Economic Analysis from John Mauldin
- Tue, 03 Dec 2013 23:53:00 +0000: Euthanasia of the Economy? - Mauldin Newsletters
Today's Outside the Box comes to us from my good friend and business partner Niels Jensen of Absolute Return Partners in London. Niels gives us an excellent summary of how QE has affected the global economy (and how it hasn't). I have found myself paraphrasing Niels all week. I also want to call to your attention an interview first posted at ZeroHedge between my friends Chris Whalen and David Kotok. This is an inside-baseball view of a not-so-minor issue involving central banks and ZIRP....
- Sat, 30 Nov 2013 14:19:00 +0000: Arsonists Running the Fire Brigade - Mauldin Newsletters
The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake. – Alan Greenspan If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid. – John Maynard Keynes And He spoke a parable to them: "Can the blind lead the blind? Will they not both fall into the ditch?" – Luke 6:39-40 Six years ago I hosted my...
- Wed, 27 Nov 2013 18:25:00 +0000: An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities - Mauldin Newsletters
In today's Outside the Box, my friend John Hussman of Hussman Strategic Advisors addresses the members of the Federal Open Market Committee, the Federal Reserve committee that makes decisions about interest rates and national monetary policy. The Fed has been notoriously clueless about bubbles, particularly in the run-up to the Great Recession, and so John would like to help them recognize the currently inflating bubble in equities. He leads off with the key point that when the Financial...
- Sun, 24 Nov 2013 13:44:00 +0000: Game of Thrones – European Style - Mauldin Newsletters
In 2009-10 it seemed like this letter was all Europe all the time. There was a never-ending crisis from one corner of the Continent to the other. That time seems to have slowly faded from our collective consciousness, but the Eurozone crisis is not over, and it will not end quickly or soon. Even if it seems to unfold in slow motion – like the slow build-up in a Game of Thrones storyline to violent internecine clashes followed by more slow plot developments but never any real resolution, the...
- Wed, 20 Nov 2013 18:48:00 +0000: A Limited Central Bank - Mauldin Newsletters
This week’s Outside the Box is unusual, even for a letter that is noted for its unusual offerings. It is a speech from last week by Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia at (surprisingly to me) the Cato Institute’s 31st Annual Monetary Conference, Washington, DC. I suppose that if Dallas Fed President Richard Fisher had delivered this speech I would not be terribly surprised. I suspect there are some other Federal Reserve officials here and there whoare...
Economic Analysis from Casey Research
- Wed, 04 Dec 2013 13:53:00 +0000: Obamacare’s “Hippocrites” - Casey Research - Research & Analysis
I still remember my doctor making $5 house calls in Abilene, Kansas. Now my healthcare policy has been deemed "substandard" by government mandate. In a world where technology accelerates, health care degenerates. The 2,700-page Affordable Care Act is to be the crowning blow.
You may think you know all there is to know about Obamacare, but wait until you read Dr. Elizabeth Lee Vliet's piece below. You may not have heard about Ezekiel Emanuel's "The Complete Lives System." I hadn't. It's the intellectual underpinning for the Affordable Care Act, and it's frightening.
Obamacare was to fix the ills of America's free-market healthcare system. However, the US healthcare system has been anything but laissez faire since WWII, when patients lost the power of the purse with their doctors. Employers, needing to attract wartime employees and skirt wage controls, offered insurance instead.
President Harry Truman told Congress on November 19, 1945, just seven months into his presidency, "The right to adequate medical care and the opportunity to achieve and enjoy good health" was a part of his proposed Economic Bill of Rights. Another was "the right to adequate protection from the economic fears of … sickness."
Even the American Medical Association (AMA) called Truman's bill "socialized medicine" and said those in the Truman White House were "followers of the Moscow party line."
Truman backed off, but in 1965 President Lyndon B. Johnson signed Medicare into law at the Harry S. Truman Library and Museum and reminded onlookers that Medicare "all started really with the man from Independence."
Now, Uncle Sam provides health care for more than three-quarters of those over 65, whether they realize it or not. In a famous town-hall exchange with Republican Congressman Bob Inglis, one of his constituents in South Carolina shouted, "Keep your government hands off my Medicare!" The man couldn't be convinced that Medicare was already a government program.
Nearly a third of all Americans depend upon the government for their health care. They already bear the brunt of an overregulated system that generates too much demand and too little supply. As long ago as 1922, the great Austrian economist Ludwig von Mises, in his book Socialism, wrote about a German medical system controlled by government that destroyed the price system, eradicating economic rationality and creating economic chaos.
Medical socialism is particularly devastating to people, because it affects their capacity to stay healthy and alive. By robbing individuals of their rights to exchange and choose, Mises wrote, state-run medical systems are comparable to those run by the army or by prisons, which are not centers of health but of disease and disaster.
In her very provocative piece, Dr. Vliet explains that Obamacare runs smack into the face of a physician's Hippocratic Oath of doing no harm and benefiting the sick. We know the president lied when he said, "If you like your coverage, you can keep it." Even more outrageous is what he didn't say.
That said, if you like outspoken people like Dr. Vliet, I should tell you that Doug Casey is about to release his second book after the wildly popular Totally Incorrect. This one is called Right on the Money and focuses mostly on topics such as the economy, investment strategies, speculation, and how to be a contrarian… as usual in Doug's inimitable, irreverent style.
Read it yourself and/or give it as a holiday gift to those who appreciate a candid and humorous read devoid of political correctness. You can preorder it here.
And without further ado, here is Dr. Vliet's article. Be warned—it's not for the faint of heart.
Contributing Editor, Casey Research
Obamacare: Diametrically Opposed to the Hippocratic OathElizabeth Lee Vliet, M.D.
Over 2,500 years ago, Hippocrates—the Greek physician and father of modern medicine—outlined the principles that have guided medical practice ever since. We call it the Oath of Hippocrates today.
