By Simon Grey, on December 15th, 2011
Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.
More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.
“This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,” the researchers noted.
Investors defaulted in large numbers after home values began to drop in 2006. They accounted for more than 25 percent of seriously delinquent mortgage balances nationwide, and more than a third in Arizona, California, Florida, and Nevada from 2007 to 2009.
Sweet Keynes but the banksters just do not have a clue. Somehow, the FRB of New York has come to the hilarious conclusion that somehow, mysteriously, those who “flip” houses are the root cause of the recession. Talk about clueless.
The question that the NY FRB is apparently too stupid to ask is: Why would some people suddenly decide to “flip” houses? Answer: because it’s generally profitable due to the increased demand for houses as a result of a)artificially low interest rates from The Fed, b) massive fraud among the banks in regards to loan application, c) the Federal Government’s willingness to subsidize market risk, and thus eliminate moral hazard, through the agencies Freddie Mac and Fannie Mae, and d) the general tendency of the government to encourage and subsidize home ownership through, among other things, federal income tax breaks. Basically, the government as at the root of most of the problem here, and the Federal Reserve played a major role.
Of course, the FRB is not going to admit to wrongdoing, particularly since greedy businessmen make for a more compelling villain in this narrative. But blaming people for responding to incentives at the margin, as clearly happened in this case, is indicative of just how worthless mainstream macroeconomic analysis clearly is. Quite simply, it takes an astonishing amount of either dishonesty or short-sightedness to come to the conclusion that greedy businessmen are to blame for the current recession instead of the incentive system in which they operated.
The shallowness of this analysis, if honest, is simply evidence that those who are currently in charge are simply too stupid to merit the power with which they’ve been entrusted. If, on the other hand, they are liars, the case for their removal from power is not in any way diminished. In sum, there is no excuse for those presumed to be intelligent, and thus deserving of power, to be offering analysis this putridly vapid; they must be summarily dismissed and the system must be dispatched with.
* Cf. Dr. Sowell’s book Applied Economics.
By Christopher Briem, on December 5th, 2011
So I wind up often getting into an agument that boils down to me disagreeing with a common belief that the recent recession for Pittsburgh is a slightly milder, but still very similar experience to the recession of the early 1980’s. Nationally it was actually two recessions officially (January to July 1980 followed by the longer period July 1981 to November 1982), though I think most would agree that the two recessions really were one big recession for the Pittsburgh region.
So as the national news parses the good unemployment numbers yesterday, the nabob version focuses on the drop in the labor force participation the numbers seem to show. It lead me to making the graph below. I took the labor force trends in Pittsburgh and made a comparable index from a period early in the two recessions. So from January 1982 and from January 2008 forward, the graph shows what happened to the national and Pittsburgh region labor forces over the subsequent 4 years. The graph shows the change from those baseline months. Lot’s to parse from it, but just take a look:
 The extreme differences for Pittsburgh in the two recession (1980s vs recently) go way beyond what that graph shows. That decline in labor force in Pittsburgh actually masks the decline in the male labor force a bit as women entered the workforce in record numbers to replace the men who were out of work. The drop in the labor force clearly correlate with the net migration that spiked from the region and the drop in population it caused. The folks who were leaving both the regional labor force and leaving the region period were predominantly younger workers who were the folks most capable of adapting and changing to new jobs in new industries. Those who stayed were far more likely to be older workers who had been displaced from the occupations they had had for decades and for many would never find new employment. Today we know that in recent years we have seen the first net migration into the Pittsburgh region in decades and changes in migration patterns almost entirely reflect changing migration patterns of young workers. It is folks in their 20’s who dominate migration flows with rates of migration dropping as folks get into their 30’s, 40’s and older.. until there is a bit of a spike in early retirement years. So if net migration for the Pittsburgh region flipped from net negative to net positive just a few years ago, it has to reflect changes in the flow of younger workers into the region.
So, just as the incredibly high unemployment rates of Pittsburgh in the early 1980’s persisted even though so many workers were leaving the region which would have taken a lot of potentially unemployed folks out of the regional labor force… masking how bad the employment situation really was; today the regional unemployment rates are being impacted by more workers, or those seeking work, flowing into the region and potentially making local labor force metrics look worse than they appear otherwise.
By Claus Vistesen, on October 24th, 2011
As I read the latest round-up of comments by Fed officials that they are certainly not ruling out another round of asset purchases I am wondering whether this signals another round of actual quantitative easing by the Fed or whether investors should change their mindset back to before the crisis where it wasn’t the USD that acted as the global carry trade funder but rather the JPY (or maybe the GBP here?).
Quote Bloomberg
Fed Vice Chairman Janet Yellen said yesterday that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” A day before, Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”
They join Charles Evans, president of the Chicago Fed, and Boston’s Eric Rosengren in calling for consideration of further stimulus to boost growth and bring down a jobless rate stuck around 9 percent or higher for 30 months. A stock-market rally and gains in manufacturing and retail sales may convince the Federal Open Market Committee, which meets Nov. 1-2, to decide that it’s too soon for a third round of bond purchases.
You see, the recent initiative of the Fed in the form of Operation Twist is not quantitative easing since it does not involve an expansion of the balance sheet. In stead, it is what we refer to as qualitative easing as the bonds the Fed intends to buy on the long end (to move long rates down to help the mortgage market) will be paid for by proceeds of selling bonds on the short end.
The biggest problem for the Fed here is not necessarily that Operation Twist is a bad idea. Indeed, to the extent that it fixes the effort squarely on halting the slide in the housing market and supporting volume and price in the primary and second market for mortgage securities I think it is an excellent idea.
But we are forgetting the auxiliary objective of QE by the Fed; to weaken the USD. Make no mistake that this is an important objective for the Fed even if they have never declared this formally. And herein lies the rub. Quite simply, with the recent announcement by the BOE of another round of QE worth £75 billion, with the ECB now willingly or unwillingly being forced into increased support of peripheral debt markets and with the BOJ also pledging more stimulus, the Fed is starting to look like the conservative central bank in the G4. [1].
In my opinion, this is very significant and also one of the reasons why Fed officials are busy ensuring markets that they have plenty of ammunition left should economic conditions merit it. But investors should not take anything at face value I think. Before the Fed actually starts to buy those MBS and/or moves to lower interest rates on excess reserves there is a real chance that especially the JPY will start to act more like the JPY of old, a.k.a global carry trade anchor of choice. Of course, this requires the BOJ to back up all the pledges with real action. For now though, the only thing we can say is that the Fed looks set to be outgunned by its peers in the G4.
EMU Outflanked
Is Europe now finally getting down to serious business or is it just another round of fudge from the fudge factory that investors have learned to respect for its ability to produce relief rallies out of nothing. Looking at the evidence I thoroughly inclined to go for the latter even if each failed attempt to shore up market confidence brings Europe closer to full fiscal union.
Even if Merkel and Sarkozy, and rightly so, appear most concerned with putting pressure on Italy, the most significant issue remains Greece which is now in default a fact that was un-sanctimoniously confirmed by the leaked bailout document which has the Troika admitting that the medicine they were mandated to administer would only make the patient worse and not better.
Quote FT
Greece’s economy has deteriorated so severely in the last three months that international lenders would have to find €252bn in bail-out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in their debt repayments.The dire analysis, contained in a “strictly confidential” report by international lenders and obtained by the Financial Times, is more than double the €109bn in European Union and International Monetary Fund aid agreed just three months ago.
The most recent estimate of haircut has now risen to 60% and this, mind you, would only reduce the debt to GDP to 110% and this without any consideration on how Greece is supposed to grow itself out of this level of debt while simultaneously dealing with the default. In addition and only adding to my disdain for the ECB, Reuters reports that the central bank opposed a 60% haircut on account that it the private sector would refuse likely refuse this leading to a “fullscale” Greek default.
I am continuingly amazed by the denial here. Ever since the first Private Sector Proposal (PSI) was put on the table, Greek has been in default and figuring out who would pay for recapitalising banks as a function of how large the final haircut ends up are merely steps in the actual default process.
The second issue on the table is what to do with the increasingly freakishly looking EFSF. There has been no shortage of suggestions on how to increase the scope of the fund using the same guarantee by the same countries for the same amount of money (currently €440 in effective capital). The suggestion that might actually work came from France which has aired the suggestion that the EFSF be turned into a bank which would then allow it to access liquidity from the ECB. Both Germany and the ECB however have vehemently denied this which indicates that there is still notable reluctance to allow the ECB to wield the full arsenal of quantitative easing.
The proposal which currently seems to have most traction is to turn the EFSF into a monoline insurer which would essentially use its capital to insure anything from 10% to 30% on any new issuance of sovereign debt by Italy and Spain. Crucially, the idea is that this “leverage” would bring calm to markets as this insurance could cover as much as 2 trillion worth of debt.
I really struggle to find adequate words here. I think this is madness and if any Eurozone politician were afraid that an equivalent of AIG would certainly enter the scene, they now seem content on creating one. The first and most widely flagged issue is this would obviously create a two tier bond market.
