UBS trading floor above in 2008 and now in 2016
helped by ultra-easy-money
Who wants gold?
Remember that you don’t have a good contrarian trade UNLESS this happens:
Indian Prime Minister Nahendra Modi has declared 500 and 1,000 rupee notes illegal for exchange. Since these are worth a mere $7.26 and $14.53, he has de facto ended paper currency for use in all major transactions.
Half the population do not have bank accounts, and consumer trade has come to a screeching halt. That is because the highest permitted denomination fetches only about one US dollar, and exchanging the larger notes requires long waits and government identification, which a quarter of Indians do not possess.
Beyond the self-inflicted economic crisis, Jayant Bhandari says India is becoming a police state. She is on a fast track to banana-republic status, before fragmentation into smaller political units.
The gold market in India is in chaos, as people rid themselves of the domestic fiat currency: the price per ounce has skyrocketed to above $2,000, and tax authorities are blocking the retailers. This means the black market is set to boom, as smugglers adapt to the new opportunity, but import demand from India has dropped momentarily, since the formal markets are under the gun.
See articles: http://www.acting-man.com/?p=47966
Another dent in confidence of fiat currencies. What are YOUR thoughts. Lessons? I will pay $1 million dollars to ANYONE who can tell me how central planning helps people increase wealth over time vs. free exchange.
The balance between quantitative and qualitative research
“There’s so much you can tell in a 10-minute tour of a plant.
I can tell you right away whether we’re making money, if we have quality or delivery issues (so customer issues) and if there’s a morale problem. It’s easy to tell.
But you can’t tell until you go there.”
– Linda Hasenfratz, CEO Linamar Corporation, in conversation with The Women of Burgundy, September 21, 2016
One of the familiar tensions underlying the quality-value investment discipline is the balance between quantitative and qualitative research. Many investors intuitively understand the importance of assessing the quantitative aspects of a business. We analyze the numbers to understand what level of return the business is generating for its shareholders, what level of debt sits on the balance sheet, and whether the cash flows into the business are stable and recurring, for example.
While a quantitative assessment is vital to an investment decision, it is not complete without a qualitative framework to guide its meaning. For instance, it is not just the level of debt on the balance sheet that matters, but whether those debt levels are appropriate for the business. It’s not just a historical record of stable cash flows that gives us confidence, but rather an understanding of the economic moat that protects those cash flows from future competition.
It is with this background that I find Linda Hasenfratz’s quote truly compelling. As CEO of Linamar, she is responsible for running a global manufacturing business that spans 13 countries around the world. She may be able to look at the financial metrics to assess how her business is doing, but for Hasenfratz it is clear that a true, holistic understanding of the business comes from walking the halls of manufacturing plants and speaking face-to-face with her management teams around the world.
Her words were a welcome reminder about the importance of being there, on the ground, to gain a complete qualitative understanding of the operations. As I listened, I felt as if a member of our Investment Team had been dropped into her seat. Take, for instance, the excerpt below from the June 2016 issue of The View from Burgundy, “Boots on the Ground,” which brings us along on a site tour of a Chinese flavour and fragrance company’s R&D facility:
“Normally lab environments are tightly controlled, but in this case, rooms labelled ‘temperature controlled’ had open windows, letting in both the hot summer air and a fair share of local insects. What’s more, the facility was curiously devoid of employees, and the few research staff we did encounter were surly and unapproachable. It seemed odd to us that a company could have its main R&D facility in such a state of inactivity and disrepair, while reporting seemingly world-leading profitability in a highly competitive research-driven industry.
Our negative impression from the site tour provided useful information that would have been difficult, if not impossible, to acquire had we not done the on-the-ground work. It prevented us from making an investment in what had appeared on paper to be an attractive business, provided one didn’t scrutinize its operations – an example of why relying on company-produced financial statements alone is not sufficient when conducting due diligence.”
In other words, the science of investing is never complete without the art.
Global financial repression picks up steam, led by India. After declaring large denomination notes illegal, India now targets gold.
It’s not just gold bars or bullion. The government has raided houses, no questions asked, confiscating jewelry.
For background to this article, please see my November 27 article Cash Chaos in India, 86% of Money in Circulation Withdrawn; Cash Still King in Japan.
