Saturday, May 28, 2011
We attended the Ira Sohn Investment conference in New York this week. You may recall us writing about this event last year because we heckled one of the speakers, Steve Rattner. This year, we were surprised by how many of the speakers have adopted some of our long-standing ideas. We don't say this to brag or allege that some of the top financial minds in America are cribbing our work. It's simply a fact...
The first speaker, Erez Kalir, founding partner of the hedge fund Sabretooth Capital, warned the government might confiscate gold (and has the power to do so no matter where in the world you store it). He said the Treasury market is completely manipulated, so shorting Treasurys is a fool's errand.
His main investment idea? Buying foreign farmland and businesses in Argentina. While Erez is a friend and a longtime subscriber, I was surprised to see him talking publicly about these beliefs. I think Erez is probably the best of New York's young fund managers. It will be fascinating to see how the establishment reacts to his extremely contrarian ideas.
Legendary short seller Jim Chanos of Kynikos Associates explained that the economics of alternative energies don't make any sense. Government subsidies aren't supplying innovations. They're only paying for installations – which is probably a waste of money. And he explained such government subsidies are likely to slow and stop in the wake of Europe's looming financial crisis.
His idea? Sell short First Solar. Longtime readers will remember I've written about the economics of solar energy for many years and have recommended shorting First Solar several times.
David Einhorn, the most popular hedge-fund manager in New York, has been talking about the West's debt crisis in more detail than any other "mainstream" money manager. He continued to display his skepticism of our monetary system this year by pointing out an infamous quote from the head euro zone finance minister, Jean-Claude Juncker: "When it becomes serious, you have to lie."
Of course, this is only a modern-day version of Otto von Bismarck's legendary political truism: "Never believe anything until it has been officially denied."
The most interesting presentation was by someone I'd never heard of before: Mark Hart. Mark made a compelling case that, contrary to popular opinion, China's currency is likely to fall in value once the world's economy begins to slow.
His argument was too complex to easily summarize. But the essence of it was that much of the world's inflation has flowed into China. When this process stops, China's economy will collapse. He compared the rise of China to the other bubbles in Southeast Asia in the mid-1990s. It was a fascinating presentation and gave me lots to think about.
I don't like seeing so many smart and influential investors sitting on the same side of the "boat" with me. And it's not only investors who have finally come to fear the financial burdens of the United States. In the Wall Street Journal today, Peggy Noonan, whose pen is the definition of "establishment," wrote:
The American establishment has finally come around, in unison, to admitting that America is in crisis, that our debt actually threatens our ability to endure, that if we don't make progress on this, we are going to near our endpoint as a nation.
It's ironic that when I wrote the same thing, beginning in December 2008, I was criticized by just about everyone in the mainstream media as being a "fear monger" or worse. But the opinion is now so commonly held that almost every speaker at Ira Sohn addressed it in one way or another. Even Peggy Noonan is writing about it in the Wall Street Journal. That's trouble.
As I warned Rick Rule back in 2006 at the height of the first wave of the commodity frenzy, "It's hard to be a contrarian when you're popular."
My newsletter has never been more popular. The ideas I've been writing about for years are now common topics of conversation among our financial and political leaders. I'm not yet willing to say, "Buy stocks, buy the dollar, dump gold." But I'm aware my ideas are no longer outside the consensus. That makes me nervous. Nothing is worse than being in a crowded trade. As tech investors learned in 2001 and 2002, when you're the last one to leave the party, it's painful.
So what should we do? We are in a period of tremendous uncertainty because the world's monetary system itself is unstable. The U.S. could default on its debts this summer. What impact would it have on the world's economy if the world's reserve currency were in default? We simply don't know. Maybe nothing. But maybe it would spark a panic out of the dollar and into gold, silver, and solid foreign currencies. Maybe it would cause U.S. stocks to rise because investors would flee U.S. bonds and buy stocks. Or maybe it would cause U.S. stocks to crash because interest rates would rise, forcing stock multiples lower.
Here's what I suggest... Guessing at macro outcomes is extremely difficult right now. We could be on the cusp of a serious global crisis that could see gold reach $5,000 or more and silver break the $100 barrier. I believe it will pay to keep 10%-15% of your assets in precious metals. (Although buying them right now is certainly not as safe as it was back in 2008 and 2009.)
I've never sold an ounce of gold, and I won't until gold returns to the center of the world's monetary system. That's still an extremely contrarian view.
I also believe high-quality stocks are relatively cheap. You can continue to hold 20%-40% of your portfolio in high-quality stocks. Why? What happens if our government begins to take steps to reduce our debts? What if our government decides to lower taxes and favor growth over redistribution? It could happen. And it might lead to a huge new bull market.
On the other hand, I wouldn't be buying aggressively right now. I'd be waiting to see how this summer shakes out. I think there's a good chance we'll get some kind of a panic about the U.S. dollar at some point before this debt-ceiling debate ends. And that might offer a good chance to buy high-quality securities at much better prices.
So where would I recommend keeping most of your liquid resources right now? I'd recommend having most (50%-60%) of your liquid assets in high-quality, short-duration bonds, including some short-term U.S. Treasurys.
I can imagine the feedback now... "What? The guy who says the dollar will eventually crash says you should own short-term U.S. Treasurys? Hang him!"
For me, the allocation issue is simple: I buy great values when they're obviously extremely out of favor and unloved. Yes, stocks are relatively cheap right now because earnings are strong, thanks to the massive Fed inflation. But they're not extremely out of favor. So I'd rather wait. How do you wait? You own cash and cash-like instruments (short-term bonds). You hedge these positions with gold and silver. That's all you can do.
Most of my own long-term investment money is going into Florida real estate right now. Talk about cheap and unloved. I'm looking at properties that are coming out of foreclosure at half their tax-appraised value, with gross cap rates of 20% or more. For me to lose money on these deals, real estate prices would have to fall in half again – something I don't think is possible.
When I write about this idea, I get nothing but hate mail. Everyone thinks I'm crazy. That's perfect because it means the asset is unloved and unwanted. No one talked about Florida real estate at Ira Sohn, that's for sure.
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Date Range:5/19/2011 to 5/26/2011
Date Range:5/19/2011 to 5/26/2011