Quote Reuters
This would create a division between insured and non-insured debt, that could split a country’s investor base and suck liquidity out of the market unless new bonds were carefully constructed to allow them to trade on a par with existing debt.”The issuer would have to create a new curve of insured debt, limiting the liquidity in both curves with risks that investors would dump the old non-insured bonds,” said Commerzbank rate strategist Christoph Rieger.
Based on a 20 percent insurance model, JPMorgan estimates that insured bonds issued by Italy would trade at a yield around 100 basis points below existing debt with new, insured Spanish debt likely to be priced 80 bps lower than existing bonds.
I think this is significant, but we are missing the main point here. If this is set ut Spain and Italy will likely never be able to issue un-insured debt again and the contingent liability here is not only complex but will lock in future capital commitments to this aim of providing first loss insurance. For me, this is a horrible way to spend already scarce capital.
Another issue is obviously that it assumes that it will make the Spanish and Italian problem go away which it clearly won’t. However, much more fundamentally; while the idea is to ring fence Italy and Spain it almost guarantees painful haircuts in the case of Ireland, Portugal and Greece and once again, who will pay for those I might ask.
The only silver lining I have seen in the latest reports is that it seems to me that while the imminent objective is to fiddle with the EFSF, there has also been serious talk about bringing forward the ESM which would have a much stronger mandate and essentially constitute a first step towards socialising of sovereign risk in the euro zone. Until that happens, the EMU and her politicians will be continuously outflanked by economic realities.
—
[1] – I repeat that with the ECB not formally in ZIRP mode, the Fed still has the yield disadvantage here but do we really expect the ECB not to lower going forward?
By The Gold Report, on October 18th, 2011
 Steve Palmer, founder and chief executive of the Toronto-based investment manager AlphaNorth Asset Management, prefers metals that have uses beyond sitting in a basement safe or gift-giving. In this exclusive interview with The Gold Report, Palmer explains why he is looking closely at hardworking base metals that could take off with increasing global demand and a market rally he is forecasting through the end of the year.
The Gold Report: In August, you wrote that you did not believe the U.S economy was heading into another recession despite continued investor concerns about global growth. Do you still believe that?
Steve Palmer: Yes, there is nothing that has transpired that would cause me to change that view. The economic data has been quite good. The market was retesting the low that it hit on Aug. 9 and it briefly dipped below that level. But it had one of the largest rallies in the last 25 years to rise above that low. From a technical point of view, the retest was successful and we have continued to trade higher since Oct. 4. I believe the bottom is in and the stock market will rally significantly into the end of the year. The recent market action only further supports that view.
TGR: As we emerge from that bottom, how are you choosing between undervalued companies right now?
SP: I am trying to focus on the less speculative names. Even the companies that are well financed have been experiencing greatly depressed share prices, so there are strong gains to be made in those. You don’t have to go searching too far down the food chain into the really speculative stuff to generate strong returns.
TGR: You’ve written that equities remain extremely attractive relative to historical valuations and are particularly attractive relative to other asset classes, such as bonds. Do you believe equities are the best place for investors to be if the bottom falls out of the market, as it did in 2008?
SP: I don’t believe that the bottom is going to fall out. But if you were to believe that that’s the case, bonds are the place to be temporarily. If you remember back to 2008, the meltdown only lasted a few months and then the market started to move higher. Historically, it is clear that equities do outperform bonds over longer timeframes. Many investors do not realize that they can lose money in bonds. Investors can take a significant capital loss on bonds unless they hold them to maturity if yields go up. A 10-year bond that is yielding 2% is locking in a 2% return for 10 years and equities are likely to far exceed that.
TGR: Also, if inflation is higher than 2%, investors are losing money.
SP: Investors should also be mindful of the tax differences. In Canada, capital gains are taxed at half the rate as interest. If you’re earning 2%, by the time the taxman gets through with it, it turns into 1%. Then if you have inflation, you are losing money every year, or at least losing purchasing power.
Investors are hoarding cash and piling into fixed-income products. They will probably continue to do that until they start losing money or see others making a lot more than they are in the equity market. Then we will see a shift.
TGR: You forecast that the equity markets are going to rebound through the end of the year. So that shift could be about to occur.
SP: For many investors it is going to take longer. Most of them will probably miss at least the first half of the rally and then they will pile in right at the end.
TGR: Recently, the asset mix in the AlphaNorth Partners Fund was 37% technology, 25% energy, 27% metals and 11% precious metals. Why does the fund have more exposure to metals than precious metals?
SP: I am not a big fan of precious metals at the moment. The precious metal stocks are far more expensive than the metal names. Both in terms of a net asset value and, on a multiple basis, precious metals are typically double the price. Base metals are, as the commodities themselves are, something that gets consumed, something people actually need. Many of the products that we use today require them. Whereas precious metals have minimal uses other than sitting in your basement vault or wearing them around your neck, which is not very practical.
TGR: That’s certainly not the case with silver. Silver has a huge industrial demand component.
SP: The major uses for silver historically have been for industrial uses, jewelry and photography. The photography component has been declining rapidly with the increased use of digital cameras. If it were not for investment demand increasing in recent years, the total demand for silver would have declined. The silver price would not be anywhere close to where it is currently if it wasn’t for the investor demand through exchange-traded funds and people hoarding it.
TGR: What’s your thesis for investing in base metals?
SP: Base metals are tied to global economic growth. Global growth should reaccelerate shortly and continue to be driven by China. The results will be favorable for supply/demand fundamentals for the commodities.
TGR: What particular base metals are you most bullish on?
SP: I have no particular favorite. The companies that are represented in the fund are a mix of different base metals. Most base metals companies have a combination of metals. For example, I met with Canadian Zinc Corporation (CZN:TSX; CZICF:OTCQB) this morning, which has zinc, lead and silver.
TGR: Those are quite common in one deposit. Are there some other base metal companies that you believe have some upside?
SP: Orbite Aluminae Inc. (ORT:TSX) is a base metal name with a twist. It is not just a base metal name. The company actually works with alumina—aluminous clay, Orbite Aluminae calls it. It has a process for extracting alumina from the clay in Québec.
Québec is home to about 12 aluminum refineries because of cheap hydroelectric power. When you combine electricity with alumina you get aluminum. Basically, two tons of alumina plus some power creates one ton of aluminum. Companies have been shipping alumina in from South America and all over the world, whereas in the future, it is anticipated that Exploration Orbite will be able to supply aluminum locally for much lower cost.
TGR: That is an interesting name that might not come across the radar screen of most investors. What are some common themes in the precious metal companies that are part of the fund?
SP: They are relatively early-stage companies with favorable odds of a major discovery, or they have a very cheap valuation relative to the peer group. The holdings are skewed toward gold.
TGR: You figure out which are the best in class and then compare valuations?
SP: It is somewhat subjective. You have to assess what the odds are that the company will find something, how big the discovery could be, and weigh it against the current valuation. We try to get in situations that have cheap valuations relative to the potential of what they can find and that have high odds of actually finding something.
TGR: Do most of these companies have prefeasibility studies?
SP: These companies are across the spectrum. Some of them have a resource already. It is a question of how big the resource can get. Some of them are earlier stage where they don’t have any drilling yet, but they have some very attractive targets.
TGR: When The Gold Report spoke with you in May, you said, “If I only make 50% on a position I’m disappointed. I’m trying to get into something that has lots of potential and make multiple times my invested capital. So, that’s why we focus on the long side.” What are some positions that you have taken in the precious metals space that you believe have long-term potential for gains that are significant?
SP: One example would be Ryan Gold Corp. (RYG:TSX.V). The Yukon has had many significant discoveries in the last couple of years. It is a very hot area right now and many companies have been getting good drill results. Ryan Gold has a huge land area there. It has an abundance of soil samples and some other geotechnical work done, which indicate some very promising drill targets. The company has a market cap of about $80 million (M) versus $60M in cash as of June 30. I view it as very high odds that Ryan Gold will find a significant gold deposit on its property. It’s just a question of time. The initial drill results will be out in the next few weeks. The company is also well financed.
I do own a few other companies in the Yukon, but I have the most confidence in Ryan Gold being able to find something very significant and offering the best returns from current levels.
TGR: Are there any other stories that you really like?
SP: Majescor Resources Inc. (MJX:TSX.V) and Seafield Resources Ltd. (SFF:TSX.V:) are examples of a couple I have mentioned before.
For example, Seafield has a strong potential to add to its resource. Its valuation is less than most other Colombian junior gold explorers. I like that there has been insider buying recently in the stock.
Majescor has some similar attributes. It is in Haiti, so it’s a totally different area, but the company just recently raised money and has cash to proceed over the next year. Insiders participated in that raise as well. It’s a very low market cap.
TGR: Majescor also has a project in Madagascar, a volcanic massive sulfide project, which seems like something that you would be interested in because it has not only gold and silver, but also copper-zinc-gold-silver mineralization. What is your view on that project?
SP: The major reason that I own Majescor is for its Haiti project. But it is also good to invest in a company that has multiple projects. If one doesn’t work out then the hope is that the other one will.
TGR: What’s your outlook for gold and silver?
