Warren Buffett has earned a reputation as one of the preeminent value investors of all time. His Berkshire Hathaway (BRK.B- NYSE) Holding company has stakes in insurance, railroads, publishing, retailing, and manufacturing, among other businesses, and its investment portfolio includes about $53 billion (as of June) of marketable equity securities.
How does Buffett make his picks? What exactly is “Warren’s Way?”
In his rare public remarks and widely followed annual letters to Berkshire shareholders, Buffett makes it sound very simple: he says he buys stocks that are “available at a sensible price.” In fact, Buffett uses very sophisticated screens to determine which companies belong in his portfolio.
Specifically, he uses these five investment criteria:
• Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million.
• Net profit margin of 15% or more.
• Return on equity of at least 15% for each of the past three years and the most recent quarter.
• A dollar’s worth of retained earnings creating at least a dollar’s worth of shareholder value over the past five years.
• Ample liquidity. Only stocks with a market capitalization of at least $500 million are included.
In the S&P “Warren Buffett” portfolio, they added one more criterion to eliminate overvalued stocks. Overpriced stocks are identified by comparing the five-year discounted cash flow (DCF) estimate with the current price.
www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Tuesday, September 28, 2010
Sunday, September 26, 2010
The most common ways we sabotage our retirement plans
The following post is from a Financial Planner/Advisor resource website where the underlying audience is normally the financial planner. However, I think it holds some valuable points for all...
By Joanne Sommers, IE
Most clients know what they should be doing to prepare themselves for retirement. The problem is that many are not very good at following through. As a result, too many clients may find themselves unprepared financially as retirement draws closer.
There are many ways in which your clients may be sabotaging their retirement plans. Here are some of the most common:
> Procrastination
Caught up in the demands of day-to-day expenses, many clients simply wait too long to start saving for retirement, says Al Nagy, an Edmonton-based certified financial planner with Investors Group Inc.
“We tend to think in the ‘now’ rather than about the future,” Nagy says. “My job as an advisor is to get my clients thinking about how the choices they make today will impact their wealth accumulation strategy. I try to get them to establish a plan and review it regularly. That helps them maintain their focus.”
Human nature is such that anything happening in the present or short term seems more important than the long term, says Tracy Piercy, founder and CEO of Moneyminding International, a Victoria-based financial literacy firm.
The key to helping clients avoid procrastination is to get them to focus on creating sustainable income to support their desired lifestyle, she says.
That approach brings long-term financial independence into the present and helps to minimize procrastination, says Piercy, adding, “We won't succeed if we continue to 'try' to get people to behave in a way that is counter to basic human nature.”
> Misusing RRSPs
People often regard their RRSPs as tools for reducing their taxable incomes rather than as the retirement savings vehicles they were intended to be, according to Clay Gillespie, managing director with Rogers Financial Group in Vancouver.
Using RRSP funds to finance pre-retirement needs and desires is another frequent mistake clients make, Gillespie says. “It’s quite common to see RRSPs used as savings accounts, with the funds used to pay for non-emergency purchases.”
The use of RRSP money to pay off short-term debt can also create tax problems, while permanently reducing RRSP room.
Two more ways clients sabotage their retirement plans
By Joanne Sommers
Your clients already know they should be making regular RRSP deposits, investing long term and paying off debt. But they don’t always follow your advice to a tee.
They may procrastinate about starting a retirement savings plan or raid the RRSP funds for a non-essential purchase.
Here are two more ways clients sabotage their retirement plans — and ways you can steer them in the right direction.
> Failing to set goals
Many clients sabotage their retirement plans by failing to set clear personal financial goals, says Piercy.
To help clients understand what a clear personal financial goal looks like, Piercy offers this example: “I’d like to be financially independent within five years, with household income of $10,000 per month from our stock, real estate and business investments so I can spend my time gardening, looking after our grandchildren and volunteering with at-risk youth. I’d like to take two vacations annually with my husband in our motor home.”
That’s much better than a long list of unspecific, generic goals such as “retiring early,” “paying off the mortgage,” “getting a better return on investment” or “selling the business,” she says.
“Generic goals simply don’t resonate with the commitment required to see them through,” Piercy says, “whether it’s a retirement goal, a fitness goal, or any other lifestyle goal. The goal must be personal, specific and have an emotional meaning to the person setting it – and of course it must be in writing and be measurable in terms of accomplishment.”
> Carrying debt
An estimated 40% of Canadians currently retire with some debt. That’s a significant reversal from the past, when the conventional wisdom was that most or all debt should be eliminated before retirement.
Gillespie believes that debt elimination should still be a priority when planning for retirement. “[Advise clients to] repay credit card balances as a demand loan rather than a line of credit,” he says, “because that forces you to pay it off.”
It’s also better for clients to repay non-deductible debt, such as a mortgage, before investing in anything else, Gillespie adds.
He recommends this strategy for some clients: “Sell your portfolio to pay off your mortgage, if necessary, then borrow to invest, using the house as collateral. That makes the interest tax-deductible.”
Piercy, suggests advisors help their clients think about debt as a wealth-building tool rather than pushing them to eliminate it altogether.
“The key is to focus on income creation,” she says. “When clients can earn income from their assets, with proper monitoring and exit strategies in place, carrying debt isn't an issue.”
www.saveriomanzo.com
Saverio Manzo
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,
By Joanne Sommers, IE
Most clients know what they should be doing to prepare themselves for retirement. The problem is that many are not very good at following through. As a result, too many clients may find themselves unprepared financially as retirement draws closer.
There are many ways in which your clients may be sabotaging their retirement plans. Here are some of the most common:
> Procrastination
Caught up in the demands of day-to-day expenses, many clients simply wait too long to start saving for retirement, says Al Nagy, an Edmonton-based certified financial planner with Investors Group Inc.
“We tend to think in the ‘now’ rather than about the future,” Nagy says. “My job as an advisor is to get my clients thinking about how the choices they make today will impact their wealth accumulation strategy. I try to get them to establish a plan and review it regularly. That helps them maintain their focus.”
Human nature is such that anything happening in the present or short term seems more important than the long term, says Tracy Piercy, founder and CEO of Moneyminding International, a Victoria-based financial literacy firm.
The key to helping clients avoid procrastination is to get them to focus on creating sustainable income to support their desired lifestyle, she says.
That approach brings long-term financial independence into the present and helps to minimize procrastination, says Piercy, adding, “We won't succeed if we continue to 'try' to get people to behave in a way that is counter to basic human nature.”
> Misusing RRSPs
People often regard their RRSPs as tools for reducing their taxable incomes rather than as the retirement savings vehicles they were intended to be, according to Clay Gillespie, managing director with Rogers Financial Group in Vancouver.
Using RRSP funds to finance pre-retirement needs and desires is another frequent mistake clients make, Gillespie says. “It’s quite common to see RRSPs used as savings accounts, with the funds used to pay for non-emergency purchases.”
The use of RRSP money to pay off short-term debt can also create tax problems, while permanently reducing RRSP room.
Two more ways clients sabotage their retirement plans
By Joanne Sommers
Your clients already know they should be making regular RRSP deposits, investing long term and paying off debt. But they don’t always follow your advice to a tee.
They may procrastinate about starting a retirement savings plan or raid the RRSP funds for a non-essential purchase.
Here are two more ways clients sabotage their retirement plans — and ways you can steer them in the right direction.
> Failing to set goals
Many clients sabotage their retirement plans by failing to set clear personal financial goals, says Piercy.
To help clients understand what a clear personal financial goal looks like, Piercy offers this example: “I’d like to be financially independent within five years, with household income of $10,000 per month from our stock, real estate and business investments so I can spend my time gardening, looking after our grandchildren and volunteering with at-risk youth. I’d like to take two vacations annually with my husband in our motor home.”
That’s much better than a long list of unspecific, generic goals such as “retiring early,” “paying off the mortgage,” “getting a better return on investment” or “selling the business,” she says.
“Generic goals simply don’t resonate with the commitment required to see them through,” Piercy says, “whether it’s a retirement goal, a fitness goal, or any other lifestyle goal. The goal must be personal, specific and have an emotional meaning to the person setting it – and of course it must be in writing and be measurable in terms of accomplishment.”
> Carrying debt
An estimated 40% of Canadians currently retire with some debt. That’s a significant reversal from the past, when the conventional wisdom was that most or all debt should be eliminated before retirement.
Gillespie believes that debt elimination should still be a priority when planning for retirement. “[Advise clients to] repay credit card balances as a demand loan rather than a line of credit,” he says, “because that forces you to pay it off.”
It’s also better for clients to repay non-deductible debt, such as a mortgage, before investing in anything else, Gillespie adds.
He recommends this strategy for some clients: “Sell your portfolio to pay off your mortgage, if necessary, then borrow to invest, using the house as collateral. That makes the interest tax-deductible.”
Piercy, suggests advisors help their clients think about debt as a wealth-building tool rather than pushing them to eliminate it altogether.
“The key is to focus on income creation,” she says. “When clients can earn income from their assets, with proper monitoring and exit strategies in place, carrying debt isn't an issue.”
www.saveriomanzo.com
Saverio Manzo
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,
Thursday, September 23, 2010
FRUGALITY: A Lasting Trend?
IN my mind he is one of the best. His understanding of trends as they form are remarkably accurate.
FRUGALITY AND ITS DEFLATIONARY IMPACT
We mentioned this article yesterday but can’t emphasize how important it is to read it and re-read it – the front page NYT article titled In Hard Times, $1 Items Lure Shoppers, and Retailers Scramble. Basically, the major dollar chains are now taking market share away from the Wal-Marts of the world because middle-class households are now shopping at the discount outlets. Read these snippets:
“The dollar stores have found creative ways to keep their prices low. When commodity costs rose for suppliers, for example, the dollar stores asked them to decrease the number of sandwich bags in a box or pushed them to come up with a cheaper version of the products.” Indeed, this is how the link between commodity prices and final consumer goods and services inflation breaks down.
