“The structural problem is a fundamental difference in the labor markets of northern Europe and southern Europe.”

If you want to balance fiscal government deficits, you have to have a trade surplus. That is the economic rule. Greece cannot balance its government budget until it balances its trade deficit. The Greek trade deficit is running at 10% because it does not produce enough goods to sell to the rest of Europe at reasonable prices. Before the monetary union, Greece could fix that by changing the value of its currency. That avenue is now closed, so it will have to reduce the relative cost of its labor.

Indeed, when you look at the data, the Greeks work longer hours and harder than Germans; they just do not produce as much at the price the Germans do. There are some reasons for that. Germany restructured its labor force early in the last decade to allow for “mini-jobs.” Companies can hire workers without having to keep them on the books. You can hire him at €400/week without paying any benefits. When you no longer need them, you can fire them. Mini-jobs released excess labor; it gave German industry an outlet, and it is part of the German productivity miracle.

Mini-jobs would be politically unfeasible in Spain, Italy or Greece. Those governments believe people should get full wages for their work. Fine, but nobody is going to buy what you are making. There are consequences to solidarity with the workers.

TGR: What strong governmental decisions need to be made?

JM: The southern European countries must restructure their economies. Simply buying their debt and allowing these governments to borrow more money only means more debt owed to European taxpayers, debt that will be defaulted on.

Now, the EU countries are talking about a European banking authority that looks like the Federal Deposit Insurance Corp. The Germans hate the idea of the ECB telling them how to run their landesbanks, their regional banks, because those regional banks are really under water.

TGR: Structurally changing the labor force could take years, no?

JM: It could take years or it could change overnight.

Change can happen overnight when you have a currency. If we went back to the peso or the lira, Spain and Italy could restructure their relative labor costs immediately by dropping their currency 10–20%.

“The choices now are between very bad and disastrous.”

The countries remain productive, trade does not stop. Italians could then buy less because their currency would be worth less and the Germans could buy more Italian goods because their currency is worth more.

TGR: Why is that option not being discussed?

JM: Breaking up the monetary union is horrendously expensive. It’s a major—insert your favorite expletives here—disaster for everyone involved.

TGR: But the Eurozone countries lose even if they continue down the path they are on.

JM: That is the second disaster. You just have to choose which disaster you want.

The choices now are between very bad and disastrous. The northern countries want a true, full-on political union, but only if the rules clearly state that the European central authorities can take over the budgetary rules for what are now sovereign states if the states cannot get their budgets together.

The northern countries want to give Brussels the power to tell Spain, for example, how many government workers to lay off, how much to raise taxes and reduce spending to achieve a balanced budget. And the Spanish would have to sit there and take it because it agreed to those rules.

TGR: Turning to the U.S., in your speech today (Sept. 10) you inferred that politicians’ knowledge that the U.S. will hit the wall unless they do the right thing has become the catalyst to do the right thing. You also said you did not like all the solutions the politicians are proposing. What solutions would you propose?

JM: We all have our own economic fantasy. Mine is more academic than philosophical. When you study the literature, consumption taxes are less damaging to the economy than income taxes. I would like to see a value-added tax created, and I would like to reduce the income tax. This can increase the total amount of taxes collected and reduce the top rates.

“Over the next four to five years, I like dividend plays and income plays, income-producing real estate, farmland if you can get it—including outside the U.S.”

I would eliminate most deductions: mortgage interest, charity, subsidies. If you make $100,000 and the top tax rate is 20–24%, you will pay that rate. I would drop the bottom rate to 7–8%, and I would make the threshold for paying that rate pretty low.

I would like to see the corporate tax rate taken to 15% or 12%, and get rid of every flipping deduction.

TGR: The deductions for mortgage interest, charitable deductions and some subsidies are pretty emotional. What is the probability they will be eliminated?

JM: I think it is pretty high because it is the only way to reach a compromise. The Simpson-Bowles compromise is one of the worst proposals I have read but I would vote for it in a heartbeat because it solves the problem.

