Monetary Policy
CNBC Tries Calling Out Peter Schiff Over Gold Price
Anyone remember those “Peter Schiff Was Right” YouTube.com videos that went viral right after the U.S. housing bubble popped and the global economic crisis really reared its ugly head in the fall of 2008?
Here’s probably the most popular one out there.
Well, I’m convinced a clip or more of Thursday’s installment of the CNBC show Futures Now, hosted by CNBC Reporter Jackie DeAngelis, will be included in a future “Peter Schiff Was Right About Gold” YouTube video. From an exchange between DeAngelis and the CEO and chief global strategist of Euro Pacific Capital:
SCHIFF: You’re talking about investors’ demand for gold going down. I would disagree. Because I own a gold company too, Euro Pacific Precious Metals. And we’ve never had more demand from our clients in the history of my company than we have now. I would say speculators, speculative demand, is what went down. I think a lot of people who came late to the gold rally were speculating in gold. They were simply buying it because the price was rising. They wanted to hop on that train. They use ETFs. They use futures markets. So I think the speculators have been flushed from the market in this pullback. But the investors- they’re still there. Because all of the reasons they’ve been buying gold for the past 10 or 12 years- those reasons have never been stronger. And so investor demand continues. We’ve flushed away the speculative demand. But I think the speculators will come back in the next rally.
DEANGELIS: Alright. Well, Peter, let’s step back for a second because you kind of jumped in there on the conversation we were having and I definitely appreciate your opinion on that. But I want to talk about the gold price that we’re looking at right now. $1,383.60. That is the price that we’re looking at at this point. We’ve had you on the show multiple times before, you said that gold was going to skyrocket, you say it’s going to be a bumpy ride and you can’t tell us exactly how we’re going to get there. But tell me today, Peter, why have you gotten it wrong?
(Editor’s note: Bold added for emphasis)
SCHIFF: I don’t think I have gotten it wrong. You just said I said it would be a bumpy ride. Look, it’s been bumpy, but I’ve been on this ride since gold was under $300 an ounce. It’s not like gold is down from that point. It’s off its highs. But I think what’s going on right now is you’ve got a false narrative out there that the U.S. economy is improving. It’s not. All the data points have been negative. A deluge of negative data came out today. The only evidence of a rebounding economy, is the stock market going up, or the real estate market going up. But that’s not because the economy is sound. That’s because of all the cheap money created by the Fed. That’s the same reason why stock and real estate prices were going up in 2006 or 2007. It is a bubble. The economy, meanwhile, is actually getting worse. And all this talk about the Fed getting ready to take away the punch bowl is all talk. They’re going to spike it even more. They’re going to up the size of QE. But people who are speculating of an early end are getting it wrong. Gold is going through a correction. All bull markets have a correction. It is a buying opportunity.
“Schiff: Gold a Generational Buy”
CNBC Video
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
Peter Schiff Warns Of ‘Phony Jobs In A Phony Economy’
“Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.”
-U.S. Department of Labor, Bureau of Labor Statistics, May 3, 2013
Peter Schiff, the CEO/Chief Global Strategist of Euro Pacific Capital who correctly called the U.S. housing bust and “Panic of ’08,” was critical of the latest U.S. jobs report in his latest entry on The Schiff Report YouTube video blog. Schiff pointed out:
The fact of the matter is, all of the jobs that were created, the reason they were created was because of QE. QE is the only reason we’re creating these jobs. And if the Fed ever were to taper it back, the jobs would disappear. As a matter of fact, the Fed is going to have to up the size of the QE to sustain these jobs. Just like with any drug, you develop a tolerance. And so the more you use, the more you have to use. So we’re going to need ever-increasing doses of QE to maintain these phony jobs.
Meanwhile, the data itself, was not even good.