SP: My view of gold and silver is that they trade with the U.S. dollar. The U.S. dollar has rallied in recent weeks and gold has dropped $300. If the commodities all improve and appreciate over the next couple of quarters, gold will probably get dragged along. But they aren’t the preferred commodities that I like to invest in at the current time. I think there are other commodities that make more sense and that will perform better.
TGR: Namely?
SP: Copper, potash, oil, gas, zinc and coal.
TGR: Thank you very much for talking with us.
Steve Palmer is a founding partner and chief investment officer of AlphaNorth Asset Management. Prior to founding AlphaNorth in 2007, he was employed at Canadian Equities, one of the world’s largest financial institutions, as vice president where he managed the Canadian equity assets of approximately $350 million. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies from its inception to August 2007 achieving returns that were ranked #1 in performance by a major fund ranking service in their small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity pooled funds. From 1997–1998, Palmer was employed as a portfolio manager at a high-net-worth investment boutique. Palmer earned a B.A. in economics from the University of Western Ontario and is a Chartered Financial Analyst.
By The Gold Report, on October 17th, 2011
 Casey Research Chief Economist Bud Conrad believes the United States is acting as a late-stage empire, acting aggressively on the world stage, lowering its moral standards and debasing its currency. In this exclusive interview with The Gold Report at the Casey Research/Sprott Inc. “When Money Dies” Summit, he explains the options for how the inevitable collapse will occur.
The Gold Report: At the Casey Research/Sprott Inc. Summit, you gave a presentation called, “A Crisis of Confidence.” After all the government stimulus from the U.S. and the rest of the world aimed at injecting liquidity and keeping interest rates low, why didn’t any of it work? Why is the economy still hurting?
Bud Conrad: First, printing money doesn’t create wealth. Putting bits in a computer doesn’t create wealth. When politicians hand out money, they are the ones who get powerful and the banks get wealthy. The middle class with savings gets hurt. What creates wealth is people working and creating things.
Internationally, the Chinese are papering over their slowing growth rate by providing liquidity, but paper money systems will collapse. That is the reality. The global financial system is supremely unstable. When people wake up to the fact that this is a “king ain’t got no clothes” economy, we will see a run to the exits.
TGR: It seems like we are saying that the currency is going to fail because of debt to gross domestic product (GDP), not because governments can print money. If governments were disciplined, then would printing money be a problem?
BC: When the U.S., and therefore every other country, went off the last vestige of the gold standard, we were placed in a fairyland. That is even more important than the debt. It is linked. Debt is the result of the ability to print money. If there were redeemability, the U.S would have stopped issuing debt when it ran out of money. Without fiat currency, the country wouldn’t have reached the current level of debt.
No government is disciplined. My question is: “Why are people letting them get away with it? Why aren’t people out protesting in the streets?” Thousands of bankers should be in jail right now. There is an attitude of resignation in young people today that dismays me. Maybe they know they can’t fight city hall.
TGR: If we are all resigned that whatever is going to happen will happen, how can people protect themselves?
BC: A lot of people probably believe that everything will be okay. When we have a financial collapse and people stop getting their payments and they see bankers and government contractors getting rich, maybe people will take matters into their own hands. It could be dangerous to be in the streets because people who are hungry will rob you.
TGR: If the bubble has already broken in the U.S. stock and real estate market and is getting ready to burst in China, are there any upside opportunities?
BC: In a paper money/fiat currency collapse, the things to hold are real assets—gold and oil will look like you are making money. Gold doesn’t change. It is just gold. When the price goes up, the metal isn’t any different. Only the dollar is going down.
There is also a moral component to the question. A lot of people are getting out of the country. This is where I was born and where my family lives and I am an American so I probably won’t go anywhere, but a lot of people are considering moving out of the U.S. to protect themselves and their assets.
TGR: What is your biggest fear for your children?
BC: That the government has turned it into a totalitarian state where the people don’t have personal freedoms to assemble, think and live their lives without surveillance, over-taxation and subservience to the state. I worry that my children and grandchildren could be impoverished by conflict, by a society that dissipates it resources in wars that only destroy wealth, rather than creating anything.
I also worry about how they will fuel their economic growth. Fossil fuels created the abundance of our generation like humanity has never experienced before. We have used half of the dinosaur remains out there. If we use it all up, then we will have to reduce the number of people on the planet. Now we need to start thinking about what is next. I don’t know how my grandchildren will live in an abundant society when energy becomes so expensive and scarce that we have big wars over it. It’s already happening. Energy explains the conflicts in the Middle East more than religion ever could.
TGR: You have said we are entering Cold War II. Can you explain that?
BC: Everyone is uncomfortable with the role we played in the Middle East. They fear we could enter a World War III. But a cold war is not a conflict between the main parties. We didn’t battle with the Russians directly. We fought in Vietnam. The same is going on with China in an economic war over resources. The U.S. bombs the place in hopes that a new government will come in and give us cheap oil while China is busy winning contracts for the access to resources in many far-flung regions from oil in Africa to soybeans in South America. China is building cultural centers and roads to mines in an attempt to gain the favor of the people while gaining access to resources. Our approach of bombing people just makes enemies and is very expensive. It is another example of the stupidity of a late-stage empire.
TGR: You have referred to the fight over access to oil, but I hear the U.S. is the Saudi Arabia of natural gas. Can that replace oil in the future?
BC: Like any extractive resources, we have to approach this new technology with care. Fracking can leave a messed up underground and contaminate water. But natural gas is abundant and affordable and it can make a difference.
TGR: What about uranium?
BC: The problem is not just the radiation and the bad design of the early plants revealed by Fukushima. The problem is that it isn’t price competitive. We can build nuclear plants safely, but it isn’t cost effective compared to oil or natural gas. There will still be a uranium mining business in replacing spent nuclear fuel, but not in building new plants for a while.
TGR: You mentioned we will soon have two retirees collecting benefits for every one worker. What is the solution for the imbalance between workers and beneficiaries short of older people wandering off into the desert so they won’t be a liability on their families?
BC: The government will continue to print money to meet its obligations to retirees, but the problem is that those dollars won’t buy as much in the future. That is why people are trying to find protection for their retirement assets. Those relying on Social Security will find it difficult.
TGR: We have heard about a possible economic slowdown or collapse in China, but it has one of the highest personal savings rates in the world. Wouldn’t that mitigate some of the economic turmoil of a real estate bubble bursting?
BC: China is strong because it has gone through so many revolutionary problems during the lifetime of people who can still remember. The Chinese know how bad it can be so they fight to avoid returning to economic subsistence levels. What China has done economically puts Japan’s economic miracle to shame. The country has overbuilt during the last few years, but it has a lot of people and the one-child policy is being dismantled. It will manage any bubble bursting well. We, in the U.S., have an arrogance of wealth and that blinds us to possible problems. That is why we are unwilling to take the strong necessary steps to right our economic disasters of too much debt, too much government and little concern for concentrating on economic development.
TGR: You said you are expecting a recession next year and a weaker economy or “stagflation.” Will that be limited to the U.S. or will it impact the entire world economy?
BC: The U.S. economy will suffer greatly because we are unprepared for how serious the situation will become, but this is a worldwide phenomenon. Inflationary central bank printing is going on in Europe and China so they will be impacted as well. The world is interconnected so what happens in the U.S. does spill over into other economies and the other way around. The European weak countries failing will cause several big European banks to fail, be nationalized and cause debt crisis for U.S. banks as well. International contagion is particularly true when the U.S. starts wars to divert people from thinking about the economy. Wars damage productivity of personal consumption and therefore the perceived wealth of individuals.
I think of the U.S. as a late-stage empire. There are lots of ways to collapse. The Third Reich collapsed cataclysmically. The British Empire wound down in a gentlemanly fashion. I think the U.S. is headed to Roman type of collapse where the internal dissipation was as big a problem as the external conflicts. We have a culture of corruption with no accountability. In this most recent crisis, no bankers have been indicted, never mind convicted, compared to the Savings and Loan crisis, when thousands went to jail.
TGR: How are you protecting your wealth?
BC: I have some precious metals and energy. I expect interest rates to rise.
TGR: You are predicting a weaker economy. When are interest rates going to move?
BC: How about now? I warn you, I have been wrong before. I predicted the debasement of currency would require higher interest rates to get people to invest. I didn’t give enough credit to the Federal Reserve’s ability to manipulate the market. We are now at record low rates and the government deficit is at such extremes that rates can only go up. I don’t know how it will all unravel. But at some point people will wake up to this sham and they won’t want to keep their money in banks. Then they will go buy physical assets, gold and food and, sometime later, real estate.
TGR: After all this bailing out, what will be the trigger point for a collapse?
BC: We all want to know that. We look at the numbers and I can’t see it going on for the rest of the decade. When it goes, it could go very rapidly. The markets feed on themselves more now than at any other point in time. What happened over a period of years in the Great Depression could take weeks this time around. Currency collapse could happen quickly. The collapse is already happening in Europe and more countries may follow Greece.
This is not war; it is merely the collapse of a currency. People aren’t wiped out by the thousands. But their savings are. Currency disintegration is not unusual. It happens all the time—about once a generation a collapse happens in every country. The fact that the U.S. dollar is the second oldest in existence today is an anomaly, an anomaly that may come to an end soon.
Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl and Tandem. Conrad, a futures investor for 25 years and a full-time investor for a decade, is also sought after as keynote speaker in Dubai, New Zealand, Vancouver, New York and many other cities. He has appeared on TV on CNBC, FOX, and on many radio shows. As chief economist at Casey Research, he produces original analysis.
By Claus Vistesen, on October 17th, 2011
It was telling that just as the ECRI and other notable research outfits decided to push recession button on the US economy the data flow became notably more positive. This could be a sign of the times that the cycle is just too volatile for even capable analysts to call or it could simply be a blip to the otherwise fundamental issue that economic weakness is here to stay for now.
Risk asset markets however made no mince of the recent stabilisation of the euro land crisis as well as the better news flow from the US economy. Just take the following headlines from Bloomberg and you know exactly what kind of sentiment I am talking about.
Quote Bloomberg
U.S. stocks advanced, giving the Standard & Poor’s 500 Index its biggest weekly gain since July 2009, as retail sales beat economists’ estimates and the Group of 20 nations began discussions on Europe’s debt crisis.
(…)
U.S. 30-year bonds capped the longest weekly losing streak since January as concern eased that Europe is unable to curb its debt crisis and U.S. retail sales climbed, damping bets the country will fall into a recession.
The question is then whether it signals a decisive and lasting breakout or whether it was simply a rally to the top of a choppy range before we start another descend to test the lows. Recent weeks’ market movement will suggest that you sell the current levels as top of a post crash range and I, for one do not think we are out of the woods yet. It is important to emphasize two issues on the US economy when it comes to the likelihood of a recession.
Firstly, the US housing market has never recovered and inventories remain low. This means that there is not much room for the economy to slump even if it does enter a recession. Any recession is then likely to be relatively short. Secondly, all liquidity gauges we are watching are pointing strongly upwards which is likely to provide strong tailwinds for risky assets 9-12 months out. Excess global liquidity, US broad and narrow measures of money are all shooting up.
In addition, we should consider the slow but sure movements by all four major central banks to increase either the short term liquidity or simply re-starting QE.
The BOE put itself at the front of the pack with the recent addition of another bn 75 GBP worth of QE, but likewise at the ECB it was interesting to see that long term liquidity operations was re-instated together with an expansion of the covered bond purchasing programme. Additionally, the ECB has been and will continue to be more or less forced to support bonds in the periphery, particularly in Spain and Italy, in order to ring fence the periphery from the coming Greek default. In comparison, the Fed’s latest much debated Operation Twist looks almost modest since it is, by the letter of the theory, not quantitative easing but rather qualitative easing [1]. Of course, the market is fully expecting the Fed to act aggressively should the economy falter further with a joint financing programme with the Treasury for long duration mortgage products as the most likely initiative alongside the more technical move in the form of reducing interest rates on excess bank reserves to negative.
I think it is important to realise that the Fed, with its latest actions, have its gaze firmly fixed on stimulating a recovery in the US housing market which is seen as the most important missing leg in an already faltering US recovery.
In Japan, the BOJ’s situation is different in the sense that economic has been distorted by first the devastation of the earthquake and then obviously the technical recovery as supply side disruptions have eased off. I take note of the fact that the BOJ has verbally put a lot of promises on the table in terms of stimulating the economy not least, one would imagine, in relation to the ongoing strength of the JPY. Finally, it is worth pointing out that the BOJ’s balance sheet has actually expanded briskly in the past two months.
The main conclusion to draw here I think is that while it is certainly not over yet, developed market policy makers are starting to open the floodgates. The euro zone crisis will remain a severe drag and like an almost chronic illness will continue to flare up. A disorderly Greek default can still not be ruled out and as the euro zone policy makers seem to take comfort on even a second of calm it seems to me that the market will have to push harder before we get a realistic proposal for a Greek default.
The recovery in the periphery (or obvious lack thereof) is still not working. The internal devaluation in the European periphery is alive and well when it comes to nominal wage increases which is getting a beating but in the context of lingering inflation in core and headline it leads to a squeeze in real wages and further depresses the recovery. The problem is that a sharp reduction in living standards through a decline in real wages to restore competitiveness is needed but if it occurs without any form of nominal currency depreciation not to mention in the context of very sticky core inflation, it just becomes counterproductive. Absent a fiscal union to socialise the risks it is difficult to see how the euro zone policy makers will be able to come with a fudge that will satisfy markets. In that regard I agree with Chris Wood here.
Ultimately, GREED & fear’s view on all of the above remain the same. This is that the only coherent end game for Euroland remains a formal move towards collective fiscal responsibility, which would ultimately address the fundamental cause of the present crisis. This is the financial fault line represented by monetary union without fiscal union. Euroland either has to go down this path or it has to confront all the problems associated with a break up since in GREED & fear’s view there is no “middle way”
One positive development on Greece is that the private sector involvement (PSI) proposal originally envisioned seems to have been abandoned for a much more realistic haircut.
But more challenging issues remain.
It was hardly surprising that the S&P downgraded Spain last week which only serves to underline the issue that while Greece may be the imminent worry the real problem lies in Spain and quite possibly Italy. There is a limit to the amount of Italian and Spanish bonds that the ECB can buy as long as it is evidently clear that growth prospects continue to remain difficult.
In emerging markets and touching on the theme I dealt with in my last installment the recent inflation data from India indicate why I continue to think that investors may hold too high expectations for easing in big emerging markets.
Quote Bloomberg
India’s inflation exceeded 9 percent for a 10th straight month in September, maintaining pressure on the central bank to extend its record interest-rate increases.The benchmark wholesale-price index rose 9.72 percent from a year earlier after a 9.78 percent jump in August, the commerce ministry said in New Delhi today. The median of 21 estimates in a Bloomberg News survey was for a 9.75 percent increase.
Elevated inflation in India and China are crimping room for policy makers to ease monetary policy and support global growth amid Europe’s debt crisis and a faltering U.S. recovery. India’s central bank Governor Duvvuri Subbarao said yesterday that a more than 9 percent inflation is above “comfort level.”
Of course, the picture is not uniform here with notable economies such as Brazil and Indonesia already lowering interest rates but all eyes are currently on China (and secondarily India) and here I think that we will have to see stronger signs of a hard landing or a relapse into a more severe global slowdown we can expect policy makers to actively stimulate.
In summary, I think that we are indeed nearing an inflection point at which money printing in the developed world will once again provide relief to risky asset markets but the problem is that the underlying economic backdrop has not improved much. In particular, the ongoing lack of resolution in the euro zone represents an issue but Eastern Europe as well as a housing bubble in Australia (and perhaps even in Denmark) are also potential sources of uncertainty not to mention the unravelling of credit excess in China. As such, “it” is far from over but a tradable bounce in risky assets which goes beyond the current choppy range may soon represent itself.
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[1] – The distinction between quantitative and qualitative easing is simple. The former refers to an expansion of the balance sheet through the central bank increasing its liabilities and adding a corresponding amount of assets. The latter refers to changing the composition of the asset side of the central bank’s balance sheet and as I am reading the gist of OT the Fed has committed to keep its balance sheet unchanged by selling short term bonds and buying long term bonds. Try this one for a good recap of what QE is and isn’t.
By The Gold Report, on October 3rd, 2011
 If you want to know the future, pay attention to the decisions European policymakers will have to make regarding debt, says Scott Gardner, chief investment officer at Verdmont Capital. In an exclusive interview with The Gold Report, he shares his analysis of debt policy investment implications, plus which gold mines Verdmont likes in Latin America and beyond.
The Gold Report: In one of your June research reports you wrote, “In the Eurozone, there has been limited political will to really make an impact on the debt side of the equation. With gross domestic product (GDP) growth set to slow, things should really get interesting for euro policymakers as they attempt to make their shaky union work.” In the Eurozone, there is more than adequate money to take care of the debt situation, but the question remains, is there enough political will to keep all the member countries inside the Eurozone? What sort of impact will pending Eurozone issues have on the gold price?
Scott Gardner: First off, you say that there’s enough money, but I think that a lack of money is the primary concern. The European Financial Stability Fund has something like €440B in committed capital and the members haven’t agreed upon future funding requirements. Also, the European Central Bank (ECB) itself only has €10B. If you compare that to the three largest banks in France, for example, they own roughly $600B in PIGS (Portugal, Ireland, Greece, and Spain)-related debt. You can see how imbalanced the system is and how undercapitalized some of these organizations are that are meant to be the solution.
TGR: In terms of a percentage of euro GDP, it’s a relatively small amount.
SG: I think the overall liability in the banking system has been estimated at about €2.5 trillion, in terms of PIGS-related financing needs over the next few years. This is significant. People talk a lot about the economics behind the crisis, but the issue in the Eurozone is just as much a social one. It’s questionable whether or not, for example, the German populace will remain in favor of bailing out some of the peripheral regions’ largess. This is where we get into the will of keeping the Eurozone together, and Europe is going to see ongoing pressure there.
TGR: George Soros said we are in a double-dip recession, and he believes that the euro will come apart. Is that your view on both accounts?