That compromise eliminated a lot of deductions and dropped the total top tax rates. Dropping the top marginal rate is actually very bullish for the economy because it allows businesses and entrepreneurs to keep more of what they make.

TGR: Will politicians who vote to eliminate those emotionally charged deductions pay for those votes when they are up for re-election?

JM: A lot of things are emotional. That is why both parties have to hold hands and walk off the cliff together.

TGR: And you are optimistic they will do that.

JM: I think they will be looking into such an abyss that it will be impossible for one party to force the other party to make all the decisions and do all the heavy lifting.

TGR: Would you also change the capital gains tax?

JM: Academically, it is preferable to get rid of the capital gains tax, but I do not think that is politically feasible, so I would leave it where it is.

TGR: Meaning no taxes on capital gains?

JM: I would get rid of capital gains period, if you go out and create something, invest in something and do something.

However, a capital gains tax of 15% will not change anybody’s economic motive for investing. Same thing for a 20% top income tax rate. People will not try to avoid taxes; they will just pay them.

I would have a 12% to 15% rate for corporations, with no deductions. General Electric made $6–8 billion and paid no taxes. I read a list of 20 corporations whose CEOs earned more in compensation than the corporations paid in taxes. This is just wrong.

I would tax foreign earnings at the same rate. Bring the money back, invest it here or do whatever makes sense for the company. This will have the added advantage of making our corporations far more competitive. It will allow us to become an export machine and it will create jobs.

TGR: How do lower corporate tax rates make the U.S. an economic export engine?

JM: By dropping to lower rates we will collect more in taxes from corporations because there would be fewer, or no, deductions. Instead of giving corporations tax deductions for certain investments or for using green technology, let the market sort it out.

By and large, the government has shown itself to be incredibly bad at trying to pick technology winners and losers. The Defense Advanced Research Projects Agency (DARPA) and a few others are the exception, where funding pure research and cutting-edge development makes sense.

TGR: Your remarks today included a warning that your optimism would change to pessimism if a solution were not developed in the first half of 2013.

JM: Very pessimistic; Spain and Greece-type ugly.

TGR: How does your optimistic side look at investment?

JM: On the optimistic side, I think the technological changes Alex Daley talked about in his remarks are real. Gross domestic product is growing at 2–3% and there are companies out there compounding it at 25–30%, in the biotech space for example.

Over the next four to five years, I like dividend plays and income plays, income-producing real estate, farmland if you can get it—including outside the U.S. There is a whole world of potential investments in companies doing cool stuff: traders, hedge funds, alternative funds. Do not limit yourself to buying a few, large-cap index funds and hoping for the best.

It will be a slower-growth economy for a while. Once we get to the other side of this, we will see a fabulous bull market start in the latter part of the decade. It could be a 15- or 20-year run. The last secular bear market is getting long in the tooth. It could be over in four to five years, maybe earlier.

TGR: What does your pessimistic side say?

JM: Investors must become more defensive; more fixed income, putting more money outside the U.S. and in gold. Look for investments that produce an income and a yield no matter what happens.

Investors should still look at technologies, but should be more conservative. You almost have to see how it will unfold.

In a disaster scenario, you have to start looking at what you will do when rates go up and the U.S. has its “bang” moment. No U.S. investor has experienced that so far. We do not know what this road looks like because it is around the curve.

My pessimist side sees more disruptions in the market, more Lehman-type events, bond markets deciding one morning that they want higher interest rates.

TGR: Your pessimistic scenario included buying gold as insurance not as a moneymaking asset. Can gold protect against these disruptions?

JM: Sure. Gold will have buying power in a disruptive society. If we cannot get our collective deficit act together, I will start increasing my gold allocation.

TGR: In a diversified portfolio, what is a healthy percentage of gold in both an optimistic and a pessimistic scenario?