(Editor’s note: Schiff’s look of disgust after saying this= priceless)
I mean, sure, it beat expectations. Because the bar had been lowered so much. It only created 165,000 jobs. All of those jobs were in the service sector. We didn’t create one manufacturing job. Zero. So we’re not creating the jobs that make us richer. We’re creating the jobs that are actually going to drain our wealth because we’re borrowing money to create them…
The bottom line is the media is going to cover this- the unemployment rate has gone down to 7.5 percent. It’s like a four-year low. We’re creating jobs. They’re going to say that things are getting better. They’re not. They’re not getting better, they’re getting worse. Government statistics don’t tell the whole story. In many cases, they tell the wrong story. And eventually, of course, when the music does stop, these jobs are going to disappear. Along with the phony economic growth that went along with it. One way or another, it’s going to happen.
“Jobs And Stocks — Behind The Numbers Lurks A Bubble Disguised As A Recovery”
YouTube Video
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
Jim Rogers Predicts Gold ‘Will Go Much, Much Higher’
I just got done reading an insightful article on the London branch website of U.S.-based investment research firm Morningstar. Legendary investor Jim Rogers was being interviewed by Morningstar’s Chris Menon concerning his thoughts about investing in gold. Here is an excerpt from their exchange:
MENON: Over what time horizon should investors expect to make money by investing now?
ROGERS: Certainly, over the course of ten years gold will go much, much higher because I don’t see any possibility that governments are going to stop printing money in the next decade. And as long as that’s going to happen then gold is certainly going to go higher and probably much higher.
The former investing partner of George Soros also shared his views on purported gold manipulation, whether or not gold’s recent plummet in price is a buying opportunity, and the various vehicles for investing in the precious metal.
As for Rogers himself? He tells Menon he likes coins (something I’ve blogged about before)
You can read the entire interview on the Morningstar (UK) site here.
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
Peter Schiff On GDP Calculation ‘Makeover,’ Delaying Our ‘Day Of Reckoning,’ And Gold Speculators
Lots of catching up going on around here today. I just got finished watching Peter Schiff’s latest entry on The Schiff Report YouTube video blog. The CEO/Chief Global Strategist of Euro Pacific Capital zeroed-in on the “makeover” in calculating U.S. gross domestic product, delaying our “financial reckoning day,” and the situation small speculators may find themselves in after helping fuel gold’s price drop the other week. Regarding GDP, Schiff pointed out the following in yesterday’s video blog post:
When the government gets around to delivering the news for the second quarter, the U.S. economy is going to be quite a bit larger than it was during the fourth quarter. Now, it’s not going to be because we’re actually more productive, it’s because the government is going to launch a brand new methodology for computing the GDP. They’re going to change the way they’ve been doing it all these years. And they’re going to start to include a bunch of things that in the past, they never included. They’re going to include things that no other country includes when they calculate their GDP. And as a result of this makeover, these brand new additions, I think instantaneously the U.S. economy is going to be 3 percent larger. That’s a big number. It’s like 4 or 500 billion dollars of GDP is going to be conjured out of thin air just based on the change in the methodology for computating GDP.
You know, this is what the government does. They change the way they compute statistics. Unemployment’s too high? Okay, we’ll calculate it another way. Now it’s not as high. Inflation’s too high? Wait a minute, let’s find another way to calculate the inflation rate. Oh look, we’ve solved the inflation problem- there’s not that much inflation.
Now, the government wants the economy to appear bigger. Why? Well, because it makes the debt-to-GDP look smaller. A lot of people are talking about debt-to-GDP now. Well, if they can make the GDP larger by figuring out another way to calculate it, well now they can make that ratio appear better.
Also, people are talking about government spending as a share of GDP. Okay, let’s make the GDP larger, and that means that government spending has now come down as a share of this larger number.
Schiff, who correctly predicted the U.S. housing bust and “Panic of ’08,” had this to say about the coming U.S. financial crash:
The fact of the matter is, governments are borrowing too much, they’re printing too much, they’re spending too much, and it’s all in a vain attempt to try to artificially stimulate an economy that’s been overstimulated, and to delay the “day of reckoning.” And the problem is, the longer they delay it, the more we have to reckon with. And, ultimately, we’ve going to have to pay a huge price for the fact that we didn’t deal with these problems sooner, rather than later.
