Investing Like It’s The Sure Thing?
By David Galland, Managing Director, Casey Research
Digging through the entrails of the fundamentals associated with the global economy and markets, it increasingly strikes me that there is really only one investment I’d now consider a “sure thing” – and that is buying gold on dips.
In support of that contention, a quick review of the other primary asset classes is in order.
The broader stock market. Now, I can’t speak for all the world’s stock markets, but will say that with the S&P 500 currently selling at a P/E of 18.29 and with a dividend yield of a miserly 2%, it’s hard to say that these stocks are selling on the cheap. Especially when you consider that during the depths of the deep recession lasting from 1980 to 1982, the P/Es hit below 7 (averaged 8.4) while dividend yields reached above 6% (averaged 5.4%)… levels we’ve been nowhere near hitting at any point in this even more dark and dangerous crisis. Yet.
Worse, the underlying problems that delivered us to this place remain largely unresolved, having been “kicked down the road” by a numbing amount of government spending, topped off with a big dollop of meddling.
If anything, the problems are even worse now than they were in the early days of this crisis, because the bad debt is still out there – lurking in the portfolios of banks and other financial institutions, and in trillion-dollar portfolios held by the Fed, Fannie Mae, and other parastatal institutions.
While the stock market and the economy are not the same thing, they are connected at the hip. As such, unless and until the economy goes through the painful process of reducing debt levels to the point where they can be comfortably serviced, the stock market remains at risk.
On the topic of unsupportable debt levels, in an interview I just completed with real estate expert Andy Miller for the soon-to-be-released June edition of The Casey Report, he pointed out that the lending criteria for the government’s mortgage renegotiation program are even worse than those applied by the subprime lenders leading up to this mess.
Specifically, under the government’s HAMP program, you can qualify for a spanking new mortgage with a debt-to-income ratio of 60%. Which is to say, you can qualify for the mortgage even if making your mortgage payments would require you to spend 60% of your pre-tax income. Insanity.
Real Estate. As Miller makes clear in our interview, it’s still way too early to invest in residential or commercial real estate. The list of problems are too long to recount here, but Andy sees things beginning to unravel in residential as early as July, and worsening as the year progresses. For now, keep your powder dry.
(Ed. Note: You can give The Casey Report, which will be published tomorrow, a risk-free trial. Why not? Here’s the link.)
Energy. As much as I personally love energy and see it as a central holding to be added to over time in the full expectation of stunning gains a year or so down the road, the BP catastrophe in the Gulf has set off a chain reaction of uncertainty throughout the sector. And it’s increasingly looking as though, due to the depth of the well, it may be months before it can be capped. Our Energy Research team led by Marin Katusa, is sifting through the risks – and opportunities – created by the disaster, but for the time being extra caution is called for. No sure thing here, at least not in the short term.
Bonds. With interest rates near 50-year lows and governments around the world spewing out hundreds of billions of dollars in new financings, suggestions of buying bonds are more appropriate as punch lines delivered from the stages of comedy clubs. That said, there may be some additional upside to be squeezed out of U.S. bonds as investors continue to flee the euro and, maybe soon, the yen… but comparing the risks against the slim potential for further rewards makes chasing the returns in bonds anything but a sure thing.
Commodities (other than gold). With the Chinese miracle looking more fragile by the day, and the strong possibility that we’re headed for another big leg down in the global economy, one has to be very cautious on the everyday commodities. While the supply/demand profiles of some commodities are better than others, a sinking ship will pull them all down, at least temporarily. Provided you are not standing in the line of fire, this is not a bad thing – because lower prices will create new opportunities to get positioned before the resulting shortage in new supplies, and a pick-up in inflation, send prices soaring again. For the next six months, however, garden variety commodities are anything but a sure thing.
Foreign Currencies. Again, a big area with lots of choices. With just a couple of exceptions discussed in this month’s Casey Report, most of the fiat currencies are like dry tinder lying too close to the roaring fire of out-of-control sovereign debasement. In addition, you also have the always-there possibility that a government will do something really, really stupid that blindsides its own currency. The most recent example was provided by Australia’s decision to slap its domestic mining industry with a special 40% tax on mining company profits, effectively wounding one of its critical export industries just as China looks to stumble. Hope that works out for them. In any event, with all the uncertainties just now, no fiat currency rises anywhere near the level of a “sure thing.”
Which brings me to the only sure thing…
Gold. As I have previously commented on in these pages, to the point of stuttering repetition, the overarching problem the world now faces is debt, debt, and more debt. Including, most importantly for this discussion, historic levels of government debt – coupled with an ongoing attitude of “If you spend it, they will come” – “they” being the easily misled voters.
All you really need to know is that in sum, the world’s top ten sovereign debtors currently owe upwards of US$135 trillion.
At this delicate point in time, the sovereign deadbeats are beginning to be strung up separately, but the odds grow daily that they’ll hang together in the not-too-distant future. Read the following excerpt from today’s Bloomberg and see if it strikes the same chords with you that it did with me…
June 2 (Bloomberg) — Iran’s central bank began the first phase of the 45 billion-euro ($55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.
The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31.
Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55 percent of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said.
Iran’s shift out of euros has been prompted by the single currency’s decline, said Jaam-e-Jam, which is owned by the state broadcaster. Other central banks, including those of the Persian Gulf states, also are selling their euro reserves, it said.
Experts in Iran’s central bank have suggested the country buy gold because they forecast the precious metal’s price will increase, the newspaper said.
What’s striking a chord with me on reading that is as follows…
a) A year ago, could anyone have imagined that we’d see a wholesale dumping by central banks of the only real competitor to the dollar’s reserve status?
b) It’s interesting that Iran is considering shifting back toward the currency of its sworn enemy, especially after numerous earlier statements it would increasingly eschew the use of the dollar in its commerce. One has to wonder how long Iran will remain willing to feather its nest with dollars?
c) Finally, the comment at the end about gold catches the eye. Especially in that it is increasingly being looked upon for the role it can, and likely will, once again play as a foundation of central bank reserves.
Of course, the sovereign nations could decide to resolve their massive debt problems through default – and some most certainly will. But at this point, that these nations will reduce their current, let alone future, obligations to manageable levels without crushing their respective economies – never a politically palatable choice – is literally impossible.
Thus, while there will be much grandstanding about making tough choices and hard budget cuts, when push comes to shove, you can bet that the choices made will be those most likely to return the politicos to office, and the cuts nothing more than window dressing, quickly offset by spending increases.
In a world awash in funny money, gold is the only sure thing.
Disclosure: Credit Writedowns is a member of the Casey Research Affiliate Program. However, the ideas expressed in this post are solely the opinions of the author and do not necessarily represent the opinions of Credit Writedowns or other authors affiliated with the site.