JM: Optimistic scenario, I would say 5% or maybe a little bit more in physical gold. In a pessimistic scenario, I would double that.

TGR: You used a technical term, saying that “yield is a bitch,” and noted that 5–6% is a good number. In which industries or sectors do you find those percentages?

JM: There are companies that will pay 8–10% yields all over the board, all over the world. If you narrow your focus to U.S. companies, you will not find all of them.

Their stock price might have collapsed, even though they are in solid industries such as beer or liquor; very few countries are going to outlaw alcohol and beer. A company will not pay a 10% dividend for very long, because people catch on and buy the stock. Soon, the dividend returns to rates that are more normal. You have to be opportunistic.

TGR: In your pessimistic scenario, is that 5% or 6% yield erased?

JM: Some of it is. You will have to look for more defensive or more bond-type plays.

People reading this who are investing $100K, $500K, $1M, $2M can look at small, viable targets. If you are looking only at where the big boys are investing, you are limiting your world.

TGR: You are already widely published, why did you decide to start a subscription newsletter?

JM: People have been asking me to do it for 10 years, and I finally found the right people to do it with.

I realized that I could not write a newsletter, do the research that I am doing and run a publishing company. I needed a partner who gets the investment process the way I do. David Galland and Olivier Garret are the right people and I am enjoying our relationship.

TGR: How did you choose Yield Shark as your first newsletter?

JM: That is where the demand is, and I have been overwhelmed by the response.

We will launch Bull’s Eye Investor with Grant Williams in a month. Within the next 18 to 24 months, we will have eight or nine different publications.

TGR: I like that kind of optimism.

JM: The newsletters will give me a certain amount of freedom in the way I write and research and structure my life. This will simplify my life a great deal. I am only doing stuff that I want to do.

My Thoughts from the Frontline will always be free. It will always be written on the weekend, with one major change. I will write it on Sunday night so I can have a real weekend.

That may mean the newsletter will show up in readers’ boxes Monday morning instead of Saturday afternoon.

TGR: Getting your weekends back is a good plan, John. Thanks for your time and insights.

Hear the recommendations of all 28 experts at the Casey Research “Navigating the Politicized Economy” Summit with the audio collection.

John Mauldin is chairman of Mauldin Economics, an investment newsletter publisher, and is the author of four New York Times Bestseller books. They include Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market, Just One Thing: Twelve of the World’s Best Investors Reveal the One Strategy You Can’t Overlook, and Endgame: The End of the Debt Supercycle and How it Changes Everything. Mauldin’s free e-letter, Thoughts From the Frontline, is sent to over 1 million people every week. He also offers The Mauldin Circle, a free service that connects accredited investors to an exclusive network of money managers and alternative investment opportunities. He is a frequent contributor to publications including The Financial Times and The Daily Reckoning, as well as a regular guest on CNBC, Yahoo Tech Ticker and Bloomberg TV. Mauldin is the president of Millennium Wave Advisors, an investment advisory firm registered with multiple states. He is also a registered representative of Millennium Wave Securities, a FINRA-registered broker-dealer. Mauldin is a spokesman for the Hard Assets Alliance.

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Retail madness

So in case you missed it.  A pretty sizable default of buildings at the South Side Works.  PBT: Soffer Organization defaults on three core SouthSide Works properties

An inkling of that was apparent long ago.    I guess the thing that I wonder about is why nobody ever poked much into the state of retail over there before this.  Maybe I missed a story along the way?

Still the redevelopment of the site remains one of the more remarkable stories when you consider what was there before.

Homestead exemption?

So there is an idea being put out there to raise the homestead exemption for local property taxes in the city of Pittsburgh and school district.

Now who suggested that might be a good idea broadly?   I guess the only difference is I did not think of the idea of raising the exemption amount as “in lieu of” mandated anti-windfall millage changes.  I guess the math works out the same.  My point then and now is that you have to raise the homestead exemption proportional to the reassessment value change or else the impact is regressive by default.  In other words.. the fixed amount exemption will be a lower proportion of total real estate value after the reassessment. Just to keep the tax incidence status quo you need to adjust the exemption amount.