“Slow ‘growth’,GDP makeover, Keynesians demand more debt and inflation”
YouTube Video
Finally, Schiff, who’s also the CEO of Euro Pacific Precious Metals, talked about gold’s recent price drop, who he thought was behind it, and what may be in store for them. From the video post:
I think the major selling in the metals market has come from the small speculator that trades on the futures market, that trades on the ETF. That’s where all the selling has been. The small speculators. I don’t think the larger investors have cashed in. They’re probably holding on. And the real buyers, the buyers in the physical market- who are not just trying to jump on a moving train to try and catch a small move because they want to get in on something that’s going up- the physical demand has been ongoing and consistent for years. But you have had some of the “Johnny Come Lately” hot money among smaller speculators. They’ve jumped on, they’re the ones that have sold, they cashed out. In fact, I think you have a lot of small speculators that are now short gold, that sold into the lows, and that are holding onto these positions with losses. And we’ll see how long they can hold those losses as the price moves higher and we turn up the heat. I think a lot of those people that were quick to short the market are going to end up covering at much higher prices.
Good insights as usual from this “crash prophet.”
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)
Gold Price Takedown Leads To Buying Frenzy
“My view is that the US Federal Reserve and the Bank of Japan ’caused’ the gold crash. The rest is noise…
The world is still in a contained depression. Sliding commodities tell us global money is if anything too tight. ‘There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now,’ said Lars Christensen form Danske Bank.
The era of money printing is young yet. Gold will have its day again.”
-Ambrose Evans-Pritchard, The Telegraph (UK), April 17, 2013
Since I started blogging nearly six years ago, if I had a dollar every time I read somewhere “gold is toast,” I’d be a millionaire by now.
Fine. I’d have a hell of a lot of singles.
And a raised eyebrow from my girlfriend.
Seriously though, what is it with people who absolutely detest the precious metal?
I’m not a big fan of paper assets, but I don’t make it my life’s mission to crucify them whenever I get the chance (website and blog comments come to mind here).
My take on investing is- keep an open mind. Lest you squander major money making opportunities. Certain asset classes simply perform better than others at different points in time.
There’s a time for stocks, bonds, currencies, what have you.
And for a number of global investors, now is the time for gold.
Sure, the precious metal really got hammered in the price department the other week. But this resulted in a buying frenzy of the physical bullion. John Noble reported on the Financial Times (UK) website on April 22:
Asia is witnessing one of the strongest waves of physical gold buying in 30 years, with bargain hunters using the drop in prices to secure jewellery and gold bars.
The feverish buying has left many of Hong Kong’s banks, jewellers and even its gold exchange without enough yellow metal to meet demand. In Shanghai, the gold exchange saw volumes – often seen as a proxy for demand – rising to a record on Monday, while queues formed outside some jewellery shops in Beijing.
To give you an idea of just how crazy the demand is in China, Noble, who’s writing from Hong Kong, added:
Haywood Cheung, president of the Hong Kong Gold & Silver Exchange Society, said the exchange had effectively run out of most of its holdings as members looked to meet a shortfall in supply amid rampant retail demand for gold.
“In terms of volume, I haven’t seen this gold rush for over 20 years,” he said. “Older members who have been in the business for 50 years haven’t seen such a thing.”
The Times piece noted demand for the yellow metal is also strong in India. Something Biman Mukherji and Debiprasad Nayak confirmed on the Wall Street Journal website on April 23. They wrote:
Indian gold retailers are paying more in order to meet immediate demand, as customers scoop up every gold bar they can lay their hands on in the wake of a plunge in international prices.
Indian retailers say they are paying premiums of $8-$10 an ounce over the international gold price, which is around $1,425 a troy ounce. That’s four or five times the premium retailers usually pay for imported gold during periods of peak demand in India, according to traders.
“We have not seen this kind of premium on gold imports in years,” said Suresh Hundia, president emeritus of the Bombay Bullion Association.
Gold demand is not too shabby in nearby Australia either. Jake Lloyd-Smith reported on the Bloomberg website tonight:
Australia’s Perth Mint, which refines nearly all of the nation’s bullion, said that demand has jumped to the highest level in five years after prices plunged, with the factory kept open through the weekend to meet orders.
