My Question to Mr. Ignatieff

31 March 2011

On Sunday, April 3, at 11:00 am EST, The Liberal Party of Canada will host a special live town hall meeting that will be streamed online at Liberal.ca. During the event, Michael Ignatieff will unveil the Liberal Platform and answer questions from Canadians.

The Liberal Party is inviting Canadians to pose questions to Mr. Ignatieff.

I have responded by submitting my question. Honestly, I don't think my question is very easy, but here it is:

"Mr. Ignatieff,

"I regard our present time as the era of investor exploitation. Mr. Harper's dismantling of the income trust program selectively harmed small Canadian investors and sold off Canadian assets to international bidders. Low interest rates punish savers and motivate investors to take excessive risks or to misdirect investments. The broad markets have been flat for a decade. In the western world, only the Australians have a different (high interest rate) policy. Capital investment (saving) is at the heart of economic growth. Do you favour restoring the income trusts, raising interest rates, and undertaking other policies to benefit savers and to restrain high-risk (speculative) activity?"

Well, I'm hoping for an answer.....

I'll keep you posted.
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Why Canada Is Doing Well

26 March 2011

Things are getting better in Canada, compared to almost every place else.

According to Niall Ferguson, here's why:

That's Canada at the bottom, trending downward. Our debt is falling relative to GDP - unlike virtually everybody else! (Australia is also doing relatively well, but it's not on this chart.)

Why?

1. We are a small country that leads the world in commodity production - mining, timber, agriculture. We have it all - including 60% of all the mining companies in the world.

2. Paul Martin (our former Liberal Prime Minister and Finance Minister) rationalized government expenditures and brought the country into surplus. He ran Canada like a business. (He was followed by an imprudent - and impudent - fellow named Stephen Harper who has gotten Canada into trouble by disenfranchising senior citizens and other savers/small investors. Fortunately, Mr. Harper has just lost his job!)

3. What Canada produces - raw materials - is in demand from the rapidly growing Asian economies. Commodities have been in a decade-long secular bull market, and that market appears set to continue into the present (upcoming) decade.

4. Both the Canadian government and Canadian banks are relatively conservative. We tend to avoid bubbles and manias. We keep speculators on a short leash.

5. We have affordable, publicly-funded health care and social insurance.

Canada is not perfect, but, compared to almost every place else, it might as well be. It doesn't get much better than this in the real world.
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The End of Extend and Pretend

23 & 25 March 2011

As a subscriber to Bill Fleckenstein's bargain-priced financial advisory service, I have the privilege of popping off questions to Mr. Fleckenstein from time to time.

Tonight, I thought I had finally grasped the fundamental paradox facing the most indebted nation in world history.

Here is my latest question to Mr. Fleckenstein (who is taking a well-deserved day off tomorrow):
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Fleck,

Sorry to trouble you on a day off, but I have a simple question.

Let's say that there is no crisis and no "flash crash" between now and June 30, and that the Fed decides to halt QE (Federal Reserve money-printing) ad infinitum.

Given that the central bank will not be buying $75 billion per month in US treasury bonds, does that not mean that there will be MORE upward pressure on interest rates?

That is, QE = more money supply (inflation), but "No QE" means higher interest rates, and eventually higher federal debt payments?

(Note: a 7% rate on the existing $14 trillion plus US federal debt = $1 trillion in interest payments per year.)

And the fix is for our elected leaders to come back to us and say, "Sorry, we can't give you what we promised you after all. We're shutting off the tap. It's all over."

I think I'm truly beginning to grasp the Catch 22. Every option is "impossible," yet as in all paradoxes, and as always through history, the paradox will have to be navigated in real time.

If I've got it right, is there a timeframe (or interest rate level) beyond which extend and pretend is no longer sustainable?
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There it is. My latest question to Fleck. I'll share any answer that comes my way.....

25 March 2011: Mr Fleckenstein replied today to my question as follows: "In my opinion, austerity is a short sale, no one will stand for it, when we can just print money. I don't think there is any set level of anything that would end extend and pretend, it will end when it does, but I'd guess it will be 'unwinding' in the next 6-9 months or so."

Again, my advice for my readers is that you subscribe to Mr. Fleckenstein's economically-priced advisory service!
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Military-Industrial Malinvestment

21 March 2011

I wish I had time to say more on this topic, but for now, here is my quotation of the day, from my friend and adviser, Ed Bugos at the Dollar Vigilante website (I recommend that you join as a subscriber):

"If the world were on a gold standard, governments could not afford the wars they are involved in today, and there’d be no question of the West withdrawing from the Middle East, because we would not be able to afford it! If, instead of printing the money, the government said that it will increase taxes for everyone by $20,000 this year to fund their ongoing intervention in the Middle East in the name of democracy, there would be a lot less "Gotta Support The Troops" going around! Without the ability to print money, there’d be no military industrial complex."