“In the last couple of quarters, Wal-Mart tried aggressive discounts on items like milk, but the price cuts did not attract huge traffic.” Talk about turning Japanese – households holding out for more price cuts … for milk!
The company said that shoppers are “cherry picking” discounts and get this – “promotions that have grown popular in recent years, such as offering 10 items for $10, are becoming less effective in driving sales”. Talk about turning Japanese. Furthermore – “The change in shopper behavior hit ConAgra’s consumer-foods segment particularly hard. Despite heavier discounting, which helped drive down prices on average by 1%, the segment sold 3% fewer pounds of food”.
by: David Rosenberg ‐ Gluskin Sheff + Associates
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
FRUGALITY AND ITS DEFLATIONARY IMPACT
We mentioned this article yesterday but can’t emphasize how important it is to read it and re-read it – the front page NYT article titled In Hard Times, $1 Items Lure Shoppers, and Retailers Scramble. Basically, the major dollar chains are now taking market share away from the Wal-Marts of the world because middle-class households are now shopping at the discount outlets. Read these snippets:
“The dollar stores have found creative ways to keep their prices low. When commodity costs rose for suppliers, for example, the dollar stores asked them to decrease the number of sandwich bags in a box or pushed them to come up with a cheaper version of the products.” Indeed, this is how the link between commodity prices and final consumer goods and services inflation breaks down.
“In the last couple of quarters, Wal-Mart tried aggressive discounts on items like milk, but the price cuts did not attract huge traffic.” Talk about turning Japanese – households holding out for more price cuts … for milk!
The company said that shoppers are “cherry picking” discounts and get this – “promotions that have grown popular in recent years, such as offering 10 items for $10, are becoming less effective in driving sales”. Talk about turning Japanese. Furthermore – “The change in shopper behavior hit ConAgra’s consumer-foods segment particularly hard. Despite heavier discounting, which helped drive down prices on average by 1%, the segment sold 3% fewer pounds of food”.
by: David Rosenberg ‐ Gluskin Sheff + Associates
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Monday, September 20, 2010
Are Canadians Living in a Bubble?
I just realized that my last few posts had a consistent negative skew to them, and, well, this one does too.
With most of my posts I look for some global issue, some concern, some trend forming that has the possibility to allow Canada to shine - and this usually surfaces on discussions about global commodities (or lack thereof), our impressive banking system and the positive conditions of our government's fiscal house, to name a few. In many ways, we are becoming the envy of the world. And for good reason as we have much to offer and we 'have our sh@#$%! together'.
But when I do look abroad, I sometimes see gleaming issues unresolved or developing. Issues that may and likely will come home to roost in our back yard. One such effect of the overall gloomy state of the US consumer and US small and medium business - the heart of an economy. So lets hope that the old adage, "when the US sneezes we catch the cold" is not true.
NATIONAL FEDERATION OF INDEPENDENT BUSINESS – SMALL BUSINESS ECONOMIC TRENDS
The NFIB put out its Small Business Economic Trends report last week, and although the Optimism Index eked out a modest gain (though still mired in recessionary terrain), much of the commentary was downright depressing:
There is no life in the jobs market.
The environment for capital spending is not good.
The weak economy continued to put downward pressure on prices.
Those looking for loans predominately are looking for cash flow
support, not funds to expand or hire (see Small Business Credit in a
Recession, 12/09).
Overall, 91 percent of the owners reported all their credit needs met
or they did not want to borrow, unchanged from July.
The first two comments are fairly obvious to anyone with a pulse living in the United States. The third comment — supported by two inflation-related releases last week — argues that a deflationary scenario is not out of the question. The fourth comment is very troubling, in my opinion. It is disheartening to see that those businesses seeking credit are doing so to support their cash flow needs. Over time, without a more sustained recovery, that will not end well. While it is encouraging to see that 91% of small businesses either do not want to borrow or are having their borrowing needs met, it does call into question the talking point that “banks aren’t lending” or “credit is not available.”
Finally, I would note that Poor Sales continue to be the Number One problem cited by small business — above Taxes, Gov’t Regulation/Red Tape, or any other issue: “What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.” So for all the rhetoric about “uncertainty,” the simple fact of the matter is a lack of demand.
Barry Ritholtz
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Surve and Gordon Pape.
With most of my posts I look for some global issue, some concern, some trend forming that has the possibility to allow Canada to shine - and this usually surfaces on discussions about global commodities (or lack thereof), our impressive banking system and the positive conditions of our government's fiscal house, to name a few. In many ways, we are becoming the envy of the world. And for good reason as we have much to offer and we 'have our sh@#$%! together'.
But when I do look abroad, I sometimes see gleaming issues unresolved or developing. Issues that may and likely will come home to roost in our back yard. One such effect of the overall gloomy state of the US consumer and US small and medium business - the heart of an economy. So lets hope that the old adage, "when the US sneezes we catch the cold" is not true.
NATIONAL FEDERATION OF INDEPENDENT BUSINESS – SMALL BUSINESS ECONOMIC TRENDS
The NFIB put out its Small Business Economic Trends report last week, and although the Optimism Index eked out a modest gain (though still mired in recessionary terrain), much of the commentary was downright depressing:
There is no life in the jobs market.
The environment for capital spending is not good.
The weak economy continued to put downward pressure on prices.
Those looking for loans predominately are looking for cash flow
support, not funds to expand or hire (see Small Business Credit in a
Recession, 12/09).
Overall, 91 percent of the owners reported all their credit needs met
or they did not want to borrow, unchanged from July.
The first two comments are fairly obvious to anyone with a pulse living in the United States. The third comment — supported by two inflation-related releases last week — argues that a deflationary scenario is not out of the question. The fourth comment is very troubling, in my opinion. It is disheartening to see that those businesses seeking credit are doing so to support their cash flow needs. Over time, without a more sustained recovery, that will not end well. While it is encouraging to see that 91% of small businesses either do not want to borrow or are having their borrowing needs met, it does call into question the talking point that “banks aren’t lending” or “credit is not available.”
Finally, I would note that Poor Sales continue to be the Number One problem cited by small business — above Taxes, Gov’t Regulation/Red Tape, or any other issue: “What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.” So for all the rhetoric about “uncertainty,” the simple fact of the matter is a lack of demand.
Barry Ritholtz
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Surve and Gordon Pape.
Sunday, September 19, 2010
The next global crisis: Hungry millions, on the move
Shocking book and an interesting read. But just how accurate is it? Does the author have the usual motive of "selling books" or is there some underlying truth? You be the judge.
Scarcities of water, land, oil and fish could lead to mass starvation in 50 years – or sooner. Why is the West refusing to swallow the facts?
Saturday, Aug. 21, 2010 Floods in Pakistan, droughts in Russia, rising grain prices. According to award-winning Australian science writer Julian Cribb, these are warning signs of an impending disaster that will dwarf the financial crisis.
In his new book The Coming Famine: The Global Food Crisis and What We Can Do To Avoid It, he warns that looming scarcities of water, land, nutrients, oil and fish will leave us unable to feed ourselves within 50 years.
In this wide-rang ing conversation, Mr. Cribb addresses the implications of the Western diet, the threat to cities and what impact famine could have on immigration.
Q: You must be a charming dinner companion.
A: I am a bit depressing. It's one of those issues people don't like to talk about much. But I'm a science journalist, so I've got a lot of other things to talk about besides food.
You outline a pretty scary scenario, but the idea of a looming global famine doesn't really seem to be on anyone's radar. Why is that?
Because we've been so very successful in food production over the last 30 years, that we've basically fallen asleep at the wheel. Countries like Canada, America, Australia, are awash with food. We throw half of it away. But what we really haven't noticed is the rate at which the basic resources for producing it are running out.
You say we've got less than 50 years until global crisis.
We're probably heading into, in 30 or 40 years, fairly savage disasters on a much larger scale than the Pakistan flood and the Russian droughts, which will displace large numbers of people. And the cost of that will fall on everybody.
Is that what it's going to take for people to notice there's a problem?
I hate to say it, but we're very slow on the uptake. Politicians don't like to move, unless they're really shoved out of their comfort zone. They haven't seen this big picture: the shortages of land, water, energy, fertilizer, fish, technology. I don't know what it's like in Canada, but in Australia, we haven't been investing anything in agricultural research in the last 20 years.
Are world leaders aware of the threat?
I think they're diverted by what they would regard as more immediate considerations. The financial crisis has got them all running around like ants, climate change has also been projected to them as a critical issue, and indeed it is, but it's a slower burning issue than the one that I'm flagging.
You need Al Gore to make a movie of your book.
I really do. I tried to get the publisher to send a copy to him. There has been a bit of a backlash with climate change though, and I'm hoping that won't happen with food. We live in an incredibly wasteful society and this is going to take hard work and co-operation, not just by governments and farmers and scientists, but also by individuals, in terms of the way they eat.
Is there any precedent for the world reacting en masse to a food issue?
In a sense, yes, the Green Revolution was that. In the 1960s, the Club of Rome pointed out that a lot of people in the world were starving and that was a disgrace. And the world invested a lot of money in agricultural science and shared the knowledge generously. We got super wheats and super rice. Places like India and China, which were starving, were self-sufficient in less than a decade.
But how do you convince Western countries that this will affect them? I think there's a perception that our borders will protect us.