Large denomination means 500-rupee ($7.30) and 1,000-rupee notes ($14.60), which account for more than 85 percent of the money supply. They are no longer legal tender, effective immediately.
As one might imagine, chaos ensued. And it continues.
India Confiscates Gold
Picking up where we left off, please consider Message to Modi: Do No More Harm by Mihir Sharma.
The chaos accompanying “demonetization” hasn’t eased up noticeably. It seems likely the disruption to the economy, especially in cash-centric rural India, will hit growth sharply for at least a few quarters. It’s tough to say for how long and by how much; we are in uncharted territory here and guesses have varied widely. But many analysts agree with former Prime Minister Manmohan Singh, who’s predicting the new policy will knock 2 percentage points off that world-beating GDP growth rate.
Demonetization was originally sold as a “surgical strike on black money”— the illicit piles of cash many rich Indians have accumulated out of sight of the taxman. It’s now clear the policy has been anything but surgical. Worse, uncomfortable questions are being asked about whether the complicated rules and exemptions that have accompanied demonetization have allowed black-money holders to launder most of their cash. Of late, Modi’s chosen to focus instead on demonetization as means of advancing a cashless economy.
Yet the idea of a war on unaccounted-for wealth remains central to demonetization’s popular appeal, which means Modi will have to find other ways to keep that narrative going. So the government has now begun to push income-tax officials to conduct raids on those who might be concealing assets in forms other than cash, such as gold.
There’s already enough fear of such raids becoming common again that the government felt the need to step in to quell some of the anxiety. That didn’t help much. The government “clarified,” among other things, the rules governing when tax officials could seize gold: Nothing would happen “if the holding is limited to 500 grams per married woman, 250 grams per unmarried woman and 100 grams per male.” It also said that there would be no limits on jewelry “provided it is acquired… from inheritance.” Also, the “officer conducting [the] search has discretion to not seize [an] even higher quantity of gold jewelry.”
What this means, unfortunately, is that India’s income tax officers have just won the lottery. During a raid, they can, on the spot, decide whether or not to confiscate a family’s gold holdings. And remember, India has an enormous amount of gold — 20,000 metric tons, much of it inherited. (The rules governing simple searches are different, but few know that.) Rather than cleaning up tax administration, the government has handed tax officials more power than they’ve had for decades. The rich will pay what they need to escape harassment; the rest will suffer.
Rich Escape, Poor and Middle Class Suffer
The last line in the preceding article says all you need to know about what’s happening: “The rich will pay what they need to escape harassment; the rest will suffer.”
Evidence suggests the politically connected, and their friends, knew about the ban on cash and acted in advance. Everyone else is stuck.
India’s raid on gold reinforces its ban on cash. Short term aside, these kinds of actions will increase demand for gold.
I keep wondering: what’s next? People pretend they know, I admit I do not. However, I am quite sure a currency crisis is coming. Where it strikes first is unknown, but the list of likely candidates increases every year.
My spotlight has been on Japan, China, and the EU. India caught me off guard, but it adheres to my general theory this pot will eventually boil over in a cascade from an unexpected place, outside the US.
US actions may cause a currency crisis, but I believe a crisis will hit elsewhere first. If I am correct, gold will be the safe haven, regardless of currency, but especially where the crisis hits.
Mike “Mish” Shedlock
(The epub edition here: https://mises.org/library/stock-market-credit-and-capital-formation
A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply–Fritz Machlup
I won’t kid you, this is a tough read, but it will pay richly. The author was both a businessman and economist who had practical experience during the Great Depression. The book helps you understand cyclical stocks–and what stocks aren’t cyclical? See the review below:
Fritz Machlup is a champion of the stock exchange and the book solidly refutes most of the charges that are commonly made against it. The most serious of such charges is that the stock exchange absorbs capital either permanently or temporarily and thus deprives the industries of capital. Machlup answers this charge by pointing out that there may be a permanent absorption of money capital only where this absorption is productive, i.e., where it leads to the formation of new real capital. When new issues are sold in the Stock market, the proceeds of the sale are utilized in the purchase of machinery and other forms of capital goods. In all other cases of security transactions which do not involve any new issues of securities, there is a mere transfer of funds from one person to another. B receives what A pays. The proceeds of the sale of securities by a speculator who withdraws from the stock market flow back into the economic system.
