Sunday, August 28, 2016

Do you think that after this world blows up, you are still going to use a cell phone?

These days feel a bit like a pressure cooker. Government’s all intrusive presence is starting to work on my nerves and likely on the nerves of many others.  I hear more and more talk about the libertarian life philosophy and Ayn Rand. Donald Trump is a demagogue phenomenon resulting from people’s discontent.  We’re giving up our freedoms bit by bit.  Your government full of unelected officials who run their little empires and who run circles around our so-called elected representatives. Those same 'elected representatives' make careers out of working from elected office.  We’ve had school teachers who spend a few years in the election machinery and become PM; real estate moguls running for president and social workers running for president.  In Alberta we have a school teacher running the energy department.  Now they receive salaries comparable with managers in the private sector and defined pension benefits that others dream off.  They are ‘advised’ or is the better term ‘manipulated' by un-elected officials specialized in their respective departments and accountable to … who????  Today, wages of many civil servants, especially when including their benefits, are what many private sector workers can only dream of.  A high school teachers with 3 months’ holidays making 6 figure salaries and again that defined benefit pension which is by itself worth millions. (just do the math: what is the value of an $80,000 annual pension when interest rates are 1 to 2%.  Yep, close to $4 million!)  Who is working for who??
Then there was privacy. Oh, we need to give the government special privileges to monitor its citizens.  After all you can get killed by a terrorist any moment now.  And you have to register every piece you own directly or indirectly with the government.  You make a large deposit to the bank, your government knows all about it through its ‘money laundering’ legislation.  What do they do with your health records?  With your tax information?  Oh… and they monitor even your email?
Then you have the private sector leadership.  Apple knows where you are when using their i-phones. It is not their fault; they have to report it to the government, yeah... right! So does Samsung.  Microsoft has a camera in your living room!  Talk about 1984! Your phones also scan your iris and your finger prints.  All is for your convenience… but if you don’t accept all their intrusive monitoring then just don’t load the app.  Yes, try doing banking off-line in an increasingly cash-less society? Then you get the endless rotation of corrupt corporate leaders: board members; CEOs; Chairman of the Board.  They all have to get paid a lot of money and if they fail… they get an even richer hand shake. Oh… and they know where you live; how you buy, what you buy, what your credit rating is. Do I have to go on?
In the meantime, the economy is barely growing. Real wages are falling or stagnant. Part is due to technology.  Even with a large cheap labor force, China cannot compete with robotics. The bankers are manipulating interest rates and commodity prices by controlling derivatives that cover any underlying asset such as all the gold in the world; all oil in storage or to be produced over the next 2 years; all copper; etcetera many times over.  There is this story that when you take all Gold ETFs and Options, then there are 500 gold owners per existing ounce of Gold.  Similar for Silver, etc.  So who really sets those prices, the manipulating trading houses such as Goldman-Sachs or the ‘free-market’?
Occupy Wall Street, The ‘One Percent’, Donald Trump, Jean Marie Pepin, Brexit, etcetera are all expressions of people’s discontent with today’s affairs.  No wonder everyone is frustrated and feels helpless in today’s world. No problem – feel helpless?  Marvel has a superhero movie for that!  Terrorism, Climate Change, the H1N1, SARS, and lately the Zika Virus are all ways to scare the crap out of people; to make them submissive and willing to give up even more freedoms.  The Press has a field day with 30-sec clip politicians who scare the heck out of the people about these frightening issues.  “We can make a Law for that”.  “Let’s jail Mr. Zika! Eh… eh…”