People don't understand that famines will impinge on them personally. It will affect the prices they see, the taxes they pay, and they will get flooded with immigrants. Think of the Irish Potato Famine. A quarter of the country departed for Canada and American and Australia. A population that's starving will move.
In the 1970s, 10 million Bangladeshis went to live in India. If there's a decent famine on the North China Plain, the Chinese would simply move north into Siberia where there are only 20 million people. But the Russians might have something to say about that.
In North America, a lot of the discussion around food right now has to do with eating locally grown, organic products, and the issue of factory farming. Do you feel like this is a distraction from the larger problem?
It's exactly the kind of thing we need to do. We need to recycle and reuse and we need to eat more modestly: smaller servings and a lot more vegetables. And eating locally makes sense because you're burning less fossil fuel to get things from around the world.
One of the consequences of burning more fossil fuel is to cause more drought, which reduces growing production. So all these things are interlaced.
Is the onus on the Western world?
Yes, because our diets are the ones that are most costly in energy and water. But it's going to apply to everybody. I think it's important for advancing economies like India and China not to take the same route. If Indians start consuming meat at the same rate we do, there's essentially no way the planet can produce enough of it.
How do you change people's perception of food?
I advocate for one year of teaching food in the world's primary schools. I believe that's an ideal time to get kids, especially urban kids who are totally out of contact with their food supply. There's some research that shows some kids don't even know meat comes from animals, they think it's something you buy in plastic in the supermarket. That kind of ignorance is what will destroy us.
Have you made changes personally to your diet?
Substantially more vegetables than I used to do and less meat. It does prod your conscience.
Are there particular regions that are troubling to you?
The biggest worry would be the Indo-Gangetic plains. They have to feed 1.3 billion people, not just in India but in central China. They're very vulnerable to water scarcity and land degradation, and they're likely to get hit very hard by climate change. Things are lining up in an ominous way for that part of the world.
Another thing that really shakes me is the thought of megacities. When you have cities of 20 or 30 million that have no internal food production, they're 100-per-cent reliant on trucks coming every day. If you've got a fuel crisis or a major climatic disruption, you could have a city of that scale starving within a week or two. We're creating points of tremendous vulnerability.
Are there countries that will be harder to convince that change is necessary?
Probably Canada will be very hard to convince – because Canada grows so much food relative to its population and, of course, it's going to gain food-growing country under climate change.
Countries like Canada will be a little more complacent about these things because they do have large domestic surpluses.
But I'm talking about a global problem that will go around the world as fast as the financial crisis did.
So we'll be affected one way or another?
No one will be untouched by it. No person, no country.
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Scarcities of water, land, oil and fish could lead to mass starvation in 50 years – or sooner. Why is the West refusing to swallow the facts?
Saturday, Aug. 21, 2010 Floods in Pakistan, droughts in Russia, rising grain prices. According to award-winning Australian science writer Julian Cribb, these are warning signs of an impending disaster that will dwarf the financial crisis.
In his new book The Coming Famine: The Global Food Crisis and What We Can Do To Avoid It, he warns that looming scarcities of water, land, nutrients, oil and fish will leave us unable to feed ourselves within 50 years.
In this wide-rang ing conversation, Mr. Cribb addresses the implications of the Western diet, the threat to cities and what impact famine could have on immigration.
Q: You must be a charming dinner companion.
A: I am a bit depressing. It's one of those issues people don't like to talk about much. But I'm a science journalist, so I've got a lot of other things to talk about besides food.
You outline a pretty scary scenario, but the idea of a looming global famine doesn't really seem to be on anyone's radar. Why is that?
Because we've been so very successful in food production over the last 30 years, that we've basically fallen asleep at the wheel. Countries like Canada, America, Australia, are awash with food. We throw half of it away. But what we really haven't noticed is the rate at which the basic resources for producing it are running out.
You say we've got less than 50 years until global crisis.
We're probably heading into, in 30 or 40 years, fairly savage disasters on a much larger scale than the Pakistan flood and the Russian droughts, which will displace large numbers of people. And the cost of that will fall on everybody.
Is that what it's going to take for people to notice there's a problem?
I hate to say it, but we're very slow on the uptake. Politicians don't like to move, unless they're really shoved out of their comfort zone. They haven't seen this big picture: the shortages of land, water, energy, fertilizer, fish, technology. I don't know what it's like in Canada, but in Australia, we haven't been investing anything in agricultural research in the last 20 years.
Are world leaders aware of the threat?
I think they're diverted by what they would regard as more immediate considerations. The financial crisis has got them all running around like ants, climate change has also been projected to them as a critical issue, and indeed it is, but it's a slower burning issue than the one that I'm flagging.
You need Al Gore to make a movie of your book.
I really do. I tried to get the publisher to send a copy to him. There has been a bit of a backlash with climate change though, and I'm hoping that won't happen with food. We live in an incredibly wasteful society and this is going to take hard work and co-operation, not just by governments and farmers and scientists, but also by individuals, in terms of the way they eat.
Is there any precedent for the world reacting en masse to a food issue?
In a sense, yes, the Green Revolution was that. In the 1960s, the Club of Rome pointed out that a lot of people in the world were starving and that was a disgrace. And the world invested a lot of money in agricultural science and shared the knowledge generously. We got super wheats and super rice. Places like India and China, which were starving, were self-sufficient in less than a decade.
But how do you convince Western countries that this will affect them? I think there's a perception that our borders will protect us.
People don't understand that famines will impinge on them personally. It will affect the prices they see, the taxes they pay, and they will get flooded with immigrants. Think of the Irish Potato Famine. A quarter of the country departed for Canada and American and Australia. A population that's starving will move.
In the 1970s, 10 million Bangladeshis went to live in India. If there's a decent famine on the North China Plain, the Chinese would simply move north into Siberia where there are only 20 million people. But the Russians might have something to say about that.
In North America, a lot of the discussion around food right now has to do with eating locally grown, organic products, and the issue of factory farming. Do you feel like this is a distraction from the larger problem?
It's exactly the kind of thing we need to do. We need to recycle and reuse and we need to eat more modestly: smaller servings and a lot more vegetables. And eating locally makes sense because you're burning less fossil fuel to get things from around the world.
One of the consequences of burning more fossil fuel is to cause more drought, which reduces growing production. So all these things are interlaced.
Is the onus on the Western world?
Yes, because our diets are the ones that are most costly in energy and water. But it's going to apply to everybody. I think it's important for advancing economies like India and China not to take the same route. If Indians start consuming meat at the same rate we do, there's essentially no way the planet can produce enough of it.
How do you change people's perception of food?
I advocate for one year of teaching food in the world's primary schools. I believe that's an ideal time to get kids, especially urban kids who are totally out of contact with their food supply. There's some research that shows some kids don't even know meat comes from animals, they think it's something you buy in plastic in the supermarket. That kind of ignorance is what will destroy us.
Have you made changes personally to your diet?
Substantially more vegetables than I used to do and less meat. It does prod your conscience.
Are there particular regions that are troubling to you?
The biggest worry would be the Indo-Gangetic plains. They have to feed 1.3 billion people, not just in India but in central China. They're very vulnerable to water scarcity and land degradation, and they're likely to get hit very hard by climate change. Things are lining up in an ominous way for that part of the world.
Another thing that really shakes me is the thought of megacities. When you have cities of 20 or 30 million that have no internal food production, they're 100-per-cent reliant on trucks coming every day. If you've got a fuel crisis or a major climatic disruption, you could have a city of that scale starving within a week or two. We're creating points of tremendous vulnerability.
Are there countries that will be harder to convince that change is necessary?
Probably Canada will be very hard to convince – because Canada grows so much food relative to its population and, of course, it's going to gain food-growing country under climate change.
Countries like Canada will be a little more complacent about these things because they do have large domestic surpluses.
But I'm talking about a global problem that will go around the world as fast as the financial crisis did.
So we'll be affected one way or another?
No one will be untouched by it. No person, no country.
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Thursday, September 16, 2010
Oil Shortage Looming: German Gov't speaks out
Peak Oil was a concept first introduced many years ago, and has yet to be proven out but there is growing evidence that the world's supply of petroleum is becoming more and more difficult to find and in "stable" places of the globe. The study briefing below is a first of its kind and coming from the not-so-vocal German Government, expressing their grim concerns. As usual, this bodes well for Canada overall.
Study Warns of a Potentially Drastic Oil Crisis
A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.
The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges.
The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes even further.
The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.
The study, whose authenticity was confirmed to SPIEGEL ONLINE by sources in government circles, was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies.
The lead author, Will, has declined to comment on the study. It remains doubtful that either the Bundeswehr or the German government would have consented to publish the document in its current form. But the study does show how intensively the German government has engaged with the question of peak oil.
Parallels to activities in the UK
The leak has parallels with recent reports from the UK. Only last week the Guardian newspaper reported that the British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is far more concerned about an impending supply crisis than it cares to admit.
According to the Guardian, the DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply. Inquiries made by Britain's so-called peak oil workshops to energy experts have been seen by SPIEGEL ONLINE. A DECC spokeswoman sought to play down the process, telling the Guardian the enquiries were "routine" and had no political implications.
The Bundeswehr study may not have immediate political consequences, either, but it shows that the German government fears shortages could quickly arise.
Part 2: A Litany of Market Failures
According to the German report, there is "some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later." The Bundeswehr prediction is consistent with those of well-known scientists who assume global oil production has either already passed its peak or will do so this year.
Market Failures and International Chain Reactions
The political and economic impacts of peak oil on Germany have now been studied for the first time in depth. The crude oil expert Steffen Bukold has evaluated and summarized the findings of the Bundeswehr study. Here is an overview of the central points:
• Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: "The relative importance of the oil-producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading powers."
• Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favor with oil-producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, "this could result in a more aggressive assertion of national interests on the part of the oil-producing nations."
• Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. "The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts," the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. "Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the 1970s, will once again come to the fore."
• Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. "Shortages in the supply of vital goods could arise" as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95 percent of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. "In the medium term the global
economic system and every market-oriented national economy would collapse."
• Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a "partial or complete failure of markets," says the study. "A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis."
• Global chain reaction: "A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil," says the study. "It is likely that a large number of states will not be in a position to make the necessary investments in time," or with "sufficient magnitude." If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it's so tightly integrated into the global economy.
• Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could perceive the upheaval triggered by peak oil "as a general systemic crisis." This would create "room for ideological and extremist alternatives to existing forms of government." Fragmentation of the affected population is likely and could "in extreme cases lead to open conflict."
The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive politically are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that "states dependent on oil imports" will be forced to "show more pragmatism toward oil-producing states in their foreign policy." Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.
For example: Germany would have to be more flexible in relation toward Russia's foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.
The relationship with Russia, in particular, is of fundamental importance for German access to oil and gas, the study says. "For Germany, this involves a balancing act between stable and privileged relations with Russia and the sensitivities of (Germany's) eastern neighbors." In other words, Germany, if it wants to guarantee its own energy security, should be accommodating in relation to Moscow's foreign policy objectives, even if it means risking damage to its relations with Poland and other Eastern European states.
Peak oil would also have profound consequences for Berlin's posture toward the Middle East, according to the study. "A readjustment of Germany's Middle East policy … in favor of more intensive relations with producer countries such as Iran and Saudi Arabia, which have the largest conventional oil reserves in the region, might put a strain on German-Israeli relations, depending on the intensity of the policy change," the authors write.
When contacted by SPIEGEL ONLINE, the Defense Ministry declined to comment on the study.
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham, Merrill Lynch Fund Managers Survey, Warren Buffett and Gordon Pape.
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Study Warns of a Potentially Drastic Oil Crisis
A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.
The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges.
The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes even further.
The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.
The study, whose authenticity was confirmed to SPIEGEL ONLINE by sources in government circles, was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies.
The lead author, Will, has declined to comment on the study. It remains doubtful that either the Bundeswehr or the German government would have consented to publish the document in its current form. But the study does show how intensively the German government has engaged with the question of peak oil.
Parallels to activities in the UK
The leak has parallels with recent reports from the UK. Only last week the Guardian newspaper reported that the British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is far more concerned about an impending supply crisis than it cares to admit.
According to the Guardian, the DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply. Inquiries made by Britain's so-called peak oil workshops to energy experts have been seen by SPIEGEL ONLINE. A DECC spokeswoman sought to play down the process, telling the Guardian the enquiries were "routine" and had no political implications.
The Bundeswehr study may not have immediate political consequences, either, but it shows that the German government fears shortages could quickly arise.
Part 2: A Litany of Market Failures
According to the German report, there is "some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later." The Bundeswehr prediction is consistent with those of well-known scientists who assume global oil production has either already passed its peak or will do so this year.
Market Failures and International Chain Reactions
The political and economic impacts of peak oil on Germany have now been studied for the first time in depth. The crude oil expert Steffen Bukold has evaluated and summarized the findings of the Bundeswehr study. Here is an overview of the central points:
• Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: "The relative importance of the oil-producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading powers."
• Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favor with oil-producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, "this could result in a more aggressive assertion of national interests on the part of the oil-producing nations."
• Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. "The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts," the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. "Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the 1970s, will once again come to the fore."
• Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. "Shortages in the supply of vital goods could arise" as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95 percent of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. "In the medium term the global
economic system and every market-oriented national economy would collapse."
• Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a "partial or complete failure of markets," says the study. "A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis."
• Global chain reaction: "A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil," says the study. "It is likely that a large number of states will not be in a position to make the necessary investments in time," or with "sufficient magnitude." If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it's so tightly integrated into the global economy.
• Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could perceive the upheaval triggered by peak oil "as a general systemic crisis." This would create "room for ideological and extremist alternatives to existing forms of government." Fragmentation of the affected population is likely and could "in extreme cases lead to open conflict."
The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive politically are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that "states dependent on oil imports" will be forced to "show more pragmatism toward oil-producing states in their foreign policy." Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.
For example: Germany would have to be more flexible in relation toward Russia's foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.
The relationship with Russia, in particular, is of fundamental importance for German access to oil and gas, the study says. "For Germany, this involves a balancing act between stable and privileged relations with Russia and the sensitivities of (Germany's) eastern neighbors." In other words, Germany, if it wants to guarantee its own energy security, should be accommodating in relation to Moscow's foreign policy objectives, even if it means risking damage to its relations with Poland and other Eastern European states.
Peak oil would also have profound consequences for Berlin's posture toward the Middle East, according to the study. "A readjustment of Germany's Middle East policy … in favor of more intensive relations with producer countries such as Iran and Saudi Arabia, which have the largest conventional oil reserves in the region, might put a strain on German-Israeli relations, depending on the intensity of the policy change," the authors write.
When contacted by SPIEGEL ONLINE, the Defense Ministry declined to comment on the study.
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham, Merrill Lynch Fund Managers Survey, Warren Buffett and Gordon Pape.
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Monday, September 13, 2010
Buffett says no double-dip, Microsoft enthusiastic about future
Do words like these coming from stature like a Warren Buffett make me feel a bit better about our economic future? Sure. (Unless he’s going senile and no knows it yet). All kidding aside, he is one savvy capitalist who has stood the test of time and literally has seen it all (he begun investing in companies more than 60 years ago). And, he’s got one the best performance track records (of anyone popular). Top this cake off with a little encouragement from Microsoft and their outlook for PC sales and hence consumers and companies willingness to spend – and finally things start to look a bit brighter than some of the news headlines we have all read recently.
Two of the biggest names in business say they see a bright future for the economy.
Famed investor Warren Buffett says there will be no double-dip recession as some fear. He says banks are lending money again, businesses are hiring employees and he expects the country to come back stronger than ever.
The chairman of Berkshire Hathaway Inc. was speaking Monday via video to the Montana Economic Development summit in Butte.
Microsoft Corp. CEO Steve Ballmer says there soon will be more technological advancement and invention than seen during the Internet era. He says that will help drive business growth.
The conference was organized by U.S. Sen. Max Baucus. The Montana Democrat says it leaves "bickering and name-calling" back in Washington, D.C., so leaders can find good ideas.
By Matt Gouras, The Associated Press
BUTTE, Mont. -
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham, Merrill Lynch Fund Managers Survey & Warren Buffett.
Two of the biggest names in business say they see a bright future for the economy.
Famed investor Warren Buffett says there will be no double-dip recession as some fear. He says banks are lending money again, businesses are hiring employees and he expects the country to come back stronger than ever.
The chairman of Berkshire Hathaway Inc. was speaking Monday via video to the Montana Economic Development summit in Butte.
Microsoft Corp. CEO Steve Ballmer says there soon will be more technological advancement and invention than seen during the Internet era. He says that will help drive business growth.
The conference was organized by U.S. Sen. Max Baucus. The Montana Democrat says it leaves "bickering and name-calling" back in Washington, D.C., so leaders can find good ideas.
By Matt Gouras, The Associated Press
BUTTE, Mont. -
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham, Merrill Lynch Fund Managers Survey & Warren Buffett.
Sunday, September 12, 2010
Canadian Corporate Bonds for Their Strong Balance Sheets
A recent interview with renowned strategist David Rosenberg. He dosnt like muich out there, but has a promising outlook for Canada, our bonds and curreny.
Highlight:
We also asked Dave Rosenberg for his One Investment recommendation for a long term diversified portfolio. His answer: Canadian corporate bonds for their strong balance sheets, high quality, income, and that Canadian currency which he believes is going to continue to appreciate against the U.S. dollar for the foreseeable future.
This week on WealthTrack’s Financial Thought Leader series, an economist who spotted the storm clouds of the credit and housing bubbles early on. What does David Rosenberg see in our future now? Gluskin Sheff’s prescient forecaster is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. It is not easy being a Cassandra, warning of dangers ahead before they actually appear, until you are proven correct that is, as this week’s Financial Thought Leader guest has been again and again. He is David Rosenberg, former Chief North American Economist at Merrill Lynch, which became Bank of America- Merrill Lynch during the financial meltdown. Dave is considered required reading by institutional investors, who voted him on the “All American All Star Team” for the last four years and ranked him the street’s number two economist in 2008. Last year he decided to return to his native Canada, where he is chief economist and strategist at wealth management firm Gluskin Sheff. Dave wrote his first report warning of the developing housing bubble in 2004 and continued to sound the alarm about excess credit, overvalued home prices and markets, and economic peril until the world caught up with him in 2008. He even predicted the massive government intervention that we’ve seen since.
Before we find out his current thinking, I want to share one of his recent charts which tells a market tale few others anticipate. Are you surprised by the stock market’s volatility? Don’t be. In a recent “Breakfast With Dave” commentary, he noted “we are into an unprecedented period of market volatility as the secular forces of deflation bump against recurring rounds of policy reflation.” Showing his readers this year’s chart of multiple “whippy rallies and selloffs,” he notes that the pattern of the last twelve years of “no return but massive swings along the way” are continuing this year. You heard that right- massive swings but no return!
Fasten your seatbelts and also think about Rosenberg’s bullish and contrarian call on bonds, which have and still are leaving stocks in the dust. What about his contrarian outlook for the economy? I asked him.
