Financial Analysts Gasp When They Hear Any Investment Gains Will Be Wiped Out By a Currency That Does Not Hold Purchasing Power
by Bill Sardi
Recently by Bill Sardi: Welcome To Fedville!
In separate articles The Wall Street Journal published profiles of two men who captain different investment groups, one a legendary investor who asks, after investors have reaped a seeming financial reward from investing in obvious hedges like commodities, foreign currencies and even gold, if their money will be worth anything; the other an investment chief who has his entire $2 billion bet placed on gold.
The first investment captain is Seth Klarman, president of Baupost Group in Boston that manages $22 billion, and author of Margin of Safety, an out-of-print book that now fetches $2400 for a used copy on the internet.
According to the Wall Street Journal report, Klarman's words drew gasps from an audience of 1600 financial analysts at the CFA Institute (Chartered Financial Analysts) annual meeting in Boston. What caused the jaw-dropping response from this savvy audience? It was when Klarman compared the financial markets to a Hostess Twinkie and said: "There is no nutritional value, there is nothing natural in the markets. Everything is being manipulated by the government."
Even more in the audience were left gasping again when Klarman said: "The government is now in the business of giving bad advice. By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can't stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate."
Then, as Jason Zweig, the WSJ reporter, wrote: "You could have heard a pin drop as Mr. Klarman proclaimed, ‘I am more worried about the world, more broadly, than I ever have been in my career. That's because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power,' he explained."
Klarman was quoted to say: "All the obvious hedges" — commodities and foreign currencies, for example — "are already extremely expensive… especially gold. Near its all-time high, it's a very hard moment to recommend gold."
Contrast the high-profile Mr. Klarman with the low-profile Mr. Thomas Kaplan, chairman and chief investment officer of Tigris Financial Group, who oversees an empire devoted largely to gold. Tigris' $2 billion bet on gold is more than the Brazilian central bank's bullion. The WSJ certainly captured the attention of online readers with its article on Kaplan entitled: "A Billionaire Goes All-In on Gold."
Kaplan says: "You've got a perfect storm with no apparent solution. If the world does well, gold will be fine. If the world doesn't do well, gold will also do fine … but a lot of other things could collapse."
These days, seekers of investment safety might want to read online comments from knowledgeable WSJ readers to gain some understanding after reading about two billion-dollar fund managers with opposing approaches to the markets. Here is what some savvy and not-so-savvy online commentators had to say:
Grant W. Levitan: The very concept of investing is on life support. … Markets are constituted principally of big program trades largely disconnected from long-term investment analysis.
Government's ever-expanding role makes decisions based on non-investment criteria but rather bureaucracy, political expediency, or lobbying by the powerful a wild card undermining investment analysis and expertise.
Virtually nothing is proposed or will be legislated to effectively change this situation. The oligarch-government cabal against investors and citizens is killing the goose that laid the golden eggs.
Sarah Starkey: I was in Investor Relations professional for a few years. If I sneezed in the wrong way while talking to a hyped up analyst, I could move the entire market. I'm not kidding. I have an MBA from a top school and have studied personal finance for 20+ years, and yet now, I'm stymied as to how to invest my own savings because investment fundamentals seem to mean absolutely nothing anymore.
We might as well all take our savings to Las Vegas and spin the wheel, the way things are going.
Arthur Grady: Re-inflate the bubble! Has there been any doubt over the last 16 months that that has been the plan. He's really not saying anything new but simply reinforcing what we already knew. The question remains whether governments will really make the necessary and very painful budget cuts. And we really do know the answer to that question, don't we?
John McLaughlin: The game has changed — the strategy has changed, the rules have changed, the players have changed (the winners, that is), and the point for playing the game has changed — from old school, old fool, investing to new school, new tools, day trading.
What's it going to take for investors to get that their precious, yet obsolete game is over…
The game has changed, so have we, and so can you — so must you.
Parker Lyons: His (Klarman's) comment on gold is very interesting with respect to currency. Seems to me to be a contradiction = hold fiat currency because gold is at all time high, but fiat currency is being manipulated and is not holding any value.