SG: People have been focusing largely on the numerator in the debt:GDP ratio and the market has become used to the pressures as they stand now. However, austerity measures and other proposed solutions will put a tremendous amount of pressure on GDP. A double-dip recession cannot be ruled out. Clearly, this will only exacerbate the debt:GDP ratio and further handcuff policymakers in terms of the policy response.
TGR: How will these issues impact gold and silver prices?
SG: During the acute stages of a systemic selloff, all investments typically get punished. We saw that during the correction at the height of the credit crisis in 2008. We’re also seeing that today in the current selloff, with gold and silver both down substantially. Over the long run, the crisis in Europe is clearly very bullish for gold and silver because the only way out of the current situation is additional stimulus from central banks. Additional stimulus will put further downward pressure on all the major currencies.
TGR: In one of your June research reports you wrote, “Gold continues to break out in all major currencies despite prevailing concerns in the market that gold is due for a major pullback. Of course, since then, gold has had a dramatic rise, but more recently, it’s beginning to look like there is a major correction under way in the gold price.” Is the correction for real? If so, what range do you believe it will bottom in?
SG: Nothing goes up in a straight line, and a gold correction from current levels is actually quite healthy as the short-term rise was technically overextended. We remain in a gold bull market and the market usually uses the 200-day moving average as a floor within a long-term uptrend. Therefore, we would be aggressive buyers in and around the $1,600 range, which would bring gold close to its 200-day moving average.
TGR: Do you believe that pullback will inhibit the performance of junior precious metals plays, given that the dramatic uptick in the gold price in August didn’t seem to carry many precious metals juniors much higher?
SG: We learned during the selloff in 2008 that junior gold stocks behave like stocks first and gold investments second. If there is substantial risk in traditional investments, gold stocks selloff in sympathy. This time around, we believe investors will look through short-term weakness and see the inherent profitability that gold stocks offer. Arguably, in the current environment, gold stocks are the only game in town, given that they’re the only sector that is growing earnings and profitability to the extent that it is.
TGR: In a May research report you wrote, “Despite the recent correction in the base metals complex, it is too early to initiate positions or increase underweight allocations within resource-focused portfolios. Our preferred segments of the commodity market remain energy and precious metals at the expense of agriculture and base metals.” Has your position changed?
SG: No. We were lucky enough to advise clients to short copper a few months ago, and we still see continued pressure in base metals–related equities. Many argue that current base-metal stock valuations are reasonable, but we believe overly optimistic commodity forecasts are baked into earnings estimates. Analysts are still forecasting 2012 copper at around $4.30/lb. We’d like to see more conservative copper estimates before we get more enthusiastic on the base metals complex. Meanwhile, gold analysts are forecasting, on average, something like $1,600/oz., which may prove overly cautious.
TGR: You’re based in Panama, and you get to regularly visit gold projects in Latin America. What are some projects you visited recently?
SG: We recently visited Sunward Resources Ltd. (SWD:TSX.V) property, which was very exciting. We advised clients to buy Sunward in May of this year, and we’ve done quite well. We were impressed with how advanced the project was and how quickly management was moving along. The company just came out with an updated resource of 8.2 Moz. of gold, which more than doubled the existing resource of 3.7 Moz. That is very encouraging.
TGR: That’s a gold-copper porphyry project in Colombia. Five rigs continue to drill the property; is that right?
SG: It has seven drills currently turning, and it’s moving toward nine at the end of the month. There is still tremendous exploration upside at the property, given that the current resource estimate only incorporated two of seven identified anomalies.
TGR: Is the project’s metallurgy relatively simple? Is there potential for a bulk-tonnage target?
SG: Given that Titiribi is a low-grade project, it’s key for Sunward to really get the tonnage up and it has proven the ability to do that with the recent resource update. One of the main concerns with the project is metallurgy. The company is coming out with some metallurgical testing in October, which we believe is a key catalyst for the stock and will answer a lot of questions concerning profitability.
TGR: Colombia is certainly seeing all kinds of exploration since the government has become more mining-friendly. What other projects in Colombia are you following?
SG: We’ve been supporting a company by the name of Red Eagle Mining Corp. (RD:TSX.V) for over a year. We were involved in the pre-initial public offering (pre-IPO) financing. The company IPO’d in June of this year. Generally, we’re guiding our clients toward developed projects with recognizable assets and advanced-stage projects, but Red Eagle Mining is an example of an early-stage exploration company that people should look to take a small position in. It has two highly prospective projects in Colombia and they have a great management team. Even though the company only recently IPO’d, it already has a team of 15 geologists in place and a 25,000-meter (m) drill program under contract. In this market, we want to focus on companies that have near-term news flow and REM will be coming out with results in mid-October.
TGR: Red Eagle is trading at about $1.05. Is that a good entry point?
SG: Yes. Whenever there’s heightened systemic risk in the system, these early-stage plays get hurt. Moving forward, due to the fact that Red Eagle has a sizeable and prospective land package, is drilling and is well capitalized, we think the market will start looking beyond current weakness.
TGR: What other projects in Latin America are you hot on?
SG: We’ve recently bought Belo Sun Mining Corp. (BSX:TSX.V). It is an interesting story in the Pará state of Brazil. The company has a 3.4 Moz. resource at its Volta Grande project. It has 11 rigs on site, and the main resource envelope remains open in many directions. The company is due to have an updated resource estimate at the end of October. Analysts are expecting it to boost ounces into the 4 Moz range.
TGR: Peter Tagliamonte is on Belo Sun’s board. He was also part of Desert Sun Mining & Gems, which got the Jacobina gold mine up and running, and that spurred a takeover bid from Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE). Does the presence of someone like that, who’s been involved with takeovers and successes in the past, hearten your investment choice?
SG: Without question, Belo Sun is a company that a larger-size company would find attractive given the known resource, the exploration upside and its location in a mining-friendly region. The recent takeover of Grayd Resource Corp. (GYD:TSX.V) is a perfect example of what the larger-size companies are looking for. They’re looking for an existing resource with decent exploration upside in a mining-friendly region, and Belo Sun fits that bill rather nicely.
TGR: How about one more in Latin America?
SG: We’ve been actively supporting Pershimco Resources Inc. (PRO:TSX.V), which is advancing its Cerro Quema project right in our backyard here in Panama. Pershimco has a 500 Koz. deposit, and we see the potential for this to grow considerably. It has two drills on site, and recent results in the easternmost segment of the property expanded the footprint of the mineralization to more than 4 km.
TGR: Pershimco also has a couple of projects in Mexico and one in Canada. Do you like that diversification, or is it spreading resources too thin?
SG: PRO has assembled quite a team, and the focus has been primarily on Panama. I think it’s done a tremendous amount with the property here, and we’ve been very pleased. Things might begin to look up at the Quebec property. The market has been assigning little value to the project, but management has been slowly building up a sizeable land package in the area. As seasonal factors make drilling possible, that might wake people up to the property’s merits. Management could always do a joint venture on their other assets if they were concerned about being spread too thin due to their focus on Panama.
TGR: Verdmont invests all over the world. What are some other juniors Verdmont has taken an interest in?
SG: We tend to favor advanced-stage exploration plays in the current market. Lydian International (LYD:TSX) is an attractive prefeasibility, heap-leach gold development story in Armenia. The project has great infrastructure and a strong management team that’s led by Timothy Coughlin. He’s the former chief geologist with AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE).
TGR: That’s the Amulsar gold project. It has outlined about 2.5 Moz. and is working toward a feasibility study and production in 2014. Is that realistic?
SG: We don’t have any issues with that. The company has been focused on expanding the known resource. It’s currently due to finish 40,000m of drilling over the course of 2011. Even though it’s a little bit off the beaten path, Armenia has favorable, Western-style mining policies in place. We don’t see anything that makes the project’s timeline unrealistic, and we don’t see any real permitting issues.
TGR: Name one more strong junior.
SG: With the majors and the advanced-stage gold stories being so cheap, we’re focusing a lot of our efforts and investors’ capital in those areas. But one pure exploration name that shows up on our radar screen is Smash Minerals Corp. (SSH:TSX.V). Smash is a relatively advanced exploration company with a sizeable land package in the white-gold district of the Yukon. Smash was put together by Adrian Fleming, the founder of Underworld Resources (UW:TSX), which was sold to Kinross Gold Corp. (K:TSX; KGC:NYSE) in early 2010.
Smash is interesting due to its very prospective and sizeable land package. It has more than 4,000 claims representing something like 800 sq. km. One thing that concerned us before we started investing was that the white-gold district was quite hot, as well as the Yukon in general. We were concerned that with Adrian Fleming and Shawn Ryan (owner of Ryanwood Exploration Inc.) involved, the story might be overly promoted, but in the current selloff, the stock is trading at an enterprise value in the single millions. For a highly prospective exploration company like Smash Minerals, it’s a no-brainer at current levels.
TGR: One issue with a number of the Yukon plays right now is that assay labs are backed up at an unprecedented level. These companies can’t get the news flow out as quickly as they would like, and that’s hurting share prices in some instances. What would you tell investors about that phenomenon?