DAVE ROSENBERG: Well, I think that what we’re starting to see is a very discernable slowing and economic growth take place. It’s tough to discern whether we’re going to get into the classic double-dip recession. I’m not quite there yet, but I do think we’re starting to see visible signs that the economy is moderating and quite rapidly, and really what’s happened, Consuelo, is that we’re seeing the effects of the inventory contribution to the economy start to fade. We’re seeing the effects of all the government stimulus start to fade, and I’ve been saying for a while it’ll be interesting to see once the fiscal benefits start to subside and the impact of what the Fed has done, not just in interest rates but on its balance sheet you start to subside, how does the U.S. economy really look like organically, without the crutch of all the stimulus and getting past this inventory cycle, and I think we’re heading into an environment where GDP growth will be basically 1 to 1.5%, not much better than that. So it might not be a classic double-dip recession, but for a lot of people it’s going to feel like one.
CONSUELO MACK: So let me ask you about that. So 1 to 2%, is that real growth? That’s ex inflation, is that right?
DAVE ROSENBERG: That’s real growth. That’s actually a great question, because we’re heading very quickly now towards a period of price stability where there is no inflation, where real GDP growth and nominal GDP growth are actually one and the same. So we’re talking right now about 1 to 2% real. Maybe we’re talking 2 to 3%in terms of nominal, but it’s the direction that matters for financial markets, and the direction of growth right now is down. It’s not negative, but it is heading in the wrong direction.
CONSUELO MACK: So 1 to 2% growth. What’s that going to feel like?
DAVE ROSENBERG: Well, what it’s going to feel like is a higher unemployment rate, and for a politician, I think that for anybody on Main Street, that’s what really matters. What’s the unemployment rate doing? And you don’t need to have negative GDP growth to have the unemployment rate go up. If the potential growth rate for the economy is, say, 3%, and all you’re really doing is growing at, say, 1.5%, you’re building up excess capacity in the economy. That shows up in the unemployment rate. So you get 1 to 2% growth in the economy- real terms, the unemployment rate by the end of the year is going to be at a new high.
CONSUELO MACK: And let me ask you about the unemployment rate, because right now it’s in the high single digits, but you basically said that the unemployment rate that we all follow is really not the true unemployment rate, that it’s actually probably almost twice that. So how do you look at and measure the true unemployment rate? What is it?
DAVE ROSENBERG: Well, one of the things that business can do, they don’t have to fire you. They can cut your hours in half. So let’s say you get your hours cut in half. You’re still technically counted as employed, but you’re only working half the time. So there is something called the U6 unemployment rate. There’s actually six different measures. The U6 is the broadest form that will take into account, for example, the shift towards part-time and away from full-time, employers cutting hours. This all-encompassing unemployment rate is actually right now almost 17%.
CONSUELO MACK: Dave, inflation. You’re predicting zero inflation or lower. Why?
DAVE ROSENBERG: Well, we’re past the peak rate of growth for the inventory cycle, past the peak of all the stimulus, past the peak rate of growth for the economy. And what are we left with? We’ve got headline inflation, no matter how you measure it, at two percent. The core rate of inflation is below one percent.
CONSUELO MACK: Ex food and energy. Right?
DAVE ROSENBERG: Ex food and energy, and I don’t know where all the inflation-phobes come from. I guess maybe they’re looking what the Fed is doing. The Fed is boosting the money supply. One part of the money supply is going up, the part that the Fed controls, but they’re not doing it in a vacuum. Right? They’re basically boosting the money supply, and it’s almost like fixing a leaky boat, because as they boost the money supply what they’re doing is trying to offset this ongoing credit contraction of the private sector. It’s hard for me to believe that we’re going to get inflation, and we’ve got double-digit unemployment. We’ve got widespread excess capacity in the economy, and we’re in the middle of this post bubble credit collapse with widespread excess capacity. It doesn’t make sense to me that we’re going to get inflation. I think we’re going to get price stability. I actually think that’s a good thing, because it means that there’s going to be room for interest rates to go even lower at the longer end of the yield curve.
CONSUELO MACK: Oh, at the longer end, because I was going to say, what does this mean for Fed policy, first of all, if we’re talking about basically zero inflation?
DAVE ROSENBERG: Well, if we get to zero inflation, the Fed is going to keep interest rates at zero. We get into a deflation, we’ve already seen how aggressive Ben Bernanke can be, and he’ll be more aggressive in terms of expanding the Fed’s balance sheet if we get to a period where prices actually start to go down, but I think we have to understand, people still go back to that period of the 1970s and early ’80s. They think that was the normal experience, inflation. When you look at history, that was actually the anomaly. Okay? And we had a situation where from 1980 to 2007, we had the inflation rate go from 15% down to three. Yet at the same time, when you take a look at the ratio of total debt in society as a share of GDP, it went from 120% to 230%; it almost doubled and yet inflation came down, and that’s because we had all these great supply side developments take place. Right? We had lower marginal tax rates. We had freer trade, deregulation, productivity, technology, and here we are, and the debt to GDP ratio is starting to go down. We’re on the other side of the credit chart.
CONSUELO MACK: Oh, interesting.
DAVE ROSENBERG: And so what’s happening is that this is no longer both supply side-led disinflation. We’re talking about a deficiency of aggregate demand caused by this ongoing credit contraction. So we’ve already got these levels of underlying inflation just barely above zero as it is. So you can’t rule out at this stage, never mind a double dip, you can’t rule out the prospect that we actually go into a deflationary experience. This is what’s on Bernanke’s mind right now, by the way, but I think that in all likelihood we’re going to go into a prolonged period of price stability.
CONSUELO MACK: That’s great. A prolonged period of price stability would be a good thing. Two things. Number one- the people who are the inflation-phobes are looking at the burgeoning Federal debt, which has to be financed. So they’re saying that’s got to be inflationary. Right?
DAVE ROSENBERG: Well, that’s only one part of the pie, because the Federal government debt is going up. It’s no different than looking at the Fed balance sheet. You look at the Fed balance sheet. If you look at the monetary base, you say, “Wow, we’re going to get big inflation,” but you have to take a look at what the Federal government’s been doing and what Ben Bernanke is doing in the context of this epic contraction of private sector credit.
CONSUELO MACK: So that’s it. One is canceling out the other.
DAVE ROSENBERG: One is canceling out the other, exactly. And my concern, or not concern, my forecast actually is that when you take a look historically at debt deleveraging, whether you walk away from your debt and go delinquent, or there’s some people that actually are paying down their debt, these are actually very deflationary trends. My sense is that, and if you look at history, these deleveraging cycles last six to seven years. What have we been through? Maybe the second year. These tend to last six to seven years historically. That’s just an average. Look how long it’s lasted in Japan. Yet look what’s happening in terms of fiscal policy. A year ago, everybody’s begging for fiscal stimulus. All of a sudden we hit a 10% deficit GDP ratio, $1.5 trillion dollars of deficits. Our debt to GDP ratio at the government levels about to hit 100%, and right now the general population is saying no. It’s enough. No more fiscal stimulus.
So my stance is that you’re going to have the deleveraging in the private sector ongoing at a time when you’re going to find that the public sector- look what’s happened to state and local government level. They’re going to be deleveraging as well. So that, to me, I know this is not a consensus forecast. I think that maybe people want to believe that we’re going to have inflation because that’ll be commensurate with booming economy and booming demand, so people want to think that inflation is going to come, but I actually think quite the opposite. I think there’s a greater chance we will actually slip into an outright deflationary experience.
CONSUELO MACK: So what you’re describing, though, to me sounds scary potentially, too, because the other argument that people have about the fear of a double dip is that the Federal government, the Fed specifically, has used its arsenal. And so if we do slip into a deflationary period, and in a time when the population is saying, you know, we don’t want to take on any more debt, isn’t that potentially a dangerous mix?
DAVE ROSENBERG: Well, the reason why I said it’s scary is because it’s something that we haven’t really dealt with in the post World War II experience where we’ve only dealt with inflation. When you take a look historically, and there was an economy and there was a capital market globally going back before World War II- that’s where most of the current data go back to, the monthly data that we pay attention to- but there was an economy and a capital market before 1945, and you take a look at centuries worth of data, and actually you had as many periods of deflation as you had of inflation. It’s scary because it’s something–
CONSUELO MACK: New.
DAVE ROSENBERG: New. What it means is that it is going to be very difficult for companies to raise prices. It means they’re going to have to focus on productivity to make sure that they’re going to be generating profits. So it’s going to be a whole new world in that sense, and it also means that people think that these low interest rates are an abnormality. No. They’re going to be here to stay. So like anything else, in an inflationary world, there’s winners and there’s losers. In a deflationary world, there will be winners and there will be losers, and the reason why it’s scary is because it’s something new, but believe me, it’s something that we will be able to cope with.
CONSUELO MACK: So let’s talk about what some of the winners might be, and I know one of the things that you’ve said is that the most important driver of bond yields is the direction of inflation, and again, one of your most prescient calls has been the fact that you have predicted the Treasury yields, for instance, yields on Treasury bonds, would continue to go lower and, in fact, they have much to everyone else’s surprise. So what’s the outlook for bond yields and for Treasuries?
DAVE ROSENBERG: Well, it’s always been a very interesting debate, but I think the proof of the pudding is in the eating. We’ve come off a $1.5 trillion fiscal deficit, and I think most people would have said, you know, interest rates are just going to shoot up, but they didn’t. The ten-year yields are right back down to 3% or lower. I’m not going to sit here and say, “Oh, no, the supply of bonds and the fiscal policy has no influence on long-term interest rates.” They do. I’ve run the models. They have about a 40% correlation historically. It’s not zero; it’s 40%. But 80% of the direction of bond yields is determined by inflation. It’s got double the impact, and I think that’s the big story here. The big story is this ongoing downdraft in the inflation rate, and my sense is that it’s going to continue for a whole host of reasons.