Warren Sanders: Why is he saying gold is at record levels if it's still below its inflation-adjusted record price from 1980 or 82?
Owen Pirkle: Gold has no intrinsic value. You are simply hoping that you can find somebody at a later date that you can sell it to at a higher price than you paid. If the world economy goes to hell, good luck finding buyers.
Eric Kjellen: If one day all dollars are worthless like happened in post-WWI Germany it doesn't really matter how many dollars you had to pay for those gold coins, you'll just be glad you have them.
Gordon Arnold: You can't take a gold brick to the Safeway to buy your groceries. They prefer cash.
Bob Baker: The world economy will not go away, but currencies will be inflated to ridiculous levels in an attempt by central bankers and government officials to hold on to their power. Currency collapses are not out of the question and when they happen, people all the sudden see the fallacies of fiat currencies. History holds no example of fiat currencies lasting much more than 100 years before collapse and a resetting of the order. Gold is to preserve wealth during that transition. Silver is for buying food and other necessities during that transition. Ammo is for obvious reasons. Read more history and less financial advice.
Paul Olmstead: …you should consider alerting the central banks of the world that their reserve asset is useless. The USA is the worst sucker with 8000 tons of the stuff.
My comments are as follows:
Whatever government does overshadows the markets. Government is now the wild card. Curry favor with Washington DC and your company's stock will rise.
The stock market is totally manipulated, the reserves held by banks are all in the form of bailout funds, and demand for US Treasury's are artificially propped by central bankers. The country is only pretending things will return to normal soon and that this is only an unforeseen recession when in fact it is a total collapse of worldwide banking, investment and currency systems, revealing their fraudulent underpinnings.
Virtually the whole country has become a Ponzi scheme — the earliest ones enrolled in the program receive rewards, the later enrollees, nothing. The charade cannot go on for much longer.
The Federal Government's options are down to one. Government cannot default entirely on its debts and maintain order. Government cannot buy more debt from foreign lenders, primarily Asians, who are reluctant to loan and asking for higher interest rates. Government cannot print money incessantly without risking hyper-inflation. Government cannot meet all its obligations and promises by raising taxes on the wealthy. Its only option now is to officially devalue the dollar, probably by 30%.
The US government may be forced to devalue the dollar if (a) investment rating agencies (Fitch, Moody's, Standard & Poor's) down-rate the value of US Treasury bonds as they should, or (b) the EURO continues to decline in value to the point where European goods will be cheaper in the world marketplace, crushing US exports, or (c) it cannot make interest payments on its huge $12 trillion accumulated national debt.
It's not that the Federal Government doesn't have other options — it does. But they are not on the table — namely deep cuts in military spending and Medicare totaling over $1 trillion, or conversion to a gold-backed paper money system. Both of these are anathema to politicians and central bankers.
Gold is a bellwether for the value of paper money
While gold is a current focus of large investors because of the crisis in currencies and markets, silver is undervalued, cheap and more practical to purchase groceries should a banking crisis or lack of confidence in paper money occur. You don't want to go to the store to buy $100 of food with a $1000 gold coin and receive $900 in change in the form of debased paper dollars.
Silver is for survival, gold is to maintain wealth. The masses should be buying U.S. silver coins and selling their gold jewelry if needed to pay bills.
Regardless of what skeptics say, gold and silver do have some intrinsic value as they are used in industry and will always be in demand by women for adornment. Paper money relies upon the faith of the public in its value as a medium of exchange and has no intrinsic value whatsoever. It could only serve as confetti or fireplace fodder. Limited supply and unremitting demand suggest gold and silver have inborn advantages over paper money. That's why gold and silver were once used to back paper money and why the Constitution describes gold as money.
Out of nowhere, financial counselors have been forced to suggest gold become 10% of a savvy investor's portfolio. This signals a major change. Gold and silver have risen as an option in an era when all other investments appear to be risky. These precious and relatively scarce metals are the only time-tested way to put a halt to the printing of fiat paper money to cover for the debt run-up by government.