- Ed Bugos, from The Dollar Vigilante Blog

In fact, I can say a little bit more on this subject, as I commented on Ed's post at the Dollar Vigilante site, as recapitulated below:

"OK. That was an interesting twist at the end. Where does the excess money printing end up? In the hands of terrorists, despots and dictators in the oil producing nations, and in the hands of the Military-Industrial Complex on our side of the pond! Now, you could write a book on military-industrial malinvestment!

"As to the crisis that produced Reagan and Thatcher, I suspect the next one will somehow be a blend of the 30s and the 70s, but I do not know which parts will figure into the final blend. Unfortunately, it will not be pretty, and it will be the direct result of money-printing!

"What I do know is that nobody will be calling, "The bottom is in! Buy real estate/stocks/whatever now!" The bottom will appear endless, and gold will be the ONLY bright light at that point...."

That's all for now, folks!

(Credit: The poster used above and the US dollar chart below came from this interesting article.)

(Disclaimer: The above comments are not directed at any particular military venture, some of which are needed in my view, but rather at the type of world that is created by printing money rather than paying our bills....)

Additional comment: Regarding the present intervention in Libya, the application of the above lesson runs something like this: (1) Money-printing (inflationary monetary policy) made oil expensive, enriching (and arming) such despotic leaders as Qaddafi. (2) We "solve" the problem with MORE money-printing, to pay for military interventions to protect the Libyan people from the ruthless leader whose ascendancy we funded in the first place! (3) The devastating consequences? We'll "solve" that with money-printing yet again! I hope you can see where this is going.... The cycle continues literally until the currency reaches the point of inflationary collapse. Then, hopefully at least for a while, we learn to live within our means again!
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Sure the Market's Rational - Just Give It Two Decades!

8, 21 & 27 March 2011

In Canada, gold stocks have been lagging the price of gold from the start of the gold bull market in 2002 (they were quite lively in later 2003, from May 2005 - May 2006, and of course after the October 2008 crash, but that's about it!).

Of course, the Canadian dollar has run up from $0.62 US to $1.03 US during that same period (a trend that will continue for most of this decade). That is a 66% gain - no small headwind against the US dollar gold price! (Unfortunately, I can't chart the SPTGD Canadian Gold Miners Index against Canadian dollar gold, or I would!)

However, even when we look at gold mining stocks in US dollar terms, we still see a decline in the ratio of the stock prices of gold miners (the HUI "Gold Bugs" index) to the price of gold from 2003 onward.

What's wrong with this "ratio" decline? I can tell you - gold miners' profits are rising faster than their costs, due to the now 10-year long gold bull market - but the miners are losing in value against gold, whereas rationality tells us that they should be gaining as their margins inexorably rise!

Consider too that gold has been quite strong - more than sufficient to cover rising costs - in Canadian dollar terms as well, as seen below (Canadian dollar gold had risen from $390 to $1405 as of March 7, 2011):

Is the market therefore irrational?

My gut response is to say, "Yes, absolutely - this downtrend in gold mining stocks relative to gold is totally crazy!"

However, as we have discussed here many times, this is just the "wall of worry" that all bull markets climb. In fact, I'll tell you exactly what is happening. Gold has been gaining in price for 10 years - and it has at least 7-9 (and perhaps many more) years to go.

However, every time gold makes a new high, the broad majority of investors start to prepare for the possibility that "the top is in." Then when gold sells off even $10-$20, due to normal market fluctuations, they unload the gold stocks they had bought a few days or weeks earlier. On a daily or weekly basis, this pattern of fluctuation looks like noise, but as you can see on the long-term charts above, the market is now dramatically underpricing the stocks of global gold mining companies (60% of all mining companies are listed on the Canadian exchanges).

That is, everybody knows this is a 10-year bull market, but the great majority entirely lack confidence that it will be an 11-year or 12-year bull market, let alone a 17 to 18-year bull market (which is typical of such cycles), or perhaps a 2 to 3-decade bull market, as we have seen recently in bonds - which surely are topping out somewhere about now.

Take today's action as another example of that consistent pattern. Only yesterday, gold made a new all-time record high of $1444.40. However, today it sold down to as low as $1423.40 (a $21 decline, but from a record high level!).

What then happened to the gold stock sector? Let this come as no surprise to you - gold stocks were smashed, with both the HUI and SPTGD gold stock indices losing over 1%. Hey, and what happened yesterday? Oh, the same thing. On that day, gold sold at the highest nominal US dollar price it has ever commanded in history - and the stock prices of gold mining companies sustained losses of about 1.5% on both the US and Canadian exchanges - greater than their losses today!

Again, on a daily basis, this looks like noise. but it actually represents a cumulative 9-year downtrend in the market price of gold mining companies relative to the soaring price of the commodity they sell at ever-increasing profits - gold!

If the market is indeed irrational, as demonstrated above, will it then correct at some point for such obvious mispricing of gold mining companies?

You betcha!

If history is any guide, the odds are 99.99% that the answer is "yes." At some point, the market will price gold stocks rationally - and then, more confoundingly still - it will go on to over-value them!