We have people losing confidence in their political ‘leaders’; in their economic system – what is government debt? 200 or 300% of GDP. What the economy is still not growing? Let’s rob some more (private sector) retirees from their pensions and have negative interest rates! What, that doesn’t help? What about a 11-billion-dollar deficit?  What about a Trillion-dollar deficit?  What used to be doomsday forecasters of impending ‘End-of-the World’ scenarios is gradually becoming main stream.  Not because we are more easily scared!  Gosh, we get so much scariness in our daily diet, we must become immune!  No, the ‘End-of-the World’ scenarios are becoming more likely.  Try to cash in on your bank account lately?  You probably need to make an appointment and fill out some bank and government Fin Track forms. Oh… you must also wait for about a week or three before we have your cash here at the branch. 
In the meantime, government debt is going through the roof.  Loans are taken out to buy back shares; sub-prime loans are what drives GM’s car loan sales. Haven’t we learned from 2008?  Why does Vancouver’s real estate value shoot up (until your politicians made yet another 'reasonable' law)! Because, Chinese and other overseas investors are afraid for their own government and try to hide their assets often including kids in a more political ‘stable’ environment. In Alberta we have rectified all environmental issues in one blow – tax the crap out of your depressed economy and your citizens by implementing an hydrocarbon charge that makes your eyes hurt! Just wait until the average gullible Albertan feels this in his wallets!
So yes, if you have a feeling we’re living in a pressure cooker and something nasty will happen sooner or later. You may be right.  The more I learn, the more I start to believe that we are moving towards a breaking point. The ‘breaking’ may be a sudden snap or it is something that evolves over several years. People will get sick of the scare mongering oppressive society where nobody dares to speak-out because of the ‘political correct’ backlash which sometimes amounts to nothing different than a public lynching. I suspect there will be one or more triggers – excessive abuse of privacy invasion; another big layoff; a bankruptcy where once again numerous small investors are holding the back while the ‘big guys’ with anxiety in their faces and a golden handshake on their back are moving on to the next group of gullible shareholders.  An accounting scandal or a particular nasty automobile recall. Whatever, the trigger – something will give and then it will be once again you and me who hold the bag.  Because, the guys who ran this racket scheme won’t end up in jail; they will drive away in a Rolls Royce and pose at the ‘new leadership of change’.
No wonder, the Donald has such a large following regardless of what he says – as long as it is not the ‘Establishment’ friendly Hillary!  Yet, it doesn’t matter who wins.  Maybe like last time, we’re ending in ‘political gridlock’.  That is another word for ‘big-fat-pay-checks-and-no-solution’. And in the end, the system comes crashing down.  Maybe not closed stores; maybe you will keep your assets and we avoid big civil riots. But your dollar may end up worthless, because nobody believes in the system.  A big market crash where you lose a large portion of your retirement savings – What?  Yet again?  This is why many ‘legendary investors’ like George Soros start to flee into gold.  Because it is the only asset, as proven by history, that may take over the role of money.  When push comes to shove and short of plain barter, gold may prove to be instilling a lot more confidence as a currency than some corrupt government’s paper IOUs.
I am not saying sell everything. I don’t know what will happen. But I have more confidence in real assets – a house, a repair shop, trees, oil, a garden, a service you can provide – than a piece of paper. And one of the most valued assets that can act as the ‘new money’ is gold.  It is also more difficult to track gold by 'your friend the local politician’ who sells you out in Ottawa or Washington. I feel we’re living in a pressure cooker about to blow up. Will it or not?  How should I know? But owning a portion of your wealth in gold may not be such a bad idea.  But be careful where you store it and keep it away from your Nest Security camera (Google), Xbox or smart phone.  Do you think that after this world blows up, you still are going to use a cell phone?  :)