And for investors what’s important is that in an inflationary environment, go out and buy all the growth stocks you can possibly get. In a deflationary environment, bonds are king. You want to squeeze as much income out of the portfolio as you possibly can, and that’s what we’ve been doing with our clients’ money at Gluskin Sheff, is moving them increasingly into our bond strategies, and it’s working very well.
CONSUELO MACK: Because one of your investment themes is to look for safety in income at a reasonable price, so where can you find safety in income at a reasonable price in today’s markets?
DAVE ROSENBERG: In other words, it’s called SIRP, and we call it from ZIRP to SIRP: zero interest rate policy to safety in income at a reasonable price. There’s different ways that you can do it. People always think that, because I’m very cautious or I’m bearish, that I’m just saying go and just buy Treasuries or just buy Canadian government bonds. No. I’m saying actually in some cases, corporate balance sheets are in better shape than some government balance sheets are.
In fact, and this is something positive that I’m going to offer the viewership, is that this is not 2000, 2001 when there was a corporate balance sheet recession. This, of course, is a household balance sheet recession as it pertained especially to the mortgages. It’s maybe, in some sense, in the state and local governments. It’s a government balance sheet recession, but actually corporate balance sheets are in great shape when you take a look at liquid asset ratios, interest coverage, debt equity. The corporate balance sheets in most cases are in the best shape they’ve been in 50 years. So I take a look at the equity market. The equity market, to me, is a play off the income statement. In a period of disinflation or deflation, I’m not so sure earnings are going to be strong, but corporate bonds are really priced off the corporate balance sheet, so I would say high-quality corporate bonds, a very good place to be.
CONSUELO MACK: Long term? I mean, what maturities?
DAVE ROSENBERG: Yes. I would be say that the higher the quality, the longer the duration. The lower the quality, the shorter the duration.
CONSUELO MACK: This is, as you know, so contrary to just about every other piece of advice that you hear out there- whereas everyone’s saying, you know, shorten your maturities. Interest rates are going up, and don’t be at the long end. That’s where you’re most vulnerable. You’re saying, in fact, that could be the sweet spot, right, of high-quality credit, is the longer maturities.
DAVE ROSENBERG: I’m saying that I’ve spent most of my professional life being a contrarian, and I’m still standing, and my credibility is intact, or so I’m pretty sure it is.
CONSUELO MACK: Yes, it is.
DAVE ROSENBERG: And so nothing wrong. Actually, being a contrarian often is quite profitable, but I do believe that the trend on long-term interest rates are going to be down, not up. Now, if you have an inflation view, and you have a view that the Fed’s going to have to raise interest rates and taking what they call the carry-away, well, then bonds will get carried away, too. If you take a look, when you go into a bear market in bonds, I’m not talking about a periodic spasm. A real, true bear market in fixed income happens when you have inflation and when the Fed is tightening interest rates. I don’t think we’re going to have either, and so I think that corporate bonds are going to be a very good place to be, and I think that’s really what you want to focus on in a deflationary environment. Am I bearish on the entire stock market? Well, of course not. There’s about 20% of the stock market again that we have put our clients into. What are–
CONSUELO MACK: Such as.
DAVE ROSENBERG: Well, like dividend growth, dividend yield, stable income streams, defensive sectors, not overly cyclical sectors.
CONSUELO MACK: And defensive sectors being–
DAVE ROSENBERG: Oh, like staples, for example. Okay, we’re talking staples, talking health care, talking utilities, talking about the parts of the economy that will not be hurt as badly, if at all, by these deflationary pressures. They will tend to hurt more the companies that are dependent on pricing power. That tends to be in the more cyclical segments of the stock market. So there is a segment of equities, and so once again, you can squeeze income, and it’s interesting that this past year one of the themes nobody really talks about are that the dividend payouts have gone up dramatically. The dividend yield has improved. So there are segments, you know. Despite the fact that I’m, say, bearish on equities as an asset class, I would never tell a client, “be zero equities.” I’m not zero equities, but I would say have 20% in the equity market, but make sure that what you’re in are stable industries that also spin off an income stream, because it’s very important in an inflationary environment that you want to secure that income.
CONSUELO MACK: What are some of the other investment themes that you are advocating for your clients? I know one of them is gold and precious metals. Right? It’s so interesting. In a deflationary or at least a flat inflationary environment or disinflationary environment, you’re actually recommending gold. Why?
DAVE ROSENBERG: Right. Well, because gold is a hedge against a lot of things. People just think about inflation because it’s a store value, but look what happened in the 1930s. In the 1930s, we can’t really look at the U.S. dollar price of gold, because FDR fixed it twice. So deflationary experience in the 1930s, the sterling price of gold doubled, and we’ve seen over the course of the past 10 years gold rally in deflationary episodes. We had a couple of inflationary episodes, for example, during that period when the credit bubble was really forming in 2005, 2006, 2007. We had a temporary blip in inflation. We know gold can do well in inflation. Why does gold do well in deflation? Especially in a deflation, when you have these massive debt loads globally, right– and not just here but also what’s happening abroad. Look at Japan at 200% debt to GDP ration. The level of outstanding debt globally to GDP has never been as high as it is today, but what happens in a deflationary environment is that the real level of debt actually goes up. It makes it that much harder to get these government and household balance sheets into better shape. So it leads inherently to more instability, and so gold.
What is gold a hedge against? Gold is a hedge against these lingering concerns, that aren’t going to go away, over the integrity of the global financial system because of these monumental debt levels that we have in many governments around the world and in many households around the world as well. So that’s why deflation, because it tends to be destabilizing, but the time that you don’t want to own gold is when you have the three Ps: Peace, prosperity and just outright price stability. And that’s what we had, for example, in the 1980s and 1990s.
There’s other reasons why gold is very attractive right now, and this comes down to what economists can do, if they do it correctly, which is draw supply and demand curves. The supply and demand. The demand for gold is going up, and I’m not talking about demand for jewelry. I’m talking about demand by Asian central banks that are diversifying out of dollars, out of euros and moving into gold. And I think gold, just based, you know, you can have your own deflation view, your own inflation view, just based on how the supply and demand curves are shifting over time. I think gold is going to go to new highs over the next several years and will be a very good place to be.
CONSUELO MACK: So gold, that’s the metal. What about gold mining stocks? Is that another way to play it or–
DAVE ROSENBERG: Absolutely. Well, at Gluskin Sheff, we don’t actually buy the physical commodity.
CONSUELO MACK: Oh, you don’t.
DAVE ROSENBERG: No, we invest in securities. So we’d be buying gold and silver mining companies. You know, it could be junior mining companies, or it could be the large caps, and we have, right now in terms of our equity portfolios, the highest share of gold and silver that it’s ever had before. So we are putting our money where our mouth is, and it’s one of the reasons why. You know, people look at Canada as an oil play, but actually if you take a look at the Canadian stock market, 13% of the Canadian stock market right now is comprised of gold and silver, where it’s less than 1% in the U.S. and one of the reasons why that’s adding more allure for the Canadian dollar.
We talked about dividends. We talked about income. We talked about gold and silver, but we should also be discussing what currency should you be in. You want to be in a good currency.
CONSUELO MACK: So tell us.
DAVE ROSENBERG: Well, I think that there’s a handful of them around the world for countries that really have true triple-A government balance sheets, where there was conservative governments. You know, it’s very interesting that in the U.S. the pendulum has shifted to the left. We’ll see after the November elections, mid term elections, how it shifts back to the center. Canada has got a conservative government, a very pro business, pro capitalist government. This is actually very rare that we’ve ever seen a right of center government in Canada.
CONSUELO MACK: In Canada.
DAVE ROSENBERG: Well, for decades, Canada was viewed as almost like European, and so Canada shifted to the right politically and economically, and the U.S. has tilted more to the left. That does not happen very regularly. But you know what? Global capital will flow to where it is treated the best, and when you take a look at where pro business policies are right now, it’s in Canada.
CONSUELO MACK: So one of the things that you’ve told clients, you’ve been quoted saying, is that this is a rent-a-rally market; that you don’t really want to go long for prolonged periods of time. Is that right? Or explain to me what you mean by this is a rent-a-rally market.
DAVE ROSENBERG: Well, it comes down to the title I’ve been using in my presentation package now for over a year. I’ve never done that. I’ve never gone a full year and never changed the title. It’s called “Focus on the Forest, Not the Trees.” So I start first principles. What is the primary trend line? What does that look like? Because if you can get the primary trend correctly, it’s going to look after a lot of other things. So for example, we have to understand that the stock market moves in long cycles. Okay? So we’re getting into the real technical analysis right now, but the stock market has had this historical pattern of moving in long cycles.
CONSUELO MACK: Eighteen years.
DAVE ROSENBERG: Yeah, roughly 18 years, and so, boy, do I wish this was back to 1982 to 2000, 18-year secular bull market. Boy, do I ever. I can’t wait to turn bullish again, but who would have known in 1987, as the stock market went down 23% in one day in October 1987? That was really– if you look at it today, it’s like a thumbnail on the long-term chart. It was a great buying opportunity. Who knew back then that there was another 13 years to go before we’d hit the peak, and that’s the story. The story is that in the secular primary uptrend in the stock market, sell-offs are opportunities to get in the better price. Now, we’re in a secular bear market where it’s different, and it means you aren’t going to get rallies, but these are rallies that you rent. You don’t own them.
CONSUELO MACK: So the point is, don’t buy on the dip, but should we sell on the rally?