The real RAD debate is forgotten

So the big debate of late is whether the Allegheny County Regional Asset District (aka RAD) is allowed to use some of its funding to support public transit.
Some may not think about it much any longer, but what is the Regional Asset District?  No real ‘region’ in it.  The RAD is a semi-autonomous entity that collects a 1% supplemental sales tax only on eligible purchases only in Allegheny County. Nowhere else in the region is impacted; so region with a small ‘r’ I guess. The RAD itself and the tax has not been around all that long having been implemented following a contentious public debate in the early 1990s.  The tax itself went into effect in 1994 based on enabling legislation that first passed in Harrisburg and then with the support of a majority of the county commissioners that ran county government here at the time.

The whole idea of the RAD however was a culmination of a decades long process that started long before it finally came into being.  For more on that history read: Pittsburgh: a regional city with a local tax base, though I would argue it all connects to earlier debates on local public finance and debates in the 1950’s that lead to to the creation of the city’s earned income (or wage) tax and also to some of the earlier attempts at the creation of an Allegheny County Home Rule Charter…. before the version that finally came into being later in the 1990’s only after the RAD was created.

Back when it when the new tax was being debated it was big news.  The core of the debate was what would happen to retail firms and sales in Allegheny County.  Would everyone flood out of the county to make their routine and large purchases.  Would retail biz in the county collapse as a result of the extra tax that could be escaped by a short ride in most any direction?  It was a very real question and very much expected by many.

What really gets me a bit is that around here there is just no follow up to anything.  Lots of debate at the time looking at what the future impact of what the RAD would be, but nobody every bothers to look back once there is real data to look at.  So what happened?  Did Allegheny County become a retail wasteland because of the RAD tax?  It is not that hard a thing to check.

Before looking some pesky data we now have, what do we know about what happened to the retail sector within Allegheny County in the decade following the implementation of the RAD sales tax?  Maybe a few new retail confabs have come into existence and thrived.  Waterfront, South Side Works, Pittsburgh Mills, virtually all of the retail paroxysm otherwise known as Robinson..  Folks new to the region may not even realize that just a few years ago most all of that was completely undeveloped land.  Like all of it. No mall, nothing.  Sure seems like retail has just withered in the years following the implementation of the RAD tax. Back before the RAD there was regular discussion about how under-retailed the county was.  I don’t hear that much any longer.

For those who want to argue the point.  Argue with the data.   Here is the total value of retail sales by county within the Pittsburgh MSA.  This data is from the Census Bureau’s quinquennial Economic Census if you want to check the numbers.  I pulled the values for 1992, just before the RAD was implemented, and for 2007 which is the latest available. Note that the values are nominal values and there has been inflation over 15 years. So I calculated the growth in total retail sales by county, but also added up the cumulative sales and change for the 6 suburban counties.  Given the prognostications on what impact the RAD tax would have to have, you would at the very least expect Allegheny County to trail growth in the suburban counties.  When you add in the fundamental fact that population in the suburban counties has fared a lot better than the decline for Allegheny County over that period you would expect Allegheny County’s retail sector to trail the suburbs by much more. You would expect a lot of retail sales to follow patterns in residential migration… RAD tax or not.   But…  that’s why we bother to count:

Retail Industry Total Sales ($1,000s)
1992 2007 Increase

Allegheny
$10,833,966 $20,075,411 85.3%
Armstrong $373,232 $532,139 42.6%
Beaver $954,144 $1,555,258 63.0%
Butler $1,051,177 $2,527,258 140.4%
Fayette $1,039,489 $1,535,518 47.7%
Washington $1,271,702 $2,283,225 79.5%
Westmoreland $2,424,364 $4,154,689 71.4%
6 county subtotal $7,114,108 $12,588,087 76.9%

Interesting readings for September 10, 2012

Rajdeep Sardesai on the problems of law and order in Bombay. Nothing is more important in the priorities of the State than the police and the courts.