SG: I think the weakness in Yukon plays is largely due to the fact that they ran so far so quickly, and a lot of them have outstanding paper. The assay lab issue is not a primary concern. That simply creates an opportunity to invest in Smash Minerals, which has been dragged down with the group. It’s one of the few early-stage companies that are drilling this summer. Results are due out in October, so there is lots of news in the pipeline.
TGR: Tell us one economic situation that you’re going to watch the most closely as Q311 comes to an end and Q411 begins.
SG: All eyes will be on Europe and the pressures there. Generally, the market is trading in sympathy with both European financial stocks and, to a lesser extent, American financial stocks. Policymakers need to find a solution before we get a base and see strength in a lot of these junior mining stocks.
TGR: Thanks, Scott; it’s been a pleasure.
Scott Gardner, CFA is the Chief Investment Officer at Verdmont Capital S.A. based in Panama. He is responsible for guiding firm investment strategy and is the head of the company’s discretionary investment management program, research and corporate finance operations. Prior to joining Verdmont, Scott was a portfolio manager with an offshore bank in Bermuda, where he managed discretionary investment portfolios, mutual funds and was the bank’s lead strategist for commodity-related investment programs. Scott is a CFA charter holder and a member of the CFA Institute.
By The Gold Report, on September 29th, 2011
 Mike Kachanovsky, known as “Mexico Mike,” doesn’t follow the so-called smart money. Founder of the website smartinvestment.ca, Mexico Mike believes mainstream commentators are leading investors astray by insisting that it is too late to get into mining stocks and precious metals. In this exclusive interview with The Gold Report, Mexico Mike explains why everyone needs to have some exposure to precious metals and gives his favorite prospects.
The Gold Report: Gold juniors fared worse than most equities in the economic collapse of 2008. Now economic fears are gripping the market once again. The S&P 500 has been trending down since mid-June. Many fear a double-dip recession—if not worse. Why do you still believe in junior precious metal equities given the current market conditions?
Mike Kachanovsky: We are in a double-dip recession. A lot of market commentators still feel that we can avoid that, but I think we’re right in the middle of it. I am still bullish on the junior mining stocks for the reason that, unlike most other business models, mining companies have stronger fundamentals down the road. Most of these juniors that have commenced production are making money now and their outlook is to make even more money going forward. I like the junior resource stocks and I tend to shun the more conventional sectors for investors.
TGR: Investors exited precious metal juniors en masse in early August when U.S. politicians couldn’t reach a deal on the debt ceiling. Gold then spiked, but has since trended lower. Do you believe traders are looking for the gold price to find a bottom before they return to the market?
MK: I think that’s a good statement. The typical investors that I talk to believe that precious metals and gold are too high, that they missed the run, and they’re expecting a lot lower price levels before they consider buying in. That’s very bullish. That’s a contrarian indicator.
Most of the time that sort of analysis has been flawed and the people who were holding off on buying and hoping for lower levels to buy at were left behind. I don’t think it is any different this time around. I think the gold price will go above $2,000/ounce (oz.) and silver will move above $50/oz. before the end of this year.
The fact that so many investors are standing on the sidelines suggests that there is less downside ahead and that a lot of the buying power will start chasing the metals higher once we get some sort of a recovery and a sustained rally.
TGR: Any idea of the timeframe of when that might happen?
MK: The biggest mistake that any amateur analyst can make is to try and pin a time on when a correction is coming or when a new high is coming. It is such a volatile sector. I think the more rational approach is just to buy the dip. It is a volatile commodity. There are triple-digit moves happening on a regular basis in gold. When I see that gold has been hammered for three or four days in a row and it is at a low, I’ll pick up the phone and buy more. In fact, I did just that on Friday and bought more gold and more silver.
TGR: Was that bullion or equities?
MK: I buy and sell equities and I buy bullion and accumulate it. I have actually never sold an ounce of gold or silver, but I’ve been a buyer steadily for the last eight years in both metals.
TGR: The gold price is trading primarily on fear right now. We can see daily swings of $20–$80/oz. When do you think the hyperinflation trade will kick in?
MK: All the major currencies in the world are in a race to the bottom. The events of hyperinflation in the last hundred years usually involved one weak currency, while most other nations were showing strength. In those cases, it was very easy for inflation to manifest itself in places like Germany’s Weimar Republic and Zimbabwe. We are not seeing that because it is affecting almost every nation worldwide. However, because gold, and to a lesser extent silver, are rising so strongly in this environment, that indicates that it is already underway. Gold is the asset of last resort that people are turning to. When you start having a lot of people in a lot of countries around the world all acting at the same time, that is when I think we start having to be concerned that a hyperinflation environment is starting to kick in.
TGR: The London Bullion Market Association (LBMA) said almost 11 billion ounces of gold traded in the first quarter of 2011, which is far more gold than has ever been produced from all mining combined on the planet. Does that make you somewhat wary about some of the gold derivatives being offered out there?
MK: That statistic is probably the most important fact that all investors that are even considering precious metals should consider. The LBMA is just one market. You also have gold trading on the Comex. You have Over the Counter trades between private counterparties. Shanghai just opened a bullion market. Collectively, the amount of gold that trades in any given day is a multiple of the real gold that is out there.
As a trading vehicle, there are all kinds of exchange-traded funds and paper products, but if you want leverage to actual bullion, there is no substitute for buying the real thing and having it in your control and custody. There are all these paper and derivative products that are leveraged to it. I think that is unstable and a lot of people are going to be left holding a toxic asset at the end of the day instead of the security that they thought they were getting leverage to by putting money into bullion.
TGR: You have said that you are buying equities as a way to get some leverage on the price for gold and silver. Are you sticking to precious metal producers or near-term producers with money in the bank as a way to mitigate risk in the current market?
MK: To get full leverage to the sector, you need to have diversity across the spectrum. My current strategy is to lean toward the companies that are currently in production. Both gold and silver have risen substantially. The companies that have the real leverage to that, the producers, are the ones that are going to benefit the most at this stage in the bull market. They are the ones that have the rising earnings and the stronger fundamentals for investors to focus on.
On the other hand, I like emerging stocks. They are trading at a very tight discount range relative to their historic multiples. Companies that have viable deposits that are funded and able to emerge as producing mines in the next year represent a compelling story. I still like exploration because the greatest gains that you can get in this sector come from buying a low-priced exploration story that hits on a big new discovery.
But that is also the riskiest part of the market. Investors need to be very selective and careful in choosing good projects, good management and companies with the money to continue with their exploration work.
The fear that we are seeing in the market right now is very short term and cyclical. An exploration story may take years to develop. I don’t think investors should stay away from the explorers. They just need to be selective because during those bearish times it is difficult for companies to raise money and their stocks are probably going to be out of favor. Investors should find the companies that they can be comfortable holding and wait until they find new mineral discoveries and get rewarded with a higher share price.
TGR: What are some producers that fit that bill?
MK: I just returned from a trip to Montana to see Revett Minerals Inc. (RVM:TSX; RVM:NYSE.A). I was floored. I was impressed at every stage of this operation. The company is a silver and copper producer, so it has leverage to base and precious metals. Its balance sheet is strong. Its mine is absolutely superb. Its mineral inventory is growing. Environmentally, Revett is a textbook operation in how to run a clean, efficient mine. The stock price is trading at a value range right now. I started accumulating the stock just in the last couple of weeks. I think it has a bright future.
This is exactly the kind of company that I am looking for to provide safety in my current investment, provide upside for the future, and have full leverage to what I believe is a long-term bull market for the metals.
TGR: The company also has another more robust project called Rock Creek. However, Revett’s involved with litigation regarding that project in a district court. A ruling is not far away. If Revett were to get a favorable ruling on Rock Creek, it could materially change the stock price in a hurry.
MK: I agree. I think Revett has done everything right. It is starting to win over some of the environmental groups because of the attention to environmental stewardship that the company demonstrated in its current operation. It has proven that it can run a mine that has very minimal disruption to the surrounding wilderness and community.
At the same time, Revett brings in great benefits to a part of the world that doesn’t have a lot of economic opportunity or high paying jobs. My feeling is that the company will be successful in getting permitting for Rock Creek. However, I minimize the impact on the actual operating results of the company because even if it had approval today and it was able to commence development, it is a very large project and it is probably at least two years down the road before it would see any operating return. Whereas the current Troy Mine has a world-class resource that could still be producing in 20 or 30 years.
It is nice to have an even better prospect to look forward to, but I think it is compelling just on its current upside potential.
TGR: Let’s talk about some near-term producers.
MK: There’s a stock that I like in the rare earth segment called Pacific Wildcat Resources Corp. (PAW:TSX.V), which has two projects active in Africa. The company’s tantalum mine, which is an exotic metal, is in production. It also has a rare earth and niobium project. If Pacific Wildcat can get one of these rare earth element mines into production, it has the potential to generate near-term cash flow from just niobium and tantalum.
Pacific Wildcat is a very risky stock. A lot of moving parts could create delays. But, on the other hand, it is priced at a very reasonable level. It has strong upside if the management team is able to advance these projects to a point where it achieves full production and has leverage to the high metal prices in those resources. Don’t bet the farm and put granny’s retirement money on the line, but a small investment in a company like this could easily turn into a very large winner.
