You imagine me sipping champagne from your boot
For a taste of your elegant pride
I may be going to hell in a bucket, babe
But at least I'm enjoyin' the ride
at least I'm enjoyin' the ride
Yeah, at least I'm enjoyin' the ride
For a taste of your elegant pride
I may be going to hell in a bucket, babe
But at least I'm enjoyin' the ride
at least I'm enjoyin' the ride
Yeah, at least I'm enjoyin' the ride
"Hell in a Bucket" by The Grateful Dead
I've gotten a lot of questions lately that go something like this, "With the world going to "hell in a bucket", why on earth is the stock market going up almost every day?" Well the simple answer my friend is that with zero interest rates where else do you expect the money to flow. Corporate earnings have been stellar (especially large corporations), and profit margins are near record highs. It's really not that difficult to see why. If you are a large corporation your cost of capital is low single digits, and your remaining work force is working overtime to keep their jobs. Of course banks are showing the most remarkable earnings as they continue to borrow at 0% and then turn around and buy treasuries yielding 3%, why hire anyone or loan money to anyone when you can get a risk free return of 3%? Yes we are having a tax-payer subsidized, risk-free melt-up, enjoy the ride. There really are only three losers: savers earning 0%, small businesses not able to borrow at 0%, and future tax-payers saddled with paying off the debt when interest rates soar. Not to worry unless you fall in one of those three categories...oh shit, I fall in all three.
Investment Considerations: We are at maximum weight in US and International equities, US and International REIT's, Gold and most commodities. Inflation oriented and risk oriented assets are all in positive trends. Also restocking the wine cellar.
How do people go bankrupt? "Slowly, then all at once."
One of my favorite Ernest Hemingway quotes, that perfectly sums up what is going on in Greece and many other sovereigns. As I've said for several months the situation in Greece wasn't pretty, and the solutions were even less so. This week started to remind me of 2008/Bear Stearns/Lehman Brothers, all over again; it was a great reminder of just how fast things can unwind. Last Thursday April 22, Greek 2 year notes were yielding 10%, on Monday they were yielding 13%, and on Wednesday they peaked at 26%, and they are now back to 13%!
Now it appears that Greece has agreed to a 24bn euro austerity package in order to get a 120bn euro loan package. Some of these austerity measures are extreme. It appears that Greece's public workers will have to endure a three year wage freeze, and they will lose their 13th and 14th month salaries. Now I thought the Greeks were on the same calendar as us, but it appears that they used to get paid an extra month for Christmas and an extra month for Easter. The pensioners will face the harshest cuts as the average retirement age will rise from 53 to 67. The head of the private sector union warned of confrontation ahead. I honestly believe that the Germans are throwing good money after bad, and that eventually default will be the only solution for Greece.
Greece is known as the birthplace of democracy, will it also become known as the gravesite of social democracy?
The biggest issue now is what happens to the European Union and the Euro. One way to view the Euro is like a club, there are rules for inclusion and rules to stay in. The reason there are rules is because the members want consistency, they want to know what to expect, no surprises. The Euro started out that way, and one of the rules for inclusion was that each member country had to have their fiscal house in order, and had to keep it that way. One of the rules was that a countries deficit-to-GDP ratio had to be below 3%, Greece's ratio is 13.6%. The problem with the European Union, like all clubs, is that if you don't enforce the rules, then why bother having a club. If Germany does not refuse to bail out Greece they will be known as the world's biggest "patsies". All of their hard earned wealth, success, and competitiveness will be used as a "cash cow" to bail out those countries that decided to go the easy money/debt/don't pay your taxes route. While it would be painful, especially for the european banks who loaned them money, the eurozone would be greatly enhanced if they allowed Greece to default.
Investment Considerations: We continue to be at a minimal weight in non-US sovereign debt, and as I mentioned earlier we are at a maximum weight in gold.
Your House Priced in Gold
This ratio peaked back in 2001 at about 825 ounces, when gold was trading at about $276/ounce and houses were at about $227,700. It is currently at 253 ounces to buy the average house. That works out to gold trading at $1,166/ounce and the average house at $295,000. So even though the average house (priced in dollars) is up 30% since 2001 (3% per year), it is actually down 70% when priced in gold. Remember that gold was fixed at $35/ounce until 1971, it quickly rose to $180/ounce in 1975, and then shot up to $700/ounce in 1980.
Is this chart reflecting the volatility of gold, the volatility of housing, or the volatility of the US currency that they are both priced in? Good question, that I am not even going to begin to try and address in this short note. Suffice it to say that whenever people begin to distrust the promises backing their fiat currencies, gold tends to do rather well. What do you think this chart would look like for Greek housing, especially if Greece defaults?
Investment Considerations: We have been at a maximum weight in gold for over a year now, and that trend has not broken.
Red Skelton - Pledge Allegiance to the Flag
When I was growing up we never missed an episode of "The Red Skelton Show". I had forgotten just how special he was until a friend sent me this link...priceless!
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
No comments:
Post a Comment