There’s been strong interest, including from the U.S., with buyers speculating that the metal will rebound from the decline, Ron Currie, sales and marketing director, said in a phone interview from Perth…
“We haven’t seen levels like this since the 2008 global financial crisis,” Currie said yesterday. “Compared to March sales, April sales have doubled or tripled,” he said, without providing figures.
On Friday, April 12, the afternoon fix gold spot price was $1,535.50 per ounce. The price tumbled to $1,380 an ounce by Tuesday, April 16. Today, the London P.M. fix was back up to $1,467.50.
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)
Sources:
Noble, John. “Asian bargain hunters pile into gold.” Financial Times. 22 Apr. 2013. (http://www.ft.com/intl/cms/s/0/56244496-ab39-11e2-ac71-00144feabdc0.html#axzz2RuiP9ndw). 29 Apr. 2013.
Mukherji, Biman and Nayak, Debiprasad. “India Gold Premiums Soar as Demand Outstrips Supply” Wall Street Journal. 23 Apr. 2013. (http://online.wsj.com/article/SB10001424127887324874204578440242906344734.html). 29 Apr. 2013.
Lloyd-Smith, Jake. “Perth Mint Works Through Weekend as Gold Demand Surges on Price.” Bloomberg.com. 29 Apr. 2013. (http://www.bloomberg.com/news/2013-04-30/perth-mint-works-through-weekend-as-gold-demand-surges-on-price.html). 29 Apr. 2013.
Jim Rogers: ‘This Is Artificial Floating Of Assets And It’s Going To End Badly’
Lots of Americans these days probably think higher stock and home prices reflect the economic reality of the times.
A strong economic recovery in America?
Try fiat currency printing presses around the world working overtime.
The famous investor Jim Rogers sat down with CNN International’s Nina Dos Santos, host of World Business Today, last Friday. From their exchange:
ROGERS: It’s the first time in world history, recorded history, when all major central banks at the same time are printing a lot of money. The Japanese in December said “we will print unlimited amounts of money.” So the Americans said “we can do that!”
DOS SANTOS: You don’t agree with that strategy?
ROGERS: No, of course not. Debasing your currency sometimes works in the short-term. It has never worked in the long-term. And it doesn’t ever usually work in the medium-term. Debasing your currency- lots of politicians like to do it because it’s an easy way. But then the Americans said “we’ll print money.” And then the English said “well, we’ll print money.” And the Europeans of course. This is artificial floating of assets and it’s going to end badly.
“Rogers: Printing money is unsustainable”
CNN International Video
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
Nouriel Roubini Warns Stocks Could Correct
Another “Dr. Doom” is talking of a stock market correction these days.
Nouriel Roubini, co-founder and chairman of Roubini Global Economics, spoke with CNBC Europe from Lake Como, Italy, last Friday. The former Treasury official in the Clinton administration, who correctly-called the 2008 global financial crisis, talked about the U.S. economy and larger financial system. “Dr. Doom” told viewers don’t expect quantitative easing to go away anytime soon:
Increasingly QE has less effects really on the economy. There is some credit creation right now. There is a positive and so on. But certainly it is becoming ineffective. The trouble is if you take away QE very fast you could have a significant back up in long rates, and that’s going to essentially kill the recovery in its tracks. Therefore, the Fed has no choice but maintaining QE3 for as far as I can see.
(Editor’s note: Italics added for emphasis)
In addition, the professor of economics at NYU warned of a possible correction in stocks later this year:
Down the stream, second half of the year, the U.S. stock market could correct somehow.
“Roubini Warns on US Economy”
YouTube Video
Definitely more subdued than the other “Doctor Dooms”- Marc Faber and Peter Schiff- on the near-term prospects for the U.S. economy and financial markets.