TGR: Any other near-termers?
MK: One that I like is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; SGMF:OTCBB) in Mexico. The company has been active on this project for 20 years. It was in production in the 1990s. The company just got this thing going again in the last year and it is making money. It plans to expand capacity and continue with production.
Avino has strong management, a very strong balance sheet, a good resource, current infrastructure in place, it’s profitable, and it provides investors with full leverage to gold, silver and base metals. It’s a good near-term emerging producer that I can put into my portfolio, hold for a year or two, and probably see the stock rise substantially. But there may be ups and downs and swings of sentiment that are going to be a test of commitment along the way.
One other emerging producer that is worth a look is Scorpio Gold Corp. (SGN:TSX.V) I think Nevada is a great place to build a mining company and Mineral Ridge Mine looks like it can generate strong cash flow with gold above $1,500/oz. I expect to see a nice growth curve as the company expands production and improves the overall operating efficiency of the project; plus I think there is a good chance that further exploration will expand the resource and extend the mine life. The stock has plenty of upside potential if the company can achieve its production targets for next year.
TGR: What about exploration plays?
MK: I am following quite a few good explorers right now. And when I say a “good” explorer, I mean they have the potential to find a world-class discovery. But a lot of these companies are early stage.
One explorer that I like is Galore Resources Inc. (GRI:TSX.V), which has a large-scale project in Mexico. It has been working on this project very patiently for about two years doing field work, defining structure and identifying the areas that could produce a world-class deposit.
Galore trades at a very tiny market cap. It has a chance to be one of those winners that can make a portfolio. It has got very competent management and a solid track record in advancing the early-stage exploration on its prospect. It has all the upside ingredients and you can still buy it very cheaply today, and sit and wait. It is like the prototypical lottery ticket junior explorer.
TGR: Galore also has a copper project in British Columbia. Where’s the company at with that?
MK: I believe that Galore’s real focus is in Mexico and it’s just going to do enough work to maintain the copper story and hold it in good standing. It’s not necessarily what the company is most excited about at this point in the cycle.
TGR: Galore just released some results on the property at El Alamo, which is part of the Dos Santos project. The best result was 12 meters of 0.96 grams gold. That’s a very modest result, but it points to the fact that there is certainly gold in the area. What were your thoughts after hearing about those results?
MK: Typically, I’m not motivated by the grades that come from the early-stage field work. I want to see that the company is finding gold or whatever metals it has leveraged at surface and that the geology and the interpretation of the structure suggests that there could be a large volume of rock that has those types of grades. Most large deposits have zoning, so what is going on in one part of the story may be completely different from what is found as you go deeper.
A lot of companies will get investors excited because they’ll do trenching and find really high-grade gold at the surface, but then they’ll find out it doesn’t go very far down and they can’t replicate the same kind of intervals to depth. There has to be a lot more of that type of metal the further down you go. That’s when you start getting excited.
Canplats is a great example of that with their Camino Rojo discovery in Mexico. Canplats was bought by Goldcorp Inc. (G:TSX; GG:NYSE) and so Camino Rojo is now a Goldcorp property that is very close to Galore’s property. About three years prior to the big discovery, its stock wasn’t going very far. It was very quiet and sedate. It was coming up with reasonable grades, but nothing exciting for a long time. Then, all of a sudden, it started to hit these broad intervals and the project accelerated.
TGR: What are some other interesting explorers?
MK: One that I really like in Québec is Eastmain Resources Inc. (ER:TSX), which has been active for more than 10 years. The company has been finding high-grade gold just about everywhere it goes, but it just recently announced a new discovery in a part of its deposit that had not been investigated.
Eastmain is finding high-grade gold across fairly wide intervals. It has evolved to become an open-pit gold mine prospect, whereas previously it was drilling deeper and finding more narrow vein high-grade gold. Now it has revaluated the entire prospect and figures that it can have an economic shot with a lower average grade, but in a large deposit that can be open-pit mined near surface.
That is why I’m starting to get excited about this story. A lot of other juniors have taken that same model in recent years and started looking at much lower grades that can be mined more cheaply in a window of $1,500–$2,000/oz. gold.
I like Eastmain because it has a strong track record of success. The company is located in a favorable mining jurisdiction. It is spending over $10 million this year alone in exploration. It’s very well funded, so it can continue to carry a project forward. Plus, its market cap and share price are still very low relative to its peer group. Despite all these strong factors, Eastmain is still a cheap stock to buy with a big upside if it is successful.
TGR: Is there another out-of-favor name that you like?
MK: Commerce Resources Corp. (CCE:TSX.V; D7H:Fkft; CMRZF:OTCQX) is another rare element story. The rare element subsector tends to go through boom/bust cycles. Right now, we’re on the bust side of it. Investors seem to get very excited every year or so about these stocks and then it fizzles and the stocks sell off again. It doesn’t really reflect the fundamental strength of some of the companies within that subsector.
Commerce is a very strong company. It has been active in rare metals for more than a decade. It’s not just a “flavor of the month” pick. It has two excellent projects in play, both of which are emerging as very large tonnage, relatively high-grade discovery areas. Commerce is actively advancing both projects to be able to support a development decision.
A project that I’m excited about is known as the Eldor property. It has several showings on that property for rare elements. I’m excited because it has enrichment zones in both the heavy rare earth elements and the light rare earth elements. That’s very rare. Very few companies anywhere in the world have deposits that are enriched in both the heavy and the light.
Eldor is still fairly early stage, but having that higher grade and a high value is a huge advantage that can help even if some of the other development parameters come in marginal. Commerce fits my model of finding quality companies that are well financed with strong discovery potential, but trade well below the peer group for the sector.
TGR: Any final bits of investing wisdom for our readers?
MK: There are a lot of big changes going on in the world. I think “buy and hold” no longer works. The torch for economic leadership is in the process of passing from the developed Western nations to emerging countries and the Asian nations. It’s a period of turmoil and change.
Based on the major stock indexes, investors haven’t made any money in the past 10 years—in fact, they probably lost money. Many of the different asset classes are losing money. The one exception is bonds and fixed income, but I believe that’s a bubble that’s subject to popping. It’s too late to buy those. The one exception to this is precious metals. They have outperformed every other asset class and it is the only legitimate candidate to be a buy-and-hold investor in.
I find it very ironic that the majority of the commentary in the mainstream is steering people away from the metals and suggesting perhaps that it’s a bubble or that it’s the wrong time to be a buyer. I have always approached the market as a contrarian. I feel most comfortable putting my money at risk where most other investors are not feeling bullish. I think there is a really good trend there and I am going to continue buying the mining stocks that have strong fundamentals with full leverage to the metals and ignoring what the majority of the so-called smart money has to say.
The mainstream commentary that has had anything to say about the precious metals sector over the last 10 years has been largely discredited. I would be very leery as in investor right now in participating in fixed income or bonds or buying the broader markets. But I do think everyone needs to have some exposure to precious metals and to be a long-term passive investor in these sectors. That’s probably the way to have some sort of stability in this macro environment of dramatic change and volatility.
TGR: Thanks, Mike.
Mike Kachanovsky, known as “Mexico Mike,” is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column in Investor’s Digest of Canada. Kachanovsky is a founder of the website www.smartinvestment.ca, which serves as an online community for the discussion of all topics relating to junior mining stocks.
By Claus Vistesen, on September 26th, 2011
If investors were hoping that the strength of commodities was sign that decoupling, led by Asia and Latam, were running on course to help the global economy expanding, events last week must surely have extinguished such hopes. Indeed, it was always a question of commodities and emerging markets catching up to the ongoing slaughter in Europe.
Indeed, what seems to be main question now is whether the US economy will avoid a recession and, as a consequence, just how bad it has to get before the Fed starts another round of shock and awe QE. In this sense, I also always thought that expectations of emerging market foreign exchange reserves bailing out Europe and/or central banks easing aggressively to support the global economy were pinned on expectations that after all were too high.
(Quote Bloomberg)
The world’s largest emerging economies will not act as a bloc to ease Europe’s financial crisis, Russian Deputy Finance Minister Sergei Storchak said.“It’s impossible, I’m certain of that,” Storchak told reporters today in Washington. “If the BRICS are going to act to overcome the euro zone’s financial problems, then it will be based on the possibilities presented by working through the International Monetary Fund.”Finance ministry and central bank officials from Brazil, Russia, India, China and South Africa met before this week’s IMF annual meeting to discuss coordinating policy as Europe reels from a sovereign debt crisis and growth slows in the U.S. There is a “high” danger that Greece will not fulfill all of its debt obligations, Storchak said.
As for the EM tightening cycle I think that while we may certainly see an easing of pace or perhaps even a full stop of tightening measures I think a reversal is out of the question. This is especially the case as the recent strong correction in commodities and the global slowdown is likely to make inflation a non issue going forward. However, inflation lags the cycle and if the central banks are fixed on this measure it will take some time before the data allows decisive action unless of course the future is suddenly discounted in a radically different way due to rising downside risks.
In India, the tightening cycle is surely near its end with the yield curve already flat as a pancake, but with sticky inflation and fiscal policy continuously loose, there is limited scope to the central banks’ ability to maneuver.