China, realizing the US may default on its $1+ trillion debt, has quietly begun to buy up gold mines so as not to drive up the price of gold by buying ingots or coins.
What fate for holders of 401k plans?
Small investors who have 401k accounts face the prospect of pulling their money out of these doomed investment plans before maturity and facing penalties, then facing further evaporation of their money with an impending devaluation of the US Dollar.
The government knows, when the economy collapses, that the masses will attempt to tap into their 401k plans to pay their bills. This would evaporate reserves banks must have to stay in business. This is why it is said that government will confiscate or prohibit premature withdrawal from 401k plans and other long-term tax-deferred investments. This time it will be confiscation of retirement accounts, not gold.
So what if the price of gold declines?
Imagine a scenario where the price of gold drops from $1200 to $300 an ounce because of declining demand, simply due to plunging incomes and a sell-off by gold owners to pay bills as paper money becomes confetti. So you have worth-less-and-less paper money and a few pieces or gold and silver in your hands. Which of these, gold or paper money, will likely be deemed valuable as payment in exchange for goods and services? What will a shopkeeper accept for a bag of groceries in a financial crisis, during a run on the banks?
In the very early stage of a crisis the masses will run to the banks to withdraw cash. Then the banks will be shut, ATM machines limited to providing $100 at a time. Shop keepers are going to fast learn that a silver US coin is certainly welcomed at their store.
Imagine that an hour of your labor is deemed to be worth $10. Imagine that government prints more and more money, diluting its value until you must now charge $20 for your one hour of labor to buy the same amount of goods and services as $10 did before all the extra paper money was printed. Government keeps printing paper money till you must charge $100 for an hour of labor in order to survive. At this point, what is paper money worth?
A one-dollar bill in 1913 is worth 3-cents in purchasing power today, $100 is worth just $3. During this same time gold miners increased the supply of gold, but certainly not at the rate that paper money was printed, and the increased supply was balanced against an increase in the population. Which is more valuable, the shiny metal or the crinkled paper?
Against a 1980-high of $850/ounce of gold and $49/ounce of silver, the inflation adjusted value should be $2275/ounce for gold and $132/ounce for silver. Yet gold today (May 2010) is selling for ~$1200 and silver ~$18 an ounce. (The price of silver has seemingly dropped since 1980 because of the Hunt Brothers hoarding of silver to manipulate the market in the early 1980s. Prior to this market manipulation, silver was selling at ~$5.00/ounce.)
If you had paper money worth $2.60 in 1980 it would only be worth $1.00 today (2009). So gold and silver have risen in value, while paper money has declined in value since 1980.
This is against a backdrop where central bankers have covertly depressed of the price of gold and silver so they won't pose a more lucrative alternative to the stock market, municipal bonds and US Treasury's.
Investing in gold may be risky, but as Seth Klarman says, government is pushing investors to make more risky, speculative investments. If Klarman looks in the mirror and listens to his own tapes, he should be investing in gold. On a relative basis, gold and silver are far more valuable than paper money, a fact that would be realized if government and Wall Street manipulations were removed. It's just that Wall Street controls government and the news media which the masses rely upon for interpretation of daily events.
In an inevitable future crisis, paper money will finally be exposed as a false god. We can only pray for its rapid demise. The money changers need to be rousted from the temple. The financial system needs a major overhaul, not papered-over reform that calls for more and more regulators and oversight. The problem is we have grown to rely on this false god for far too long. Stop the Wall Street/US Treasury/Federal Reserve Bank fraud and learn to embrace gold and silver. Put a stop to the erosion of your money.
May 26, 2010
Bill Sardi [send him mail] is a frequent writer on health and political topics. His health writings can be found at www.naturalhealthlibrarian.com. He is the author of You Don't Have To Be Afraid Of Cancer Anymore. His latest book is Downsizing Your Body.
Copyright © 2010 Bill Sardi Word of Knowledge Agency, San Dimas, California. This article has been written exclusively for www.LewRockwell.com and other parties who wish to refer to it should link rather than post at other URLs.