Gold and silver the last bastions of safety in current market clime.
Presenting part two of the final two-part series from the June Stockhouse Macroeconomics session. To wrap up, participants were asked to share their summary thoughts on what investors might do to protect themselves from the ensuing economic decline.
Please add your comments at the bottom of the page, and enjoy!
[Editor’s note: Posts have been edited for punctuation, spelling, grammar and length.]
SH_Arber: I have two questions for everyone to think about and answer as part of today's wrap up. [Questions repeated from part one.]
1) As an investor, what is one thing that you can do given today's macro climate, and why? Why do you think it's a good idea / trade, I mean. I'd like to see something a little more specific than "buy commodities" - we're inundated with that in mainstream media already. I think StilesBC is the only one so far to disclose a few actual positions. Let's hear one pick / angle from everyone, with brief analysis / background / forecast for success. This could be short term or long term.
2) What is one thing, the first thing, that ought to be done to, in the broadest sense of the term, "fix" the U.S. economy? It has to be an active thing - but it could be a negative action. For example, you might suggest that the Fed not bail out any more investment banks that are poised for destruction as a first step toward teaching a lesson in what happens when you muck around with risk in the markets. Either way, you must argue why your pick for a first step should be the first step (as opposed to anything else that might be a first step).
Don't get too big / broad with any of these ideas - drill down and get practical.
If everyone has a different investment idea and a different first "fix," we'll end up with a mini-book of thoughts that might have some practical value.
arnoldj: “Skating with Elephants.” If I was to write an essay about today’s economic and capital markets this would be an appropriate title. As an individual investor, one is dodging 500lb, 600lb, 700lb and 800lb issues as if one was on a small pond skating in circles, swerving and swaying, trying to navigate around elephants. Confluence of dominant themes:
1. Banks are failing as capital is being destroyed. This will continue and we should expect to see a surprising number of large bank failures as real estate values continue to fall.
2. Conspiracy of deception and obfuscation by the financial establishment. Those who profited the most want to be held accountable the least for what can only be described as a period where deliberately synthesized profits created historic levels of fictitious capital and unsustainable imbalance in the economy, hence their continual efforts to this day to obfuscate and deceive the public.
3. Government debt levels are reaching crisis levels in the U.S.; in fact, the check is on the table and it is time to pay the bill. The bill is so large, that central bankers in the U.S. are at an inflection point of default on debt, or monetizing debt.
4. Consequently, a tug of war is underway between inflationary vs. deflationary forces on a monumental scale.
So what does an investor do when skating with these elephants? What is one thing to own in this environment to protect oneself?
Simple. In a deflationary environment, money is king. In an inflationary environment, gold is king. Gold IS money. So in an environment where academics, economists and the public debate inflation versus deflation and engage in speculative conjecture about the outcome, the best hedged investment is to buy gold and gold stocks to protect from either condition.
Also, gold is a direct hedge against distress in the financial sector, and with the failing of the banking industry gold will rise materially, improving the fundamentals for gold stocks. Gold stocks are leveraged to gold and should start to catch up to their lag compared to gold itself as profit margins once again expand with a rising gold price, outpacing rising costs. So buy gold bullion.
CEF is a great choice for bullion, but preference [should be] given gold stocks. Gold stocks have languished behind bullion for a number of reasons but should now begin to catch up. Money will first flow into the large cap stocks. Goldcorp, Agnico, are solid choices.
My top preference is longer term warrants such as Goldcorp warrants because you benefit from the money flow into the larger cap stocks and still get all the additional leverage of a junior stock. Supplement bullion and large cap gold stocks with a handful of quality juniors with promising assets and knowledgeable management in safe jurisdictions. My favorites are CPQ, PEZ, GIX and SA, all on the Venture exchange.
When examining the “elephants,” what measures can be taken to best mitigate fall-out from the coming economic turmoil, or perhaps even mitigate much of the turmoil itself? Acknowledging that there is simply too much debt at government levels and unsecured debt within the capital markets and banking system, there will be an unavoidable and necessary economic contraction.
In fact, it seems necessary as unsupportable debt levels have to be purged and banks to be let to fail. In short, there is nothing that can be done to prevent a US dollar currency crisis and economic crisis in the next 1-3 years. There is too much debt to be funded at a U.S. government level as well as at [a personal level].
Moreover, as a direct product of leveraged finance, lax regulations, unbridled greed and deception, there is simply too much fictitious capital to be cleansed. This just adds further pressures upon fiscal budgets as tax collections fall. Measures must be then longer-term in focus to mitigate social damage and ensure a structurally sound economy going forward. The single most important measure in this regard would be to “bite the bullet” and place immediate legislated constraints on fiscal spending at federal and state levels. Strong economies are balanced and entrepreneurial economies. Balanced between production and consumption, savings and investment, and at the core is government allocation that is efficient and sustainable.