The core tenet of the Oath of Hippocrates is that a physician has a sacred duty to serve the needs of the individual patient to the best of his or her ability. Here's a snapshot of what the original Greek version says:
I swear by Apollo Physician and Asclepius and Hygieia and Panacea and all the gods and goddesses, making them my witnesses, that I will fulfill according to my ability and judgment this oath and this covenant:
I will apply measures for the benefit of the sick according to my ability and judgment;
I will keep them from harm and injustice.
I will neither give a deadly drug to anybody who asked for it, nor will I make a suggestion to this effect.
Similarly I will not give to a woman an abortive remedy. In purity and holiness I will guard my life and my art.
Whatever houses I may visit, I will come for the benefit of the sick, remaining free of all intentional injustice, of all mischief and in particular of relations with both female and male persons, be they free or slaves.
What I may see or hear in the course of treatment or even outside of the treatment in regard to the life of men, which on no account one must spread abroad, I will keep to myself, holding such things shameful to be spoken about.
If I fulfill this oath and do not violate it, may it be granted to me to enjoy life and art, being honored with fame among all men for all time to come; if I transgress it and swear falsely, may the opposite of all this be my lot.
That's pretty clear: it is a doctor's duty to do what's best for his or her patient, no matter what. This one-page oath has guided Western doctors for over two millennia.
Obamacare, clocking it at 2,700 pages (plus 20,000 pages of regulations, which they're not done writing yet) is based on the exact opposite idea: that a physician should serve the collective, or greater societal good, even at the expense of an individual patient.
I've written before about how Obamacare is based on "The Complete Lives System" by Ezekiel Emanuel, Rahm Emanuel's brother, and an early senior White House health policy adviser to Obama. Most Americans have never read these articles, because they were published mainly in British medical journals. You can read one for yourself here.
"The Complete Lives System" makes crystal clear that physicians must not focus on the individual patient. Instead, medical care should be allocated based on the patient's usefulness to the "collective good." If you're too old, or too young, or your ailment is too complicated, society is better off letting you die, rather than paying a doctor to heal you.
One tenet of the Complete Lives system is that medical care for people under age 15 and over age 45 should be attenuated. "Attenuate" means to ration. Emanuel believes that the very young and the elderly are less valuable to society than those in the middle of the age curve. He published this chart called the "reaper curve," which illustrates which age groups he believes should receive the most and best medical care.
And who will do that allocating and "attenuating" of your medical care? Why, bureaucrats, of course. Instead of doctors asking, "Is this in the best interest of my patient?" bureaucrats will consult their spreadsheets and ask, "Will the government get a decent return on its cost for this patient's medical care, or could that money be better used for someone else who will better serve the needs of society?" Sorry if you happen to die in the process.
Unfortunately, it seems that the Oath of Hippocrates is headed for a similar fate as the Constitution and Bill of Rights. It's becoming an anachronism.
Physician responsibility for decision making is the core tenet of Western medicine. Obamacare seeks to undermine that by putting the federal government in charge of medical decisions.
"We Should Never Again Let Doctors Work for the Government"
History shows the disastrous outcomes when doctors work for governments instead of patients. All totalitarian regimes—Lenin, Hitler, and Castro included—have used control of medical services to control their populations and devalue human life.
I realize that invoking those names can elicit negative knee-jerk reactions; I'm not trying to minimize their atrocious reigns by comparing them to Obamacare, nor am I saying that our medical system is headed the way of the Third Reich. But these murderous regimes taught us lessons about the relationship between doctors and government many decades ago. Those lessons seem to be slipping from our collective memory.
For example, when analyzing the grotesque outcome of Nazi medicine, we only see the end results of the doctors' atrocities. We hear of Nazi doctors who were hanged for experimenting on and killing patients.
But you don't hear about the long, slow process it took to get to that point. Nazi leaders didn't just command doctors to start killing people one day. They started by removing focus on the individual patient and switching to a "greater good" basis. They installed panels of "experts"—including doctors, lawyers, and psychiatrists—to decide who lived and who died, based on a cost-benefit analysis of the patient's value to society. This system stymied the many good doctors who wanted to do right by their patients. They had two choices: obey the government or join the victims.
Many prominent physicians were tried at Nuremberg and executed. Following the Nuremberg Doctors' Trial, Leo Alexander summed up the combined British, French, and American prosecutors' opinions that most of the German doctors were not inherently evil. The problem was that they worked for the government.
The Allied prosecutors concluded: "We should never again let doctors work for the government."
Government Doctors Come to the US
Government doctors are back in style. As is the "Progressive" view that some individuals must give up their medical services to others who are more deserving. The "cookie cutter" protocol of rationing based on age, condition, and cost is dangerous and costs lives. But that's where we're headed.
If there ever was a time and reason for internationalizing your life and assets, this is it. There are steps you can take: get some money in a health savings account overseas. Get an international health insurance policy.
Someday, your life could depend on having access to that money free of government restrictions. Prepare for that day.
Your health is your greatest wealth. To protect it to the best of your ability, explore health care options outside of the US.
Dr. Vliet writes as an independent practicing physician with medical practices in Tucson and Dallas focused on issues of endocrine aging in men and women from puberty to late life. Dr. Vliet is also the CEO of International Health Strategies, Ltd., a medical consulting company that assists patients in finding appropriate high-quality, affordable medical care overseas to maintain patients' medical privacy and medical freedom to choose individualized treatment options free of government intrusion.
Dr. Vliet is the author of six consumer health books and the 2007 Voice of Women Honoree by the Arizona Foundation for Women for her pioneering work on the overlooked hormone connections in women's health. She has appeared on nationally syndicated radio and TV shows discussing the healthcare law as well as a variety of health topics for women and men. Dr. Vliet was one of the speakers at the recent 2013 Casey Research Summit (click here to purchase the complete Summit audio set).