Even when there is a chain of security transactions before anybody withdraws from the stock market, the chance of a temporary “tying up” of funds is greatly reduced by the Clearing House method of offsetting mutual indebtedness among the brokers and jobbers. The settlement procedure adopted by the stock exchange members renders any considerable use of money unnecessary. The private speculator who is not a member of the stock exchange may not avail himself of clearing facilities and the payments between brokers and private speculators may require cash or bank deposits. But even this difficulty is greatly removed by the extensive use by private speculators of what is called “brokerage deposits”. A private speculator who sells securities may leave the sale proceeds on account with his broker until he buys other securities. The broker will not usually maintain idle balances but is more likely to use them to grant loans to other private speculators who want to buy securities.
Customers keep on selling and buying and their accounts with brokers perform the function of money. The balances held by Stockbrokers on behalf of their customers are called “brokerage deposits”. They constitute a special type of medium of exchange and are much used in the security transactions between the regular customers and brokers. It is only in the event of an excess of customers’ withdrawals of balances over new deposits that payment by check is necessary. But even that is unlikely to take place except when a large number of outside speculators who are not regular customers of brokers enter the speculative market. This only happens in times of credit inflation by banks through an “easy money” policy. There may be a temporary tying up of funds in a chain of security transactions only when a large volume of such transactions are carried out with cash or check payments, and that is rendered possible through credit inflation by banks. The blame for temporary “tying up” is therefore on the inflationist policy of banks rather than on stock exchange.
A second charge against the stock exchange is that speculation is at the root of business cycles. The charge is based on three grounds. It is said that speculation causes mal-investment and overinvestment. Secondly, it causes credit inflation and lastly it makes credit dear. The author refutes each of these allegations and concludes that it is not speculation per se but credit inflation which causes all these disturbances both in the capital market and in the money market.
There is nothing inherently wrong in fluctuations in prices of securities. They may be due to changed expectations of returns and transactions may be carried on both in a rising or a falling market without any fresh funds being brought into the stock market. It is only when inflationary credit is placed at the disposal of speculators that new issues of securities are floated at random and funds are absorbed in investments which are unsatisfactory. Inflationary credit whether given direct to industries or to the stock exchange from which it flows into industries causes disproportionalities in the production structure. (To learn more see: skousen-structure-production). More funds are invested in the purchase of fixed capital and in roundabout processes than is justified by the savings of society. When the flow of inflationary credit ultimately dries up, the fixed capital becomes unremunerative and is either worked at a loss or has to be scrapped. It cannot be said that financing of industry through the stock exchange causes any greater malinvestment or overinvestment than financing of industry direct. The effect of inflationary credit is the same in both cases.
As for stock exchange speculation causing inflation the author argues that one must blame the elastic supply of credit by the banking system rather than the increased demand for funds by speculators in a rising security market. Unless there is a latent capacity and willingness on the part of bankers to extend more credit, the demand of speculators alone cannot cause inflation. If the banks are prevented from inflating credit through regulation of reserves, discount policy, etc., then stock exchange speculation can do no harm.
Nor is stock exchange speculation to blame for making credit dear. The stock exchange is only a convenient means of attracting capital for long term investment. Higher security prices mean a lower rate of interest and hence cheaper capital for industry. It is not the stock market which competes with industry for funds. It is industrial long term credit which competes with industrial short term credit. As a result of higher security prices, in the absence of any inflationary credit, the long term rates fall and short term rates raise which close the usual gap between the two rates and thus exert an equilibrating influence. It is only when credit is inflationary that short term rates may go above the long term rate and the complaint about “dear money” is heard.
In short Machlup reveals inflationary credit as the underlying cause for all those disturbances for which blame is usually laid on the stock market. The book is exhaustive with regard to the field it seeks to cover. It bears every mark of patient research and painstaking reasoning. It is with great delight that the Mises Institute has brought it back into print.
And look what’s coming!
So why do we lose?
Nobody wants to be the bearer of bad news. Nobody wants to crush people’s dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.
I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.