In recent weeks, we’re seeing fresh attention on the flaws of the HR processes of government. Shashi Tharoor in the Indian Express on the IFS, and Sundeep Khanna in Mint.

Trampling on the individual in India:
- Sending cartoonist Aseem Trivedi to jail is ridiculous.
- Vijaita Singh in the Indian Express about the government interfering in grants to think tanks, followed by an editorial on this.
- As Robert Kaplan says, underdevelopment is where the police are more dangerous than the criminals. Here’s a story about the police in Gurgaon.
- Meghan Davidson Ladly writes in the New York Times about the struggle for freedom that many women in Pakistan are facing. We can’t say we’re finished with this. What fraction of India faces this level of social backwardness?

N. Sundaresha Subramanian has a great first draft of history, telling the story of Sahara in the Business Standard. This is a great vindication for K. M. Abraham and C. B. Bhave, and a reminder of the importance of the recruitment process in government. Also see great reportage on Firstpost : Sahara will have to sell realty assets to pay off investors by Raman Kirpal; ROC: The dog that did not bark when Sahara came in by R. Jagannathan.

I recently blogged about checks and balances that will keep Indian capitalism safe. I guess I am picking up ideas from the zeitgeist. On related themes, see: The old India is dead. Wake up, netas and business babus by R. Jagannathan on Firstpost; A long way from 1984 by Pratap Bhanu Mehta in the Indian Express and an editorial Behind the curve in the Business Standard.

Many people in India like to invest in gold and in real estate. I would like to remind them that the analytical case for these is weak. Here is some new evidence on gold, and here are some older arguments about real estate.

Sunil S. in Pragati magazine about India’s electricity grid problem.

Mobis Philipose in the Mint writes about an intruiging development: a `Intermediaries and Investor Welfare Association (India)’ has filed a petition in the Delhi High Court alleging that algorithmic trading is bad. I wonder who is behind this.

On the theme of the transformative impact of google maps, see How Google Builds Its Maps, and What It Means for the Future of Everything by Alexis C. Madrigal.

Sebastian Mallaby has a great response (originally in the Financial Times) to the Apple-Samsung patent violation case. If you’re in the US, you need to run, not walk to buy cool Samsung equipment, or buy it when you travel abroad.

The Euro crisis is back from vacation by Adam Davidson, in the New York Times magazine.

If Xerox PARC invented the PC, Google invented the Internet by Cade Metz in Wired magazine.

Why sex could be history by Kira Cochrane in the Guardian, about a new book by Aarathi Prasad.

Some of the biology that we learned in high school is getting overturned.

The UK under the loop – Safe Haven for How Much Longer?

One of the extraordinary effects of the euro zone debt crisis has been the manner in which the market and media have taken the notion of safe haven investment to heart. Consider for example the fact that the situation we are currently in largely comes down to too much debt tied to real estate, mortgages, and property development.  Consider then Denmark with the largest ratio of mortgage and private household debt to income in the world and you wonder why international money is pouring into the Danist mortgage backed securities to such an extent that interest rates are now negative. I mean, wasn’t this the very products that got us here in the first place?

The same reverse logic can be applied to the UK where yields on Gilts are heading for new lows even as we learn from the most recent McKinsey study on global deleveraging that the UK is now the most indebted economy in the world even surpassing Japan.

Ben Davies and his team at Hinde Capital have also been wondering about the UK and the result is a timely and very detailed report on the UK economy, its challenges and how to solve them. The report has been published in two parts, with the first part coming out earlier this week causing a flurry of debate as it was picked up by Izabella over at FT Alphaville.

You can get part 1 here and part 2 here.

It is well worth reading, preferebly before you stuff yourself with more Gilts.