(Quote Bloomberg)
India’s central bank is close to the end of its record series of interest-rate increases as inflation will probably slow next year, Deputy Governor Subir Gokarn said.“You could say that the cycle is nearing its end,” he said, “given the projection that inflation will start coming down and will continue to move down from December onwards.” He declined to specify when the Reserve Bank of India may stop raising rates.
Worryingly, recent news out of China appears that the country may be turning Indian or at least that the expected easing may not come as expected. Especially, it is bad news for the global economy in the near term (but perhaps good in the long run?) that Chinese authorities seem to be engineering a crack down on property developers which will not only lead to an acceptance of lower growth in order to effectively quell off balance sheet lending.
It seems that investors hoping for emerging markets to drive forward the global economy may, for the moment, be guilty of too high expectations.
By Claus Vistesen, on September 7th, 2011
 One of the stories that caught my attention this week was the Bloomberg piece about how banks in London and New York are starting to jump ship on the old finance hubs due to fear of effects from planned regulatory tightening.
Quote Bloomberg
Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.Nomura Holdings Inc., HSBC Holdings Plc (HSBA) and UBS AG (UBSN) are among lenders preparing plans to book as much business as possible through legal entities in jurisdictions where tax rates are lower and rules on capital and liquidity are less onerous, the banks and lawyers and accountants working with them say.
(…)
Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.
Perhaps this is a sign of the times in the sense that both banks and market participants seem to be looking increasingly outside the boundaries of the developed world for growth, profit and eventually prosperity. Having just moved to the Big Smoke I would not necessarily lament a downsizing of the finance sector even if it is the pond that I also do my fishing for the daily meal ticket. Perhaps, if fast moving financiers chose to go to Singapore instead of London, the residents of the latter would not have to endure paying 300.000 GBP for a studio flat in Canary Wharf [1].
Of course, it may all be a red herring but it could also be part of a number of tentative signs that the locus of global activity on a variety of fronts is moving to new epicentres. Let us hope they do not travel entirely in our foot steps.
More generally, we just put out our monthly report and the outlook is very much wishy-washy. Surely, our leading indicators are pointing down, but after the market puke in August it seems to me that the end of the world had almost been priced in as the S&P500 hit the 1100 marker. In this sense, do not be surprised to see it ticking towards 1250 even if the recent job data were abysmal, but beware. The old range has been broken and we are finding a new lower one. Market prices have a tendency to become “normal” after a period and with global economic activity visibly slowing the fundamentals are not really on the bulls’ side even if they point to the merits of chasing a counter trend rally after a 10% drawdown.
More generally as I noted before, the divergence between respectable analysts is widening which always makes me take a few steps back. On the one hand I see both buy side and sell side analysts rather stubbornly sticking to their year-end S&P500 targets of 1300-1400 while other independent analysts put the fair value of the index at 900-1000. Both will obviously have an axe (or maybe even a book) to grind, but part of my job is to synthesize the consensus into a fairly straight road map for our clients, and it is getting difficult.
I tend to side with the pessimists if only because I find it difficult to see how US corporates can continue to operate as efficiently as they have been doing so far. Gerald Minack had some excellent points on this in his latest report;
A big medium-term uncertainty for DM equity investors is the sustainability of earnings. A decade ago, the big uncertainty was whether valuations could be sustained. They weren’t . The de-rating may have further to go, but clearly valuation is less of a headwind now than at the TMT-inspired peak. Earnings, on the other hand, are very high. Profits are now near an all-time high as a share of global GDP, and the real return on equity has followed . What’s not able, however, is not the cycle rebound, but the elevated level of earnings (and real returns) over the past decade. The forward-looking issue is whether those elevated returns can be sustained. At a global level, the answer may be ‘yes’ – for the simple reason it’s now possible to make profits in places where previously it was not. What’s not clear is the sustainability of high earnings in the developed world.
In particular, I would would point to the contradiction between continuing ultra low unit labour costs and the need to now see growth moving from cost cutting to topline growth. Something does not add up.
Real unit labour costs are now at 60-year lows. This matches the decline in wage share of GDP to a 50-year low. Arithmetically, this is the most important support for high profits. As I’ve discussed in prior reports, it’s not clear how long households can support consumer spending at near 70% of GDP with labour income at multi-decade lows. That’s been possible recently due to massive transfers from the public sector, but that support appears unsustainable.
In my opinion, this is big elephant in the room in relation to the US stock market. It will be difficult for earnings (and margins) to stay at current levels going forward. It follows naturally from the fact that if all companies cut costs and this improves margins this will only work for a limited period time as there are decreasing returns if everyone follows this strategy at the same time. Now we need to see topline sales growth for margins to be sustained, but this is obviously difficult with the current macroeconomic backdrop, so something has to give.
Globally, coincident data is already slowing visibly across the globe with headline PMI readings and trade data coming in steadily lower. In that sense we are up against the wall again only so shortly after the shock of 2008/09 and this time, the ability of policy makers to respond is limited.
However, I would be weary about calling this another 2008. One of the effects of experiencing a balance sheet recession with subsequent deleveraging is that trend growth falls and thus that the economy becomes liable to more frequent recessions. This applies to the US in particular but essentially also to the whole of OECD. This means that we will see more frequent but also essentially shallower recessions. The only qualifier here is really that some parts of Europe are now stuck in a depression locked in a vice of dysfunctional institutions and a lack of willingness and political capability to deal with the problems.
As such, within Europe also lies the potential source a Lehman like shock should the crisis prompt a rapid and violent default of one or more sovereigns and/or financial institutions. Certainly, euro area banks are feeling the pinch as USD funding is getting cut off and if anything it seems to me that the EURUSD is looking a bit too strong for its own good given the backdrop of the mess in the euro zone. As cash levels at euro zone banks are drawn down the currency will adjust to fundamentals not to mention of course the fact that the ECB is slowly but steadily being pushed into full blown QE and monetisation of peripheral debt.
The latest G&F provides a good summary;
(…) The risk of a dollar rally against the euro in coming months is growing. This is because, sooner or later, the ECB will have to reverse its recent insane monetary tightening. Trichet made a start in this direction this week in his usual ponderous manner. Thus, he told the Committee on Economic and Monetary Affairs of the European Parliament in Brussels on Monday that “risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September.” The issue here is whether markets will allow Trichet to save face and not performs an abrupt U-turn before his scheduled departure from the scene on 31 October.
More generally, the recent comments from the IMF that euro zone banks need additional capital is once more a case of stating the almost obviously obvious. The transmission mechanism here is very simple. The market is now effectively pricing in a default of Greece and possibly other peripheral economies and this means that the attention must now turn to the losses that creditors will bear or, alternatively, the size of the bailout if we stick to the old mantra of no losses. As a good friend of mine pointed out recently,
All trough last month’s banking shares’ collapse, I have been thinking that perhaps, equity investors are worried that the recapitalization will be different this time, with either the taxpayer (wrong solution) or the bondholder (rightly, through a bond-for-equity swap), massively diluting the shareholder. Politicians obviously do not have the stomach, nor the muscle for new bailouts.
Or to put it differently, there are no easy solutions left. One solution is the Brady Bond plan which is currently being floated in the case of Greece. The problem as I see is that it is fudged precisely when it comes to the current valuation of the bonds. Basically, there has to be pain today for the creditors, otherwise we are just kicking the proverbial can down the road as recapitalisation is avoided today but made worse for tomorrow. A solution for recapitalising banks today would naturally be for their creditors to accept a swap for equity and thus being moved into the frontline to absorb any losses that the banks would bear on sovereign debt, but that is not popular. Essentially, being degraded to equity holder in a bank with known sovereign assets in the European periphery is equal to taking a haircut on your initial investment, but all this then leaves the inevitable question of who and when someone will step up to take the lead in the debt restructuring.
Of course, the idea of substituting debt for equity is the same principle applied in the case of Greece posting domestic assets (islands, utility companies etc) as collateral for credit. We can then think about this collateral as Greek sovereign equity and as with creditors of banks, it is all good in theory but in practice, not so well.
Elsewhere, the game of Old Maid in global currency markets continue with the SNB still in the spotlight despite already having taken desperate measures to stop the appreciation of the CHF;
Quote Bloomberg
While the Swiss National Bank has so far avoided currency purchases in its latest bid to keep a lid on the franc, it may soon have no alternative but to follow through on its threat to intervene, economists and strategists said.
But what really caught my attention was comments by Brazilian Finance Minister Guido Mantega that lowering interest rates represents an effective antidote against an appreciating currency.
Quote Bloomberg
For “the next two or three years, the conditions will be there for rates to keep falling,” Mantega told reporters in Sao Paulo today. “Falling rates are a good antidote for the gains in the real.”
Allow me to quote myself from the post linked above;
Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end of the game. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.
The easy investment advice here is naturally to buy the Old Maid which means that just as the global financial punditry searching for clues as to what lies ahead for the global economy and the looming slowdown the SNB et al may have to skint yet awhile for light at the end of the tunnel.
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[1] – No my dear reader, I am renting and I would never touch these things but they are there and they are being sold.
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