The Numbers Don’t Lie
In his seminal book “Stocks for the Long Run,” renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power — their monetary wealth adjusted for the effect of inflation.
With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.
Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.
An Inefficient Investment Vehicle
In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.
Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.
Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.
Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.
Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.
For Full Article Click WayBack
Even money says this post attracts the GOLD IS DOOMED advertisement on the page
Editor: Too bad gold isn’t an investment but just money.
Misconceptions about gold S&D
I post these charts for a historical reference point. I do not use them to predict where prices will go. Note though that rising CinC (currency in circulation) doesn’t always correlate to rising asset prices.
Update: Oct 6th: A contrarian: http://energyandgold.com/2016/10/04/bob-moriarty-i-am-ready-to-buy-silver-at-16/
Using Technical Analysis for a Fundamental View: https://nftrh.com/2016/09/03/gold-the-good-and-the-not-yet-good/
The Trend is not your friend
There’s an old saying in the financial markets that the trend is your friend, meaning that you will do well as long as you position your trades in line with the current price trend. This sounds good. The only problem is that you can never know what the current trend is; you can only know what the trend was during some prior period. How is it possible for something you can never know to be your friend?
Market ‘technicians’ often make comments such as “the trend for Market X is up” and “Market Y is in a downward trend” as if they were stating facts. They are not stating facts, they are stating assumptions that have as much chance of being wrong as being right.
A statement such as “Market X’s trend is up” would more correctly be worded as “I’m going to assume that Market X’s trend is up unless proven otherwise”. The proving otherwise will generally involve the price moving above or below a certain level, but the selection of this level is yet another assumption and the price moving above/below any particular level will provide no factual information about the current trend.
Mea Culpa: sequoia-may-2016-transcript Not much to glean.
However, a question for you: Is it better to buy franchises or net/nets?
If you could choose between a fair coin that was gold or a rusty tin coin that each paid off 4 to 1 on choosing heads or tails, which one would you prefer?
In October those near Philly Microcap Conference http://microcapconf.com/conferences/philadelphia-2016/
HAVE A GOOD WEEKEND!
The above charts came from this article. I would ignore the conclusions but focus on the historical perspective.
Note the information they give investors. How management communicates is important. Do they provide sufficient detail for you to assess their capital allocation skills and operational performance. Note page 5.
Celebrate when your stock gets downgraged
The source and root of all monetary evil is the government monopoly on the issue and control of money. –Friedrich Hayek
An interesting discussion
Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.
Zero interest rates rob future generations by bidding up the value of current government assets and privileges. A bubble of current assets inflated by near-zero –interest loans does nothing to fund the future. Retirees face a prospect of shriveled pensions and support and watching their children and grandchildren live slow motion lives. –George Gilder from The Scandal of Money: Why Wall Street Recovers But The Economy Never Does
I’d come to Wall Street for validation. I believed my value was in achievement, that achievement was conferred by instituions and rendered in money. I’d joined an army of bright young men and women dressed in business-casual uniforms, streaming into the service of massive corporation without any sense of why we’d chosen to dedicate our lives to further enriching the already rich, except that we needed proof that we were valuable, because at heart we didn’t really believe we were. –Sam Polk from The Love of Money
Moving towards a solution
Deep Value Investor: 2016-05_conference_transcript
HAVE A GREAT WEEKEND!
Below is a link to six videos that analyze the global debt problem. A good review of our monetary system and the current/impending problems. Do YOU agree with the analysis? Your thoughts welcome.
Santiago Capital: What Massive Debt Means…. http://play.pointacross.com/Player.aspx?gmid=866sfb2zve21
Gold Stock Update from Myrmikan Capital.
Myrmikan’s error in 2011 was an underappreciation of the forces the central banks brought to bear to reverse the credit collapse. Quantitative Easing was the least of the tools: it was the trillions of dollars of guarantees and the suspension of market-tomarket accounting that allowed the banks to puff the bubble even larger. And, there may remain policies that can lead into another round of even greater insanity, which would weigh on gold. Former Chairman Ben Bernanke, for example, recently traveled to Japan to educate them on “helicopter money.” According to Bloomberg, Bernanke suggested the government issue non-marketable, perpetual bonds with no maturity date and that the Bank of Japan directly buy them.
Read more Performance_Update_2016_06