The scope of subject matter was broad and at times overwhelming to gel into a few comments. Quickly one feels self-conscious of consuming voluminous amounts of blank white pages... Nevertheless, I've enjoyed participating in this forum and reading the contributions of others. A rich and deep diversity of ideas and points of view. Some have validated my thoughts, some have added new insights.
All-in-all, I've collected an understanding of these complex issues as a result and am much appreciative to all for that. Rob, thanks very much for the invite. I hope I added something to it. You have a task ahead of you considering the volumes written by everyone – to consolidate, parse and reproduce in a manner which fits your objective of this forum. Gentlemen, it's been a sincere pleasure and hope and trust to be in touch once again.
Stuart
StilesBC: 1) I hate to jump on the precious metals lovefest, so I'll propose a different avenue of investment. The most important way people can protect themselves in the current and following environment is to avoid debt at all costs. Second on the list is for people to invest in themselves. People need to expand their financial literacy so they can better understand WHY things happen in the economy. And they need to educate themselves in new and more advanced lines of work. Third is to preserve capital at the expense of experiencing gains. Relative outperformance should be the ultimate goal.
For me, at the moment, capital is best preserved with precious metals. As banks begin to fail, the inherent deflationary effects will drive people to hoard money. Precious metals are the ultimate currencies in this environment. But cash (even the paper currencies) benefit in this environment too. On a relative basis that is.
But it is apparent that this deflation will be fought tooth and nail through nationalization and socialization of the debt market. Until, that is, it cannot bear the burden any longer, and social upheaval forces the faster solution of default. I am not smart enough to know when this will happen. Next year? 5 years? 10 years? But it will happen in the next decade, as a disgruntled younger generation gasps for a fresh start. The faster it happens, the more capital will be available to employ in the next cycle.
2) I am still somewhat optimistic that if dealt with quickly, we can still be wealthy enough (even after the entire financial system is destroyed) to be able to invest in a new revolution of efficiency. Through new and cheaper sources of energy, and a social retrenchment toward frugality and away from gluttony and excessiveness, we can still do marvelous things. But in order to preserve that capital, we must ensure that we do not waste it on supporting the old and tired model of “borrow and spend.” Assets need to be allowed to revalue themselves to realistic levels, so that they reflect the amount of true wealth in our respective economies. Even if that value is deemed to be zero. Painful? Yes. But necessary.
I too enjoyed the discussion. I hope it can be done again. I'm sure we can think of some ways to do it even better next time.
Cheers, Matt
gabrielgray: Hey, thanks to everyone… especially Rob, whose real torment will now begin. It's been great, and I definitely want to be in on the next one.
A lot of good stuff, almost too much to take in really. I think maybe next time it would be good to narrow down the focus so we don't get too many threads going at one time.
I don't have anything very original to offer in the way of investing ideas. I don't like the U.S. markets because the Fed has become a loose cannon, rewriting tickets and changing outcomes at will. How can you play checkers if someone's always flipping the game board around?
I don't like the Chinese trade because China has no accounting standards, little regulation and the Party wants to be the Chinese Fed.
I don't like emerging markets like India because an Indian analyst told me everybody in India is pretty much a crook by western standards.
I don't care much for Latin America because, well, you know....Chavez, Correa, Morales, Kirchners, etc.
I like Brazil, but I'm not going to admit it here.
I don't like the Canadian markets because Stevie Harper stole my O&G trust money. But I'll be there anyway.
I like gold and silver, but I don't trust the Fed and Treasury to observe the rule of law. I think they'll try to steal it again.
Hide it somewhere where even you can't find it, in case you talk in your sleep.
I like PM stocks, but not the majors. No leverage there, because operating costs are too high. ABX said they have to have gold prices over $700 just to break even. They didn't say if that was after all their forward sales shenanigans. Go for underpriced producers with reserves that are open to depth and in all directions.
Adios amigos, and good luck!
littleguy123: I'm ready to give my brain a rest this weekend, which is another way of thinking this "panel" has given me a lot to think about, in addition to helping me get some things straight in my own mind.
Best of luck, everyone! I'll be ready and waiting for the next go-round.
This group discussion was conducted with members of the Stockhouse community.
Next: That’s it for the June session of the Stockhouse macroeconomics group. Stay tuned for the next session, appearing online in the weeks ahead!
Archive
Investor groups launch with macroeconomics discussion
Inflation and money supply, part I: Treasuries crowd bonds
Inflation and money supply, part II: Buyer’s remorse
Inflation and money supply, part III: Indeflationists unite
Inflation and money supply, part IV: Measuring money
Inflation and money supply, part V: Derivative “Death Star”
Oil supply, oil demand: Is oil in a bubble?
Housing crisis redux: Where do we go from here?
U.S. dollar devaluation not the only currency bet in town
Government and liberty, part I: Size does matter
Government and liberty, part II: A utopian fantasy
Government and liberty, part III: An optimist grown old
A new economy, part I: Foreclosures for farms
Spin-offs
Inflation debate stirs investors
Oil speculation theory taken to the woodshed
Oil prices: A critique