- Tue, 03 Dec 2013 18:08:00 +0000: The Energy Picture for 2014 - Casey Research - Research & Analysis
The Casey Energy Team hasn't been so excited in quite some time.
Because we're in the process of providing our outlook for 2014 in the next issue of the Casey Energy Report… and it's looking very good indeed.
Granted, 2013 was a good year for our portfolio—we were able to beat all our benchmarks while at the same time taking our initial investments off the table and letting the rest of the shares ride for risk-free gains.
But 2014 promises to be even better, as we're seeing all the stars align for our "big picture" themes… and the companies in our portfolio that are poised to profit.
The European Energy Renaissance is alive and well. Even though Russia currently has a stranglehold on Europe's supply of oil and gas, European nations are not going to sit idly by as Vladimir Putin uses this control to gain more and more economic and political leverage.
Remember 2009, when Russia shut off Europe's gas for 13 days in the dead of winter? Most of the EU countries fervently want to avoid a repeat of that story.
But there aren't too many ways to circumvent Russia. After all, importing oil from the Middle East could be just as risky. The best method, then, is to encourage domestic production at any cost; for companies operating in Europe, this will mean lower taxes and more relaxed regulations.
For these companies, the harder Putin squeezes, the better their prospects.
The "Next Bakken"—Still an Issue in 2014
2014 could very well be the Year of Putin, which means the Year of the European Energy Renaissance. And the Casey Energy Report is already well-positioned to profit from this ongoing trend of "Putinization" with one of the most exciting companies that we've seen in years… a small oil explorer sitting on a 2-million-acre concession in a proven oil-rich part of Central Europe that we call the "Next Bakken."
While we were the first to talk about this company, other analysts recently started to get wind of it and hype it up, leading to a quick doubling in the share price. That development prompted us to temporarily close down the Casey Energy Report to new subscribers while news of the company's first drill results was still pending.
That news has recently been released, and while the stock price dropped on investors' overhyped expectations, overall it has reacted well.
(You should know, by the way, that our "Next Bakken" play is not a shot in the dark. More than 90 million barrels of oil have been produced from this very basin in the past. An estimated 1+ billion barrels of oil reserves are still left in the ground… and with modern technology, such as horizontal drilling, the company is counting on unlocking these reserves.)
As we are reopening the Casey Energy Report, subscribers still have the chance to get in—at a good price—ahead of the company's most exciting developments to date, coming in 2014. And once our "Next Bakken" pick establishes itself as the next big thing in the oil patch, there is no telling how high the shares could go.
The New Global Battle for Energy Technology
A different theme in 2014 that we will feature prominently in our Casey Energy Dividends (included in all Casey Energy Report subscriptions) is the new global battle for energy technology—the technology to produce oil from difficult-to-access areas.
While the world is by no means running out of oil, it's a fact that the cheap, easy, light crude has been tapped out—that game is done.
The new game is called "progress." And the technology to produce oil from the difficult shale formations or from deposits miles below the ocean's surface—a technology in which the US happens to excel ahead of most other countries on the globe—is the most valuable commodity in the world right now.
This intellectual property is more valuable than anything Google, Apple, Microsoft, and Samsung combined have ever come up with.
Countries that have it will be able to keep feeding their industries with energy—those that don't will be forced to kowtow to those that do.
Companies that have it will be able to reward their shareholders with dividends and capital gains—those that fail to adapt will go the way of Kodak, Polaroid, and Blockbuster.
In this upcoming forecast issue of the Casey Energy Report, you'll also find our predictions—based on thorough analysis—on where the most important energy commodities are going in 2014.
- Will oil be up or down in the coming year?
- Will LNG change America's natural gas outlook?
- Is this finally the year for uranium?
- Are there signs of life in the coal sector… or is it dead on arrival?
All these questions (and more) will be answered in the next issue.
The Casey Energy Report, now reopened, is your best resource for making the correct decisions for your energy portfolio in 2014 and beyond. Our comprehensive research and objective, no-nonsense approach will steer you away from the minefields and into profitability.
So as 2013 comes to an end, do yourself a favor and sign up for a risk-free, 3-month trial of the Casey Energy Report and find out what 2014 has in store for energy investors. Take 3 full months to make sure this newsletter is for you—or your money back. Click here to get started.
Additional Links and Reads
Turkey isn't afraid to tread on some toes if it means securing oil from a source other than Russia. It definitely helps that major international oil companies chose to acknowledge the Kurdistan region (KRG) and its government as the governing body in the area. This gives KRG a lot of authority and handcuffs Baghdad, as the government still need majors for its capital. We expect Kurdistan to export its oil, and the pipeline to be one of the most heavily guarded lines in the world.
Methane hydrate deposit confirmed off Niigata (Japan Times)
Methane hydrate is a story we have followed for years, but it's absolutely too early to even begin thinking of investing in it. While the Japanese have already successfully extracted natural gas from methane hydrate, there are still too many risks that must be addressed before it will become feasible. The biggest risk drilling for oceanic deposits is that it destabilizes sea beds, which can cause earthquakes and tsunamis.
The environmentalists in Romania are on a roll. First it was Gabriel Resources' Roşia Montană mine that was shelved; now it's Romanian shale gas put on the back burner. We doubt this issue will be resolved in the near future, and it appears that the country will only be open to conventional drilling. This is definitely a norm throughout Europe, and conventional plays are hard to come by. We've covered this trend extensively and recommended key players with access to prolific conventional acreage. We know it's just the beginning of the cycle.
- Mon, 02 Dec 2013 16:52:00 +0000: Time for Goldbugs to Admit Defeat? - Casey Research - Research & Analysis
We've focused a great deal on gold over the years, and we've taken a lot of heat in the last two, during which the price of gold has dropped by a third. Are we fanatics refusing to face reality, or are we doing the right thing, staying the course through thick and thin?