DAVE ROSENBERG: Yes. Even in this treacherous, tumultuous environment, and even though there’s fewer needles in the haystack than there have been in the past, there are still different ways that you could grow your capital prudently, even in today’s environment.
CONSUELO MACK: So Dave Rosenberg from Gluskin Sheff in Canada, thank you so much for joining us here back in the States for Wealth Track.
DAVE ROSENBERG: Thank you for inviting me back.
CONSUELO MACK: We also asked Dave Rosenberg for his One Investment recommendation for a long term diversified portfolio. His answer: Canadian corporate bonds for their strong balance sheets, high quality, income, and that Canadian currency which he believes is going to continue to appreciate against the U.S. dollar for the foreseeable future.
And with that idea, we will conclude this edition of WealthTrack. If you are interested in seeing more of our interview with other Financial Thought Leaders and Great Investor guests, go to our website, wealthtrack.com, and click on our WealthTrack Extra feature. We have added some new ones to our selection. Thank you for visiting with us and make the week ahead a profitable and a productive one.
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Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham & Merrill Lynch Fund Managers Survey
Highlight:
We also asked Dave Rosenberg for his One Investment recommendation for a long term diversified portfolio. His answer: Canadian corporate bonds for their strong balance sheets, high quality, income, and that Canadian currency which he believes is going to continue to appreciate against the U.S. dollar for the foreseeable future.
This week on WealthTrack’s Financial Thought Leader series, an economist who spotted the storm clouds of the credit and housing bubbles early on. What does David Rosenberg see in our future now? Gluskin Sheff’s prescient forecaster is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. It is not easy being a Cassandra, warning of dangers ahead before they actually appear, until you are proven correct that is, as this week’s Financial Thought Leader guest has been again and again. He is David Rosenberg, former Chief North American Economist at Merrill Lynch, which became Bank of America- Merrill Lynch during the financial meltdown. Dave is considered required reading by institutional investors, who voted him on the “All American All Star Team” for the last four years and ranked him the street’s number two economist in 2008. Last year he decided to return to his native Canada, where he is chief economist and strategist at wealth management firm Gluskin Sheff. Dave wrote his first report warning of the developing housing bubble in 2004 and continued to sound the alarm about excess credit, overvalued home prices and markets, and economic peril until the world caught up with him in 2008. He even predicted the massive government intervention that we’ve seen since.
Before we find out his current thinking, I want to share one of his recent charts which tells a market tale few others anticipate. Are you surprised by the stock market’s volatility? Don’t be. In a recent “Breakfast With Dave” commentary, he noted “we are into an unprecedented period of market volatility as the secular forces of deflation bump against recurring rounds of policy reflation.” Showing his readers this year’s chart of multiple “whippy rallies and selloffs,” he notes that the pattern of the last twelve years of “no return but massive swings along the way” are continuing this year. You heard that right- massive swings but no return!
Fasten your seatbelts and also think about Rosenberg’s bullish and contrarian call on bonds, which have and still are leaving stocks in the dust. What about his contrarian outlook for the economy? I asked him.
DAVE ROSENBERG: Well, I think that what we’re starting to see is a very discernable slowing and economic growth take place. It’s tough to discern whether we’re going to get into the classic double-dip recession. I’m not quite there yet, but I do think we’re starting to see visible signs that the economy is moderating and quite rapidly, and really what’s happened, Consuelo, is that we’re seeing the effects of the inventory contribution to the economy start to fade. We’re seeing the effects of all the government stimulus start to fade, and I’ve been saying for a while it’ll be interesting to see once the fiscal benefits start to subside and the impact of what the Fed has done, not just in interest rates but on its balance sheet you start to subside, how does the U.S. economy really look like organically, without the crutch of all the stimulus and getting past this inventory cycle, and I think we’re heading into an environment where GDP growth will be basically 1 to 1.5%, not much better than that. So it might not be a classic double-dip recession, but for a lot of people it’s going to feel like one.
CONSUELO MACK: So let me ask you about that. So 1 to 2%, is that real growth? That’s ex inflation, is that right?
DAVE ROSENBERG: That’s real growth. That’s actually a great question, because we’re heading very quickly now towards a period of price stability where there is no inflation, where real GDP growth and nominal GDP growth are actually one and the same. So we’re talking right now about 1 to 2% real. Maybe we’re talking 2 to 3%in terms of nominal, but it’s the direction that matters for financial markets, and the direction of growth right now is down. It’s not negative, but it is heading in the wrong direction.
CONSUELO MACK: So 1 to 2% growth. What’s that going to feel like?
DAVE ROSENBERG: Well, what it’s going to feel like is a higher unemployment rate, and for a politician, I think that for anybody on Main Street, that’s what really matters. What’s the unemployment rate doing? And you don’t need to have negative GDP growth to have the unemployment rate go up. If the potential growth rate for the economy is, say, 3%, and all you’re really doing is growing at, say, 1.5%, you’re building up excess capacity in the economy. That shows up in the unemployment rate. So you get 1 to 2% growth in the economy- real terms, the unemployment rate by the end of the year is going to be at a new high.
CONSUELO MACK: And let me ask you about the unemployment rate, because right now it’s in the high single digits, but you basically said that the unemployment rate that we all follow is really not the true unemployment rate, that it’s actually probably almost twice that. So how do you look at and measure the true unemployment rate? What is it?
DAVE ROSENBERG: Well, one of the things that business can do, they don’t have to fire you. They can cut your hours in half. So let’s say you get your hours cut in half. You’re still technically counted as employed, but you’re only working half the time. So there is something called the U6 unemployment rate. There’s actually six different measures. The U6 is the broadest form that will take into account, for example, the shift towards part-time and away from full-time, employers cutting hours. This all-encompassing unemployment rate is actually right now almost 17%.
CONSUELO MACK: Dave, inflation. You’re predicting zero inflation or lower. Why?
DAVE ROSENBERG: Well, we’re past the peak rate of growth for the inventory cycle, past the peak of all the stimulus, past the peak rate of growth for the economy. And what are we left with? We’ve got headline inflation, no matter how you measure it, at two percent. The core rate of inflation is below one percent.
CONSUELO MACK: Ex food and energy. Right?
DAVE ROSENBERG: Ex food and energy, and I don’t know where all the inflation-phobes come from. I guess maybe they’re looking what the Fed is doing. The Fed is boosting the money supply. One part of the money supply is going up, the part that the Fed controls, but they’re not doing it in a vacuum. Right? They’re basically boosting the money supply, and it’s almost like fixing a leaky boat, because as they boost the money supply what they’re doing is trying to offset this ongoing credit contraction of the private sector. It’s hard for me to believe that we’re going to get inflation, and we’ve got double-digit unemployment. We’ve got widespread excess capacity in the economy, and we’re in the middle of this post bubble credit collapse with widespread excess capacity. It doesn’t make sense to me that we’re going to get inflation. I think we’re going to get price stability. I actually think that’s a good thing, because it means that there’s going to be room for interest rates to go even lower at the longer end of the yield curve.
CONSUELO MACK: Oh, at the longer end, because I was going to say, what does this mean for Fed policy, first of all, if we’re talking about basically zero inflation?
DAVE ROSENBERG: Well, if we get to zero inflation, the Fed is going to keep interest rates at zero. We get into a deflation, we’ve already seen how aggressive Ben Bernanke can be, and he’ll be more aggressive in terms of expanding the Fed’s balance sheet if we get to a period where prices actually start to go down, but I think we have to understand, people still go back to that period of the 1970s and early ’80s. They think that was the normal experience, inflation. When you look at history, that was actually the anomaly. Okay? And we had a situation where from 1980 to 2007, we had the inflation rate go from 15% down to three. Yet at the same time, when you take a look at the ratio of total debt in society as a share of GDP, it went from 120% to 230%; it almost doubled and yet inflation came down, and that’s because we had all these great supply side developments take place. Right? We had lower marginal tax rates. We had freer trade, deregulation, productivity, technology, and here we are, and the debt to GDP ratio is starting to go down. We’re on the other side of the credit chart.
CONSUELO MACK: Oh, interesting.
DAVE ROSENBERG: And so what’s happening is that this is no longer both supply side-led disinflation. We’re talking about a deficiency of aggregate demand caused by this ongoing credit contraction. So we’ve already got these levels of underlying inflation just barely above zero as it is. So you can’t rule out at this stage, never mind a double dip, you can’t rule out the prospect that we actually go into a deflationary experience. This is what’s on Bernanke’s mind right now, by the way, but I think that in all likelihood we’re going to go into a prolonged period of price stability.
CONSUELO MACK: That’s great. A prolonged period of price stability would be a good thing. Two things. Number one- the people who are the inflation-phobes are looking at the burgeoning Federal debt, which has to be financed. So they’re saying that’s got to be inflationary. Right?
DAVE ROSENBERG: Well, that’s only one part of the pie, because the Federal government debt is going up. It’s no different than looking at the Fed balance sheet. You look at the Fed balance sheet. If you look at the monetary base, you say, “Wow, we’re going to get big inflation,” but you have to take a look at what the Federal government’s been doing and what Ben Bernanke is doing in the context of this epic contraction of private sector credit.
CONSUELO MACK: So that’s it. One is canceling out the other.
DAVE ROSENBERG: One is canceling out the other, exactly. And my concern, or not concern, my forecast actually is that when you take a look historically at debt deleveraging, whether you walk away from your debt and go delinquent, or there’s some people that actually are paying down their debt, these are actually very deflationary trends. My sense is that, and if you look at history, these deleveraging cycles last six to seven years. What have we been through? Maybe the second year. These tend to last six to seven years historically. That’s just an average. Look how long it’s lasted in Japan. Yet look what’s happening in terms of fiscal policy. A year ago, everybody’s begging for fiscal stimulus. All of a sudden we hit a 10% deficit GDP ratio, $1.5 trillion dollars of deficits. Our debt to GDP ratio at the government levels about to hit 100%, and right now the general population is saying no. It’s enough. No more fiscal stimulus.