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)
David Rosenberg: Gold Heading To $3,000 An Ounce
I haven’t talked about David Rosenberg, Gluskin Sheff’s Chief Economist and Strategist too much on this blog. But back when I was running Boom2Bust.com, I would mention him on a regular basis. On February 9, 2011, I wrote:
For those of you not familiar with Mr. Rosenberg, back in 2007 he was one of the first economists to warn investors of the “Great Recession.” I started following Rosenberg when he was still Chief North American Economist at Bank of America-Merrill Lynch in New York. CNN Money said this of the economist last year:
Rosenberg, who left an eight-year career at Merrill Lynch to become chief economist at Gluskin Sheff last May, is one of Wall Street’s best-regarded financial experts. His on-the-ball predictions have landed him on Institutional Investors’ list of All-Star researchers for years.
Yep. Rosenberg was one of the original “crash prophets.”
And these days, he’s really bullish on gold.
Jonathan Burton posted the following on MarketWatch’s blog The Tell last night:
Forget the Dow. If you really want to make some money, buy gold, says David Rosenberg. Gold is heading to $3,000 an ounce, the chief economist & strategist at investment firm Gluskin Sheff + Associates said Tuesday in a speech at a CFA Institute of Chicago conference.
$3,000 an ounce. Significantly higher from where his old employers see the yellow metal going in the next couple years. Jan Harvey reported on the Reuters website yesterday:
Even Bank of America Merrill Lynch, which remains broadly positive on gold, cut its forecasts this week. While still expecting prices to rise strongly next year to an average of $1,838 an ounce, it sees prices turning lower in 2015.
“The importance of investors, coupled with the lack of investor buying, has led to concerns that non-commercial market participants in general have reassessed the rationale of holding gold in a portfolio,” the bank said, reducing its 2013 and 2014 forecasts and cutting its 2015 price view to $1,675 from $1,900.
Still, there’s a reason why Rosenberg was the only economist recognized for his accurate economic projections in Fortune Magazine’s “Best and Worst of Wall Street 2011” and was ranked most accurate forecaster for 2011 by MSNBC. Back in that February 2011 post of mine I called attention to what I called a “must-read” article by him in the Globe and Mail (Canada) in which he wrote:
The United States is in a radical money-easing environment, in which the Fed is keeping interest rates artificially low while pumping money into the economy. This type of policy breeds speculative rallies. It inevitably results in boom-bust cycles such as the ones we saw in 1999-2002, 2006-09 and today. This is no time for short memories.
At best, the Fed has managed to create an illusion of prosperity, but it won’t last. And that should surprise no one who has followed the Fed’s activities over the past couple of years.
“Keeping interest rates artificially low.” “Pumping money into the economy.” “Speculative rallies.”
Any of this sound familiar to readers? It should, as other more-visible “prophets” (Faber, Rogers, Schiff, to name a few) are warning about such events now in 2013.
I leave you with this from Rosenberg’s Globe and Mail piece:
This is no time for short memories.
You can read Burton’s entire Rosenberg gold price call post on The Tell here.
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)
Sources:
Harvey, Jan. “More banks peel away from bullish consensus on gold.” Reuters. 5 Mar. 2013. (http://www.reuters.com/article/2013/03/05/gold-forecasts-idUSL6N0BXJ1620130305). 6 Mar. 2013.
Rosenberg, David. “Fed’s illusion of prosperity bound to vanish.” Globe and Mail. 8 Feb. 2011. (http://www.theglobeandmail.com/globe-investor/feds-illusion-of-prosperity-bound-to-vanish/article1899546/). 6 Mar. 2013.
Peter Schiff: Fed Creating Another Housing Bubble, ‘Day Of Reckoning’ Early In Obama’s Second Term
First it was “crash prophet” Jeremy Grantham warning:
Courtesy of the above Fed policy, all global assets are once again becoming overpriced.
Now, Peter Schiff is saying the same about housing.
And that America’s “day of reckoning” is right around the bend.