Monday, August 1, 2016

G what do you do in these difficult markets?

It seems like we always have ‘difficult markets’ and that in the past investing was so simple. That has something to do with ‘hindsight is 20/20’’, I guess.
For years’ investors have been worrying about ‘Helicopter Ben’ and whether QE worked or not. Well in my books it worked… a bit. It was probably better than let everything go the hell as so many true ‘capitalists’ seemed to prefer. That maybe easy to say when you are in the 1% but what if you live on one or two minimum wage jobs, or if you have a young family to feed?  Yes, the strong may benefit – probably just like the banker crooks did in 2008... I recently saw ‘The Big Short’.   But this society is supposed to take care of the not-so-strong and the outright disadvantaged as well. QE and other stimulating measures helped maintain a semblance of economic stability and kept job losses to a minimum.
But now we have to deal with the fall out of those measures. Who in their right mind is lending money to over-indebted governments and corporations today and pay them for holding your money (negative interest rates)? You might just as well let your money stand in a checking account. Maybe diversify by putting the money in a U.S. Dollar, Canadian Dollar, Euro and Yuan account. That would make a bit more sense to me!  In the meantime, we have distorted currencies, anemic earnings and overextended share prices; especially super expensive share prices of dividend paying stocks.

This is a risky investment environment. George Soros and many other prominent investors seem to think so. These days they invest in gold and silver whose prices, as well as those of precious metal mining stocks, have shot up in value.
With excessive low interest rates, bond prices are also in the stratosphere. If both stock prices and fixed income instruments are in bubble territory then both will likely come down at the same time. So much for the famous diversification strategy of having 60% in stocks and 40% in bonds!  Today such a strategy is truly asking for trouble!  It shows you also that yesterday’s investment strategies are not always appropriate for today. If one believes in the new ‘Gold Bull Market’ and that gold is insurance against world instability and everything else that’s bad, how can you protect your portfolio and yourself?
In many severe bear markets, gold often performed well. Think of 2008 to 2011 for example. Now, with low, or better negative, interest rates, while coming out of a horrendous commodities bear market…. Now seems truly to be the time to dive into precious metals. Gold may boom, but silver typically outperforms gold and so does platinum during precious metal bull markets. Some prognosticators think gold is about to go up to $10,000 per ounce once the Fed decides to return the U.S. dollar to the gold standard as a remedy for today’s currency wars. Others talk about $5,000 per ounce. But even if we went through another major bear market with say stocks down 40%, real estate down 25% and bonds, the worst performer, down 50% then how much precious metals does a portfolio need to maintain your net worth or for you to even profit while the rest of the world goes to hell?  As for all major questions in life, answers can be found in a simple Excel spreadsheet.  Oh, thank you Great Bill! 
We are using our standard asset allocation for a $250,000 portfolio:
49% in real estate
28% in stocks
9.5% in bonds,
10% in cash
3.5% in gold and silver; in gold and silver mines or gold streaming businesses (e.g. Franco Nevada).

So let’s assume gold goes up to $2,500, $5,000 and $10,000 or so. Typically, in bull markets, silver outperforms gold at least 2 to 1. Mining and streaming share prices outperform the metals 10 to 1. So with those assumptions what happens to the above portfolio?   Aaaahh…. Numbers and numbers!  Well if you can’t stand the numbers what about my explanation below the numbers?
So the results are… 
Click on picture to magnify.
In case of a major economic collapse and assuming the precious metals thesis works out. If Gold doubles to $2500 (2011 high was $1900 or so) then you would basically break even.  Not bad when your neighbors lose nearly half their net worth! If things got out of hand and moderate gold bugs are right with gold going to $5000 your net worth would actually go up by 23%. Oh do I see jalousie on your neighbors’ faces?  
If the gold nuts are right and the gold price goes to $10,000 you better go live in the U.S. away from your neighbors and buy a gun because your net worth shoots through the roof!  And that by allocating a mere 3.5% of your net worth to precious metals!  You see why they call this stuff ‘chaos hedge’ or ‘portfolio insurance’?
This strategy may not only be true for precious metal investments. The same idea - investing a small portion of your portfolio in high risk but potentially high return assets - may proof a very powerful form of diversification. What about becoming a member of the Shark Tank? Investing in small cap startups?  Or invest 3 to 5% in a down trodden sector like today’s energy sector where potential surviving companies may double or go even higher in future years now that we are coming out of a severe oil and gas bear market?

What have I done lately and plan to keep on doing for the next year or so?  Similar as described above.  I am gradually selling off financials like Canadian Banks while reducing my U.S. ETFs.  I have been increasing my cash and invest small proportions in precious metals and miners of said metals (gold and silver). I also have dipped in the energy industry, including reviving my oil and gas consulting company. 
 Oil and Gas production will likely keep on leveling off or decline even further.  Demand is growing, despite a short term over supply of gasoline.With so many geologists and engineers out of work, it is only a matter of 'when not if' we’ll have great shortage of oil and gas as well as a shortage of expertise. So that is my strategy in today's environment. But that is not the point of this post. The point is: What are you going to do to protect yourself from the uncertainties of today’s economic environment?