BIG GOLD's Jeff Clark has a well-reasoned answer for us below. I hope all our readers take his message to heart.
Senior Metals Investment Strategist
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,252.10 1,345.50 1,729.50 Silver 20.03 22.49 34.35 Copper 3.19 3.28 3.59 Oil 92.72 98.20 88.07 Gold Producers (GDX) 22.28 25.78 48.04 Gold Junior Stocks (GDXJ) 32.50 39.26 87.60 Silver Stocks (SIL) 11.65 13.32 23.03 TSX (Toronto Stock Exchange) 13.395.40 13,440.61 12,202.85 TSX Venture 934.89 968.44 1,218.38
Time for Goldbugs to Admit Defeat?Jeff Clark, Senior Precious Metals Analyst
After a 12-year run, it looks like gold's wave has truly crested, and many bears are arguing that it's all downhill from here. A quick glance at a long-term gold price chart can certainly seem to confirm this impression.
Gold's price has fallen by more than a third since its 2011 high. The downturn exceeds the 2008 waterfall selloff. Many technical analysts are saying that the "damage" on the charts is too great for gold to recover. The rout is so bad, even hardened goldbugs have grown quiet lately.
Is it time for gold investors to admit defeat?
Well, if it were true that "damage" on a chart such as we've seen signals the end of a bull market, perhaps it might be. But is it so? Or is this just a correction?
One of the greatest bull markets in modern times was the Nasdaq in the 1990s. The Nasdaq composite rose a whopping 1,150% over the span of a decade. But did you know it had a major correction in the middle of that run? The same is true of oil's big surge in the mid-2000s. Consider this chart of the big corrections oil and the Nasdaq experienced:
After seeing prices crash in both the Nasdaq and oil, most investors assumed those bull markets were over—but they weren't. Here's the subsequent rise in each after prices bottomed:
The Nasdaq and oil did recover from their large corrections—despite all the technical "damage" many pointed to as proof that those bull markets were over. Investors who sold their positions during the downdrafts missed out on some fantastic profits.
Given that all the reasons gold rose from 2001 to 2011 are still in force, I am convinced gold's current correction is the setup for a second big surge—and, ultimately, a true gold mania of historic proportions.
Just because gold doesn't seem to be reacting to Fed money-printing at the moment doesn't mean it won't. Sooner or later, reality trumps fantasy. Reason says that you can't quintuple your balance sheet in five years and expect no repercussions. The Fed keeps hinting it will taper its money printing, but it still has not. We've had QE1, QE2, Operation Twist, and now QE3… none of them has worked, and the new Fed chair wants to print even more money.
It's pure fantasy to believe there will be no consequences to these actions—and the reality is that whatever else happens, gold will react positively.
Should gold investors admit defeat? I say it's reckless central bankers who should declare defeat.
A gold recovery is inevitable. Prepare accordingly. Try BIG GOLD risk-free for 3 months to access our GLD put strategy, frequent bullion discounts, and the producers that will respond the strongest once the recovery takes hold. 100% satisfaction, or your money back—click here to get started.
Gold and Silver HEADLINES
The latest figures show that net Chinese gold imports through Hong Kong accelerated in October to 131.2 tonnes (4.2 million ounces), making it the seventh month this year China has imported over 100 tonnes (3.2 million ounces) of gold and the sixth in a row. Total YTD imports now stand at 967 tonnes (31.0 million ounces).
Though there are no data for November available yet, it's certain that Chinese imports have reached the 1,000-tonne (32.1 million ounces) figure, forecasted by both the WGC and GFMS earlier this year. It's now estimated imports through Hong Kong this year will be more like 1,200 tonnes (38.5 million ounces).
Hong Kong is not the only route for gold imports, as Shanghai is another big source. Some analysts estimate that gold imports from all sources, combined with domestic gold production of 420-430 tonnes (13.5-13.8 million ounces), will be in the range of 2,400-2,500 tonnes (77.1-80.3 million ounces). This is over 80% of the latest estimates of world new gold output this year of 2,900 tonnes (93.2 million ounces).
Investor Confidence Returning to the Mining Industry (Mining.com)
One of the most trusted indicators of the global exploration sector's overall health—SNL Metals Economics Group's Pipeline Activity Index (PAI)—sits at a historical low, where it's been for the past six months.
The number of significant drill results has remained flat for much of 2013, and only a limited number of sufficiently capitalized junior companies continue advancing their top projects. SNL Metals Economics Group anticipates the level of drilling activity in 2014 could be the lowest in years, considering the large numbers of juniors that will begin next year with no funding and little available risk capital.
The good news is that there is sound evidence to assume the current below-average levels likely mean global drilling activities and resource announcements have hit rock bottom. The bad news is that it's hard to predict when it will rebound.
Australia's Mining Boom Is Over (Mining.com)
Investment in Australia's mining industry has declined in the last six months (through October), suggest new figures from the Bureau of Resources and Energy Economics (BREE). Compared with the prior six months, the number of "committed stage" projects (i.e., projects that have completed all permitting procedures and are either under construction or about to begin construction) dropped by 10 and the value of these projects has fallen by 10% to a combined value of A$240 billion.
Researchers name two key drivers behind the decline. During the period, there was a record for the value of projects moving into the "completion" phase of about $30 billion. And the country recorded the lowest value of new projects being sanctioned in the past decade: $1.7 billion.
Over the past decade, Australia's mining sector has enjoyed a massive influx of investment that's made the country host to several "mega mining" projects, those valued in excess of $5 billion. But now the country is in transition from the investment phase to the production phase.
"The economic benefits of the production phase may not be as large as the investment phase per year, but they are expected to last for considerably longer." However, with current commodity prices, "the industry is 'unlikely' to see a rebound to the very high price levels observed during the peak of the latest cycle."