From a March 1 entry posted on The Schiff Report YouTube video blog:
The Fed influenced the housing market during the bubble predominantly by influencing the short end, making it easier for people to take out ARMs. Today, the Fed is influencing the housing market not predominantly by influencing adjustable rate mortgages, but by outright buying 30-year fixed-rate mortgages to drive mortgage interest rates down to record lows. But in both cases, it was the Fed’s interference that inflated the prices, inflated the bubbles, and there’s going to be a disastrous consequence when this bubble bursts. Although this bubble, is not going to be, I think, as large as the previous bubble. I think the consequences will be much bigger, as the Fed is not going to succeed in elevating home prices. But what they are succeeding at doing is transferring significant percentages of bad mortgages from the private sector to the Federal Reserve. In fact, the federal government has never been more involved in the housing market than it is today. Not only does the government insure over 90 percent of the mortgages, through the FHA, through Fannie, and Freddie. But now the government owns the mortgages. The Federal Reserve is financing them. The Federal Reserve is buying $45 billion worth of mortgages every month. So the government is the housing market…
Now President Obama, we’s got a bigger bubble going during his presidency, and he ain’t getting out of Dodge either. Only this time, I think, the bubble is going to burst not late in his second term, but early. And the difference is going to be- there are no more bailouts. This is the last bubble. This is the biggest bubble. In my book, The Real Crash: America’s Coming Bankruptcy: How to Save Yourself and Your Country
, I call it the “government bubble.” That’s what we have. This is the final bubble, and there is no bailout. We’re finally going to have to deal with the consequences of our profligacy. And the problem is, because we’ve kicked the can down the road for so long, right? We’ve papered it over with so much inflation, that the problems have gotten that much worse, which means when we finally are forced to confront them. And again, we’re going to be forced to do it. We’re not going to do it on our own. We’re not going to voluntarily check into rehab. We’re going to have to be forced to do it, because we’ve hit rock bottom, and the world has done an intervention. This “day of reckoning” is coming. And it’s not because of the sequester. Everybody is making a big deal about how painful this sequester is supposed to be. Well this is nothing compared to what’s really going to happen when we really have to swallow the bitter tasting medicine to restore health to an economy that is virtually going to be on its deathbed as a result of all the bad medicine that has been forced-fed it over the years by the Federal Reserve, by Congress, to mask the symptoms while the underlying disease gets that much worse.
“Bernanke Almost Comes Clean On ‘Exit’ Strategy”
YouTube Video
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
Jeremy Grantham: Thanks To Fed, ‘All Global Assets Are Once Again Becoming Overpriced’
It’s been quite some time since I blogged about Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, Van Otterloo & Co. (GMO). I’ve noted before that the British investor has a special talent for correctly-calling the direction of the markets. For example:
• In 1982, said the U.S. stock market was ripe for a “major rally.” That year was the beginning of the longest bull run ever.
• In 1989, called the top of the Japanese bubble economy
• In 1991, predicted the resurgence of U.S. large cap stocks
• In 2000, correctly called the rallies in U.S. small cap and value stocks
• In January 2000, warned of an impending crash in technology stocks, which took place two months later
• Saw the 2008 global financial crisis coming. In April 2007, said we are now seeing the first worldwide bubble in history covering all asset classes.
Keep in mind that bit about “the first worldwide bubble in history covering all asset classes.”
Grantham pens a quarterly investment letter on the GMO website. And I recently read his latest installment (covering Q4 2012) which was released in February. Entitled “Investing in a Low-Growth World,” Grantham discussed what he called the Federal Reserve’s negative real rates regime, which is:
Designed to badger us into riskier investments in order to push up equity prices and grab a short-term wealth effect (that must be given back one day when least comfortable and least expected), has gone on for a long and, for me, boring time.
And the consequences? The investment manager whose individual clients have included Secretary of State John Kerry and former Vice President Dick Cheney wrote later on in “Investment Implications:”
Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit! Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.
When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two. That’s the problem. A clue to timing would be when we begin to hear more passionate new era arguments: profit margins will always be higher; growth will snap back to 3% for the developed world; and new ones I can’t think of … maybe “when the discount rate is this low the Dow should sell at, perhaps, 36,000.” In the meantime, prudent managers should be increasingly careful. Same ole, same ole.
You can read the rest of Grantham’s 4Q 2012 letter on the GMO website here.
By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)
(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)
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