So what am I claiming here?

Basically, I am stating that markets are in fact 100% rational - just not in terms of their daily behaviour, which over time may accumulate to periods of years and - as we see in the present example - decades!

What then are the lessons?

Pretty simple, actually.

Investors who hold on to gold mining stocks at today's prices will virtually certainly see fabulous gains at some future point, probably still several years in the future, as gold stocks move from being undervalued to being rationally valued, and then to being overvalued.

Sounds crazy?

Hey, this is human nature we are discussing - cumulative human psychology if you will! This is just what humans do. All the charts are doing is reflecting our own behaviour back to us - bizarre though it may be!

Based on historical trends, gold stocks are likely to be fairly valued (again) a few more years forward - perhaps as soon as 2012, based on multi-decade patterns of strength and weakness in this particular sector, which have been identified by Pamela and Mary Ann Aden.

Then what? Well, a few years further out, the market will over-value gold stocks, and then it will be time to sell them - but by my reckoning, that period of over-valuation will not occur until near the end of the present decade - or perhaps even later.

In fact, the consistently negative relative price action of the past decade has been very bullish for gold stocks!

Why is that?

Basically, contrarian psychology is at work here. After ten years, it should be quite obvious to essentially everyone who is paying attention that gold is in a sustained bull market.

As obvious as this sounds, the great majority of investors do not yet perceive this. They view the entire period to date as an anomaly - a mysterious or irrational trend that at any moment is likely to reverse.

After 10 years, you might think that such twisted logic would no longer be persuasive. Yet one need study the price action in gold and gold stocks over only the past two days to see that the same pattern which has kept gold stocks undervalued for a decade is persisting at this very moment!

Here's the funny thing about markets though - and all investors who have studied history know this - the present pattern of pricing gold stocks will not end until it has turned around to its opposite.

That is, to anyone with historical awareness, the recent top in the gold price ($1444.40) cannot possibly be the top price in the present trend, because the market is still undervaluing - vs. overvaluing - gold mining companies.

Historically - these two patterns have never occurred at the same time. That is, the gold market can "top out" only when gold mining stocks have become overvalued. There is no precedent for such an occurrence at a time when mining stocks are under-priced relative to gold, particularly while still in a 9-year relative downtrend!

Again, reversals at junctures such as we see at present simply do not happen - ever!

(To be clear, I'm not saying that we will necessarily ever recapture the ratio highs of 2002-2003 - or that gold mining shares can't randomly fall quite a bit below where they are priced today. Rather, I am discussing larger patterns. What I maintain is that the bull market in gold stocks can end only when gold stocks are over-valued, that is, when they are in a sustained uptrend relative to the price of gold. Such ending patterns have no resemblance whatsoever to the pattern we have witnessed for the past 9 years!)

History teaches an incontrovertible lesson. No sectoral bull market has ever ended with stock prices at undervalued levels. All bull markets end in overvaluation - every one, every time! And again, if history is our guide, no commodity has ever advanced for ten years and then reversed while the shares of companies that produce the commodity were lagging in price. This just plain does not occur - ever!

Now, that is about as close to a golden guarantee as you are ever going to get that the present bull market in gold has years to go, even if on many days gold stocks fall off a cliff when we see price declines in gold itself of $10-$20 or more - even when those declines follow record highs!

As has been said, "Don't sweat the small stuff - and it's all small stuff!"

What's the big picture here?

This is a bull market in gold, and at some point mainstream investors will wake up to this fact and drive the prices of gold stocks much higher than they are today.

And, if you're holding gold stocks already?

Just relax and take the ride.

It may be bumpy, but the ultimate direction is always up in markets of this type.

It is your golden guarantee!

21 March 2011: For your edification, I am posting below the most subtle chart of a rising trend that I have EVER seen:

The above chart is of the ratio of the "HUI" gold stock index to the price of gold. Now, look at the four "bottom" points on the chart starting on August 4, 2010. Now, do the math to a few decimal places. That's right!. Taking the last four bottom points into consideration, gold stocks are now rising against the price of gold - with the differential across the four bottom points amounting to a cumulative gain of .0034!

That, my friends, is perhaps the most subtle rising trend you will ever witness in a lifetime, but - and this is very important - the direction is up!

Savour it, gold investors! This is good.... you may never see anything like this again!

For the doubters in the crowd, here is the same chart from January 2010 through the present:

Yes, indeed. It's an uptrend... still!

27 March 2011:

Ho hum.... Gold set another record high this week.

The consequences? Well, things were going great until a new all-time record-high gold price was set at $1447.30 on Thursday. Then all hell broke loose!

Gold sold off and gold stocks sold off on Thursday and Friday both (though it was otherwise a net positive week for both gold and gold mining stocks).

Here is the 5-day gold chart:

And the 5-day chart of the HUI "basket of unhedged gold stocks":

Yep. There is nothing worse than record high gold prices for the gold stocks - or even for gold itself!

And yes, the psychology will change at some point. But don't hold your breath!
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