So much for Australia's great mining tax fiasco.
This Week in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our junior explorers has just raised more funds, without excessive shareholder dilution. Given how much gold this company has delivered for the money put into the ground, we're sure it will continue adding value.
- One of our gold producers has built a new mine, not only on budget, but ahead of schedule. Shares are on sale.
- Tomorrow's BIG GOLD has a new stock recommendation, a fund that yields 12% at current prices. Earn some serious cash while waiting for the market to turn.
- Wed, 27 Nov 2013 14:05:00 +0000: Currency Investing: “Hit ‘Em Where They Ain’t” - Casey Research - Research & Analysis
If money is the mother's milk of politics, fiat currency is surely the same for government. The modern version of money has no backing and thus doesn't restrain government spending. The hopes and dreams of a generation of politicians can be paid for with money conjured from thin air and the imagination of central bankers.
Doug Casey often reminds us of the many currencies governments around the world have rendered to their intrinsic value. But while the current crop of money are ultimately destined for the dustbin of history, for the moment these weapons of mass economic destruction trade against each other in a world marketplace.
As today's guest writer Mark Whitmore explains, most investors steer clear of currency markets, thinking this market is for traders who must stay awake at all hours, keeping "one eye open," moving in and out of positions in the dead of night. He makes a compelling case instead for patient, long-term investment in currencies.
What makes Whitmore's article timely and thought provoking is the ongoing tug of war between inflation and deflation. Central banks around the world are desperate to spark some price inflation to help their debt-burdened governments and businesses. Printing more money makes existing money worth less and lessens the burden of debts owed.
It hasn't been so simple, though. While the Federal Reserve, the Bank of Japan, and the European Central Bank buy debt securities and grow their balance sheets attempting to light inflationary fires, the velocity of money (GDP/M-2) and the money multiplier (M-2/monetary base) have slowed to a crawl.
In September of 2008, when the financial world crashed, velocity was 1.89 and the money multiplier was 8.61. Five years later, velocity is 1.54 and the money multiplier is 3.10. These are the lowest readings for either ratio since the Federal Reserve started keeping the relevant data.
Alan Greenspan might have been knighted by the Queen in 2002, and Ben Bernanke named Time's Person of the Year in 2009, but it turns out they are not omnipotent. While the tinder is there to create a hyperinflation brushfire, the still-crippled commercial banking industry isn't lending. So, money multiplication in the US is slow going. The other major central banks have had no better luck getting prices to move.
Whitmore has been investing currencies for decades. He is the chief executive officer of Whitmore Capital Management and manages Whitmore Capital, a currency-based hedge fund.
As he illustrates in his piece below, there is a patient and disciplined approach to currency investing that can plug a hole in your portfolio diversification.
Beyond the day-to-day bobbing and weaving of currency prices, there will be winners and losers in what economist and investment banker Jim Rickards calls the "currency wars." In his book of the same name, Rickards says Currency War I (CWI) began with the German hyperinflation of 1921. The Bretton Woods agreement laid the groundwork for CWII, and the massive central bank response to the 2008 financial meltdown has launched CWIII.
This treacherous environment keeps most investors away, while creating an opportunity for profit for those willing to think outside the box. It brings to mind the great baseball hitter Wee Willie Keeler, a small man who hit big. His one piece of advice was to "Keep your eye clear, and hit 'em where they ain't."
Make sure to read Mark Whitmore's article below. He will show you how to take Wee Willie's advice in this tumultuous investing climate.
Contributing Editor, Casey Research
Currency Investing: An Alpha-Rich Environment
By Mark Whitmore, Whitmore Capital Management
(Originally published in The Gloom, Boom & Doom Report, October 2013)
Having primarily invested in currencies for over a decade now, both personally and recently as a fund manager, I do not think there is an asset class that is less understood. The most common misconception is that the currency markets are for traders, not investors. To be successful, one must sleep with "one eye open," nimbly entering and exiting positions throughout the day and night. I take the opposite view: Currency trading is at best an uphill battle, while currency investing can provide investors superior opportunities for profit.
The Case for Currencies as an Asset Class
Some simply dismiss currencies as an asset class since all countries have fiat-based legal tender. The argument goes that since no currency is backed by gold or any other precious metal whose supply is constrained, all currencies are simply confetti—poised for debasement ad infinitum.
However, it does not follow that because fiat-based currencies are prone to debasement, they do not offer strong investment opportunities. What those who stress the perils of investing in paper currencies often fail to appreciate is this: The operative question should not be whether a particular currency is subject to debasement on an absolute basis, but instead whether a particular currency is more or less prone to debasement on a relative basis.
The modern era of untethered legal tender, beginning with Nixon abandoning the gold standard in 1971 and culminating in 2000 with Switzerland becoming the final nation to remove its currency from even being partially backed by gold, has created even greater investment opportunities in foreign exchange. Up until 2000, the range of central banking activities related to monetary expansion was much more limited, both in terms of qualitative policies and quantitative actions. Now, the disparities between the merely reckless central bankers and the central bankers who are reckless with extreme prejudice are made manifest.
Failing to appreciate the fact that significant disparities exist in the monetary policies of, and economic prospects for, different countries is to forgo the chance to potentially profit as future currency prices reflect those differences. To paraphrase Orwell, when it comes to investing in a world in which there is nothing but fiat money, while all currencies are equal, some currencies are more equal than others.
The standard case for including currencies as part of a diversified portfolio is twofold. First, currency investing has exhibited very low correlations to other asset classes, making it attractive for those looking to reduce portfolio volatility as well as potentially increase risk-adjusted returns. The second, more interesting, argument is that since a huge percentage of foreign exchange turnover comes from non-profit-seeking actors aiming to hedge currency exposure, market pricing may be prone to "inefficiencies" that can be exploited.
Personally, I think the latter argument mischaracterizes the potential profit opportunities the currency market offers. Perhaps the greatest debate in all of academic finance is whether it is possible to "beat the market" and generate positive alpha, or whether all such outperformance is explained by random distribution. Basically, the efficient market theorists and their ilk contend that markets factor in all relevant information in determining asset pricing. This means that the market price is the "right" price, making the expected profit of speculation into any given asset to be no greater than what the broader market for the asset itself would generate.
At least as it relates to currency markets, efficient-markets theorists are most certainly correct when it comes to the degree to which currency markets factor in virtually all relevant information, yet they may still be answering the wrong question. The key issue is not whether market pricing is the "right" price, but rather is it the right price for whom? I contend that foreign exchange markets have a persistent bias towards pricing that reflects almost exclusively the short-term prospects for currencies.
This presents currency investors with a longer time horizon the opportunity to take advantage of disparities between the current price of currencies and their fundamentally derived fair value, towards which currencies should gravitate over time.
Currency Strategies—One Tortoise for Every 220,000 Hares
Hedge funds and large commercial banks with proprietary currency desks have at their disposal virtually unlimited resources to expend in research and analysis. It would seem that an individual expecting to successfully "outmaneuver" these institutions when attempting to place currency trades would be a case study of hope triumphing over reason.
The evidence concerning retail currency trader track records would seem to confirm my suspicion that these traders are playing a game where the deck is stacked against them. The social network investing site eToro reports that about 90% of currency traders lose money.
Yet despite the obvious hurdles associated with currency trading, a large and growing percentage of the volume in the currency markets is from participants who anticipate holding their positions ephemerally. The Bank for International Settlements estimates that approximately 25% of all spot market volume in 2010 was from High Frequency Trading (HFT) sources, and that almost 80% of foreign exchange swaps were held for less than one week. The Aite Group estimates that by the end of 2012, HFT increased to 40% of spot market volume.
The structure of the futures market also manifests an extreme indifference among market participants towards longer-term investments in currencies. A review of the Chicago Mercantile Exchange data for August 2013 shows that of the $75,000,000+ in notational value of pound/yen (GBP/JPY) futures traded over a one-week period, not a single contract was bought or sold beyond September 2013. Even euro futures, the most popular and liquid currency future to trade, had less than 0.3% of its total futures contracts traded on August 13th go beyond one month out.
Shockingly, only one contract out of more than 220,000 euro futures that were traded that day extended into the first quarter of 2014!
Currency markets' pricing dynamics may thus offer long-term investors an advantage. After all, when it comes to having an edge against your competitors, it helps if they simply forfeit every game. With the vast prevalence of computers, money managers and individual traders making extremely short-term bets based upon non-fundamental factors, momentum and the reaction to "noise" are the chief determinants in the day-to-day pricing of currencies.
"Big picture" considerations that impact a currency's longer-term movements consistently fail to be reflected in market pricing. This creates fantastic opportunities for the handful of tortoises in the currency markets as they can bet against the momentum players who often push currency prices to unsustainable extremes.
A Model for Dynamic, Value-Based Currency Investing
If fiat-based currencies are actually a boon to investors, and currency markets can be profitably exploited in the longer term, what are the tools required for successful currency investing?
When I left the practice of law to pursue investing full-time in 2002, I was convinced there were huge opportunities for profiting in the currency markets if one employed a long-term, disciplined approach that was based on weighting macroeconomic variables and using regression analysis to somewhat frequently rebalance one's portfolio as prices and data constantly changed. Developing such a calculus became my passion and focus. While I have refined the model significantly over the years, its essential elements have remained unchanged.
What Benjamin Graham observed about the stock market is true a fortiori about the currency market: In the short run it is a voting machine, but in the long run it is a weighing machine. A wide variety of fundamental factors affect currency valuations. Personally I use roughly ten key macroeconomic variables, weighted based upon my observations on how significantly they impact currency prices over time. Perhaps the most intuitive and obvious is that of purchase power parity (PPP). Investors should select relevant macroeconomic variables by determining which ones, should they change, would make a currency more or less desirable to hold, ceteris paribus.
A critical element of my approach is dynamic scaling of positions. Once we can assess approximate fair values for currencies based upon their fundamentals, designing a currency investment portfolio becomes a matter of weighting most heavily those currencies that have the largest gaps between their market price and fair value. I take positions in no fewer than fifteen currencies, and usually closer to twenty, so as to ensure reasonably broad diversification.
Due to the fact that pricing in the currency markets can be quite fluid and dynamic, it is absolutely imperative that one somewhat frequently rebalance such a currency portfolio to reflect changes in pricing and even fair value. For instance, while the yen was Whitmore Capital's largest short one year ago, it is now not even one of the Fund's five largest shorts after its 20% decline in value versus the dollar.
Discipline and Patience
One of my favorite movies of the 90s is Bryan Singer's neo-noir thriller, The Usual Suspects. The film centers on an interrogation of Verbal Kint (played masterfully by Kevin Spacey) after he is witness to a port massacre. Eventually it is revealed that Keyser Söze, a criminal boss of almost mythical stature, is responsible. In detailing the unspeakably cruel and vicious things Söze had done over the years, Kint noted that Söze's great revelation was that, "To be in power, you didn't need guns or money or even numbers. You just needed the will to do what the other guy wouldn't."
While in a far more benign context, I find this observation to be extremely relevant to investing in foreign exchange markets: I am increasingly convinced that the most important characteristic a currency investor can possess if he hopes to achieve great success is the will to do the one thing that the money management industry and the vast majority of investors cannot countenance—lose money.
Inherent in the strategy I favor is the need to increase exposure to currency positions as they go against you. It requires discipline and patience, two things that most investors (and hence money managers who answer to them) have shown time and time again not to possess.
While seeing "cheap" currencies you own get cheaper (or having overvalued currencies you are short become even dearer in price) may seem unwelcome at the time, dollar-cost averaging into losing currency positions has proven to be the most profitable strategy I have employed throughout the years.
When the totality of fundamental factors for a particular currency is at extreme levels of overvaluation or undervaluation, I have found that price movement towards fair value is all but inevitable. But something being inevitable does not make it imminent. I see this as "when, not if" investing, but the question is whether an investor will have the stomach and the liquidity to weather what can be significant and seemingly interminable rallies in the other direction.
The importance of being willing to lose money in the short run to ultimately profit has been made clear to me on a repeated basis. Each of my most successful currency investments had either large initial losses or endured countertrend rallies that caused significant, but temporary, losses in the midst of a secular move. In one instance, the USD broadly increased in value more than 10% right in the midst of its 2001–2008 secular decline (see Figure 1).
Despite that, a disciplined, patient currency investor stood to profit nicely as the dollar declined more than 20% from its 2005 countertrend rally peak.
I cannot stress enough how investing in currencies is fundamentally different from trading them. Perhaps the most evident way in which they differ relates to the concept of discipline. In the trader's lexicon, the concept of discipline has a manifestly Orwellian doublespeak component. One is constantly encouraged to set tight stop-losses on orders, never letting losses "run."
From my experience, this is exactly the opposite behavior one would expect from a disciplined investing strategy. Indeed, using conventional trading discipline, I would have been stopped out of many of my short USD holdings in 2005, thus failing to maintain positions that were ultimately quite profitable.
Currency Opportunities Today
I am of the opinion we are in the most treacherous investing environment since the 1970s as the tug of war between inflation and deflation plays out in the global economy. While too vast of a topic to address here, in sum, we are left to consider the odds of what looks to be a distinctly bi-modal global economic future. It thus strikes me as prudent to execute currency investments in a manner so as to limit downside exposure in the event the world economy breaks in one direction or another.
Accordingly, my favored currency strategy at the moment is to find currency pairs whereby one is much more attractively priced than the other, yet both would move in a similar fashion no matter what the economic environment.
Both the Russian ruble (RUB) and the Turkish lire (TRY) have historically performed very poorly in financial downturns, and tend to appreciate when global economic complacency is high. But whereas Russia has almost no national debt (a pleasant result of going through a sovereign debt collapse, I suppose) and significantly positive current account balances, Turkey has about the worst current account balances of any country whose currency is significantly traded.
But Turkey's vulnerability to external financing shocks is even graver. As of July, Turkey's central bank reported its foreign reserves as a percentage of GDP stood at roughly 15%, putting Turkey in the lower ranks of emerging market nations. By way of comparison, Russia's foreign reserves as a percentage of GDP is 65% higher, coming in at approximately 25% (see Figure 2).
Other fundamental factors favor the ruble as well. Whereas Russia has a marginally positive real interbank interest rate level, inflation in Turkey exceeds its interbank interest rate by a substantial 4%. Finally, on a PPP basis, Turkey is shockingly expensive, particularly if one properly adjusts for standards of living. While Moscow is ridiculously expensive, prices in most other places in Russia are quite attractive. Thus RUB/TRY positions should appreciate in any economic environment in the medium to long term, with the RUB declining less than the TRY if markets are down, and the RUB increasing more than the TRY should markets continue to appreciate.
Another pair that appears to be a good risk-reward play is the Australian dollar (AUD)/New Zealand dollar (NZD). The NZD looks to be the most vulnerable to a significant correction among the dollar-bloc currencies. Its current account deficit as a portion of GDP is approaching 5%, while Australia recently reported a yearly current account deficit at less than 3.2%. Should asset markets become roiled once again, this level of a structural deficit in New Zealand's current accounts could be seen as an acute vulnerability.
Moreover, when adjusting for wage inputs, the NZD looks even more overvalued than the AUD on a PPP basis. The NZD is also still trading very near its all-time highs versus the dollar, whereas the AUD has recently pulled back more than 15% from its all-time USD highs. As a contrarian, I like the fact that the AUD is utterly despised. (In August, non-commercial traders had the largest net short position against the AUD in years.) Finally, should the precious metals complex eventually recover some, the AUD would be likely to get a little bit of a tailwind at its back compared to the NZD.
Given what I perceive to be a long history of foreign exchange markets offering relatively obvious opportunities for significant profit to the patient and disciplined investor, I am somewhat shocked that currencies continue to be almost completely overlooked as an asset class.
I just recently reviewed a model portfolio for high net worth individuals that had more than fifteen components. There was even 3% devoted to "trade finance receivables." Yet not a sliver was devoted to currency holdings.
I suspect that as a fund manager I will never have a plethora of competitors in the realm of longer-term currency investing. Nevertheless, for those investors willing to play a little outside the lines of traditional asset allocation, currency investing offers the opportunity to obtain both significant portfolio diversification and the prospect for excellent returns.
After six years of practicing law in the Seattle area, Mark left in 2002 to pursue investing full-time, using a year's salary he had saved as seed capital. Over the next nine years, Mark multiplied his investment portfolio more than one-hundred fold on an after tax basis, primarily through currency investing. In June 2012, Mark launched Whitmore Capital, a hedge fund which solely invests in currencies. In its first seventeen months, Whitmore Capital is up over 50%, net of fees, while the Parker FX Index is negative for both the last twelve and twenty-four month time periods. Whitmore Capital is open to accredited investors both domestically and abroad. Interested investors can email Mark at firstname.lastname@example.org, call (206) 227-0644, or visit whitmorecapitalmanagement.com.
- Tue, 26 Nov 2013 16:16:00 +0000: The Iranian Deal: What the Big Six Really Have to Gain - Casey Research - Research & Analysis
Over the weekend, the world changed.
Officials from Iran made a deal with six countries (the US, Russia, China, England, France, and Germany)—in exchange for suspending the world's sanctions on Iran, Iran will curb its nuclear weapons program.
Though it's only a six-month interim agreement for now, it's an important first step toward bringing Iran economically closer to the rest of the world.
This is, by any standards, a historic deal (or a historic mistake, according to Iran's archenemy Israel): the United States and Iran haven't had diplomatic relations since 1979.
This is like Wile E. Coyote suddenly signing a peace treaty with the Road Runner.
But the more important question is "Why?" Why did Iran suddenly have this change of heart after pounding the table and claiming that enriching uranium is an inalienable Iranian right?
Is it really as the media portrays? Did the tough American and European sanctions placed upon Iran finally bring the country's leadership to its senses?
As much as President Obama would like you to believe that, we think the answer is far more complicated.
All of these countries have some sort of agenda that they are pushing—and this deal is going to give them exactly what they want. And if you think that this is about "Middle East stability" and "world peace," there is a bridge I would like to sell you.
There is only one thing on the minds of these countries: oil.
Hitting the Jackpot
It is pretty easy to understand why the Chinese are interested: with the one-child policy being relaxed and a constantly growing population, there is no doubt that they're looking all around the globe for secure energy supplies. Given that Iran has one of the world's largest reserves of both oil and gas, it's the perfect location for China to be drilling.
When Iran begins to open up to the world, the Chinese petroleum companies will salivate at the opportunity to unlock some of the largest hydrocarbon fields in the world. While it is true that they'll have to compete with companies around the world, the Chinese are known for their deep pockets and willingness to acquire energy reserves regardless of the cost.
What does Europe get?
If Iran is able to start selling oil on the global market again, Europe gets something crucially important: a source of non-Russian oil.
Russia currently has a stranglehold on European oil and gas supplies (something that we have written much about over the past few years). Though Europe is ramping up its own domestic production, a phenomenon we call the "European Energy Renaissance," it cannot happen overnight. In the meantime, Europe depends on imported oil and gas… and believe it or not, Iran provides a better alternative to the heavy hand of Putin.
Because Iran just wants money for its product, but Putin wants control—both political as well as economic.
The Americans also got something great from the discussions: the continuation of the petrodollar. With a détente around the corner, America can monitor Iran's activities and quietly make sure that the sale of this oil will be denominated in US dollars. The fact that Iran has constantly tried to shift away from the US dollar for petroleum trades has always been a thorn in the side of the US government. By "working closer" with Iran, America will in fact be able to better keep tabs.
But the biggest winners of the day may have been the Russians and the Iranians—because they can now get access to the biggest prize of all.
There's no doubt that Russia and Iran are close: due to the sanctions, much of Iran's military is Russian-built, and there is a great deal of cooperation between the two countries on the oil and gas front.
If Iran does indeed open up its oil and gas fields and invites the multinationals in, it means that the country will have access to the multinationals' technology—the technology to unlock not only the vast conventional potential that Iran already has… but also the unconventional oil and gas that could dwarf Iran's current reserves.
We are talking about access to not just billions, but even trillions of barrels of oil.
"Open Sesame"—Unlocking Ali Baba's Treasure
America, rather than Russia, leads the world in unconventional oil and gas production. But more importantly, they lead the world in the technology it takes to unlock the complicated geology that lies beneath the Earth's surface.
The ability to extract vast quantities of oil means energy independence or, in the case of Iran, even more oil and gas available for exports and to fill the country's coffers.
So by inviting "the Great Satan" inside its borders, Iran will be able to acquire this valuable technology and begin to apply it.
And once everything has been built, it would only take a flick of a pen to evict the American companies.
The Russians would also be able to take this technology and apply it within their own borders… so that they can begin expanding their hydrocarbon empire beyond the boundaries of Europe.
It is clear the biggest loser in this negotiation is Israel. There is nothing they can do but stand by and watch. But Israel won't show its cards until the six-month treaty expires.
The key to how this plays out for the US is how Iran acts the day after the six-month treaty is over. Will Iran continue under the same terms? If not, will Israel tolerate it?
So How Can We Profit?
By investing not in the companies that will be physically producing oil within Iran's borders, but in the ones that will provide all the necessary services… the picks and shovels of the business, so to speak.
And we already know the ones that the big multinational companies like Shell and Exxon will turn to.
Want to find out which ones? Read all about it in the December issue of Casey Energy Dividends. Sign up now for a risk-free trial and begin profiting from the biggest diplomatic agreement in the past decade.
Additional Links and Reads
Japan formally annexed these islands in 1895; however, it wasn't until 1969 that enormous oil and gas potential was identified. Not long after, both China and Taiwan formally declared ownership of the islands, drawing upon the deep history both countries have in the area. Now that offshore oil is more economically viable, we expect the East China and South China Sea to be the stage for considerable turmoil in the future.
Coal is definitely the forgotten commodity, especially with the rise of cheap natural gas. However, many emerging economies still depend on coal because the infrastructure is already in place. We believe the demand for coal will rise again, especially in China and India, as the global economy begins picking up again.
While this may just seem like a response to the increase in government scrutiny over physical commodity trading, this can also be taken as a sign that uranium is nearing a bottom. The lack of volatility in uranium price has really hurt trading, but people have to realize the majority of uranium is traded by long-term contracts.
With tax season coming up fast, we wanted to let you know that the folks from the Oxford Club are hosting a free online video event on how to shield your hard-earned money from Washington's money grubbers. Six economic, tax, and investment experts—including our own Dennis Miller, editor of Miller's Money Forever—will lay out different (and perfectly legal) ways to reduce what you owe to the taxman.
The event will take place on Tuesday, December 3, at 2 PM Eastern. Even if you don't have time to watch then, we recommend registering so you can get the video recording after the event has aired. Click here to sign up.