So my stance is that you’re going to have the deleveraging in the private sector ongoing at a time when you’re going to find that the public sector- look what’s happened to state and local government level. They’re going to be deleveraging as well. So that, to me, I know this is not a consensus forecast. I think that maybe people want to believe that we’re going to have inflation because that’ll be commensurate with booming economy and booming demand, so people want to think that inflation is going to come, but I actually think quite the opposite. I think there’s a greater chance we will actually slip into an outright deflationary experience.
CONSUELO MACK: So what you’re describing, though, to me sounds scary potentially, too, because the other argument that people have about the fear of a double dip is that the Federal government, the Fed specifically, has used its arsenal. And so if we do slip into a deflationary period, and in a time when the population is saying, you know, we don’t want to take on any more debt, isn’t that potentially a dangerous mix?
DAVE ROSENBERG: Well, the reason why I said it’s scary is because it’s something that we haven’t really dealt with in the post World War II experience where we’ve only dealt with inflation. When you take a look historically, and there was an economy and there was a capital market globally going back before World War II- that’s where most of the current data go back to, the monthly data that we pay attention to- but there was an economy and a capital market before 1945, and you take a look at centuries worth of data, and actually you had as many periods of deflation as you had of inflation. It’s scary because it’s something–
CONSUELO MACK: New.
DAVE ROSENBERG: New. What it means is that it is going to be very difficult for companies to raise prices. It means they’re going to have to focus on productivity to make sure that they’re going to be generating profits. So it’s going to be a whole new world in that sense, and it also means that people think that these low interest rates are an abnormality. No. They’re going to be here to stay. So like anything else, in an inflationary world, there’s winners and there’s losers. In a deflationary world, there will be winners and there will be losers, and the reason why it’s scary is because it’s something new, but believe me, it’s something that we will be able to cope with.
CONSUELO MACK: So let’s talk about what some of the winners might be, and I know one of the things that you’ve said is that the most important driver of bond yields is the direction of inflation, and again, one of your most prescient calls has been the fact that you have predicted the Treasury yields, for instance, yields on Treasury bonds, would continue to go lower and, in fact, they have much to everyone else’s surprise. So what’s the outlook for bond yields and for Treasuries?
DAVE ROSENBERG: Well, it’s always been a very interesting debate, but I think the proof of the pudding is in the eating. We’ve come off a $1.5 trillion fiscal deficit, and I think most people would have said, you know, interest rates are just going to shoot up, but they didn’t. The ten-year yields are right back down to 3% or lower. I’m not going to sit here and say, “Oh, no, the supply of bonds and the fiscal policy has no influence on long-term interest rates.” They do. I’ve run the models. They have about a 40% correlation historically. It’s not zero; it’s 40%. But 80% of the direction of bond yields is determined by inflation. It’s got double the impact, and I think that’s the big story here. The big story is this ongoing downdraft in the inflation rate, and my sense is that it’s going to continue for a whole host of reasons.
And for investors what’s important is that in an inflationary environment, go out and buy all the growth stocks you can possibly get. In a deflationary environment, bonds are king. You want to squeeze as much income out of the portfolio as you possibly can, and that’s what we’ve been doing with our clients’ money at Gluskin Sheff, is moving them increasingly into our bond strategies, and it’s working very well.
CONSUELO MACK: Because one of your investment themes is to look for safety in income at a reasonable price, so where can you find safety in income at a reasonable price in today’s markets?
DAVE ROSENBERG: In other words, it’s called SIRP, and we call it from ZIRP to SIRP: zero interest rate policy to safety in income at a reasonable price. There’s different ways that you can do it. People always think that, because I’m very cautious or I’m bearish, that I’m just saying go and just buy Treasuries or just buy Canadian government bonds. No. I’m saying actually in some cases, corporate balance sheets are in better shape than some government balance sheets are.
In fact, and this is something positive that I’m going to offer the viewership, is that this is not 2000, 2001 when there was a corporate balance sheet recession. This, of course, is a household balance sheet recession as it pertained especially to the mortgages. It’s maybe, in some sense, in the state and local governments. It’s a government balance sheet recession, but actually corporate balance sheets are in great shape when you take a look at liquid asset ratios, interest coverage, debt equity. The corporate balance sheets in most cases are in the best shape they’ve been in 50 years. So I take a look at the equity market. The equity market, to me, is a play off the income statement. In a period of disinflation or deflation, I’m not so sure earnings are going to be strong, but corporate bonds are really priced off the corporate balance sheet, so I would say high-quality corporate bonds, a very good place to be.
CONSUELO MACK: Long term? I mean, what maturities?
DAVE ROSENBERG: Yes. I would be say that the higher the quality, the longer the duration. The lower the quality, the shorter the duration.
CONSUELO MACK: This is, as you know, so contrary to just about every other piece of advice that you hear out there- whereas everyone’s saying, you know, shorten your maturities. Interest rates are going up, and don’t be at the long end. That’s where you’re most vulnerable. You’re saying, in fact, that could be the sweet spot, right, of high-quality credit, is the longer maturities.
DAVE ROSENBERG: I’m saying that I’ve spent most of my professional life being a contrarian, and I’m still standing, and my credibility is intact, or so I’m pretty sure it is.
CONSUELO MACK: Yes, it is.
DAVE ROSENBERG: And so nothing wrong. Actually, being a contrarian often is quite profitable, but I do believe that the trend on long-term interest rates are going to be down, not up. Now, if you have an inflation view, and you have a view that the Fed’s going to have to raise interest rates and taking what they call the carry-away, well, then bonds will get carried away, too. If you take a look, when you go into a bear market in bonds, I’m not talking about a periodic spasm. A real, true bear market in fixed income happens when you have inflation and when the Fed is tightening interest rates. I don’t think we’re going to have either, and so I think that corporate bonds are going to be a very good place to be, and I think that’s really what you want to focus on in a deflationary environment. Am I bearish on the entire stock market? Well, of course not. There’s about 20% of the stock market again that we have put our clients into. What are–
CONSUELO MACK: Such as.
DAVE ROSENBERG: Well, like dividend growth, dividend yield, stable income streams, defensive sectors, not overly cyclical sectors.
CONSUELO MACK: And defensive sectors being–
DAVE ROSENBERG: Oh, like staples, for example. Okay, we’re talking staples, talking health care, talking utilities, talking about the parts of the economy that will not be hurt as badly, if at all, by these deflationary pressures. They will tend to hurt more the companies that are dependent on pricing power. That tends to be in the more cyclical segments of the stock market. So there is a segment of equities, and so once again, you can squeeze income, and it’s interesting that this past year one of the themes nobody really talks about are that the dividend payouts have gone up dramatically. The dividend yield has improved. So there are segments, you know. Despite the fact that I’m, say, bearish on equities as an asset class, I would never tell a client, “be zero equities.” I’m not zero equities, but I would say have 20% in the equity market, but make sure that what you’re in are stable industries that also spin off an income stream, because it’s very important in an inflationary environment that you want to secure that income.
CONSUELO MACK: What are some of the other investment themes that you are advocating for your clients? I know one of them is gold and precious metals. Right? It’s so interesting. In a deflationary or at least a flat inflationary environment or disinflationary environment, you’re actually recommending gold. Why?
DAVE ROSENBERG: Right. Well, because gold is a hedge against a lot of things. People just think about inflation because it’s a store value, but look what happened in the 1930s. In the 1930s, we can’t really look at the U.S. dollar price of gold, because FDR fixed it twice. So deflationary experience in the 1930s, the sterling price of gold doubled, and we’ve seen over the course of the past 10 years gold rally in deflationary episodes. We had a couple of inflationary episodes, for example, during that period when the credit bubble was really forming in 2005, 2006, 2007. We had a temporary blip in inflation. We know gold can do well in inflation. Why does gold do well in deflation? Especially in a deflation, when you have these massive debt loads globally, right– and not just here but also what’s happening abroad. Look at Japan at 200% debt to GDP ration. The level of outstanding debt globally to GDP has never been as high as it is today, but what happens in a deflationary environment is that the real level of debt actually goes up. It makes it that much harder to get these government and household balance sheets into better shape. So it leads inherently to more instability, and so gold.
What is gold a hedge against? Gold is a hedge against these lingering concerns, that aren’t going to go away, over the integrity of the global financial system because of these monumental debt levels that we have in many governments around the world and in many households around the world as well. So that’s why deflation, because it tends to be destabilizing, but the time that you don’t want to own gold is when you have the three Ps: Peace, prosperity and just outright price stability. And that’s what we had, for example, in the 1980s and 1990s.
There’s other reasons why gold is very attractive right now, and this comes down to what economists can do, if they do it correctly, which is draw supply and demand curves. The supply and demand. The demand for gold is going up, and I’m not talking about demand for jewelry. I’m talking about demand by Asian central banks that are diversifying out of dollars, out of euros and moving into gold. And I think gold, just based, you know, you can have your own deflation view, your own inflation view, just based on how the supply and demand curves are shifting over time. I think gold is going to go to new highs over the next several years and will be a very good place to be.
CONSUELO MACK: So gold, that’s the metal. What about gold mining stocks? Is that another way to play it or–
DAVE ROSENBERG: Absolutely. Well, at Gluskin Sheff, we don’t actually buy the physical commodity.
CONSUELO MACK: Oh, you don’t.
DAVE ROSENBERG: No, we invest in securities. So we’d be buying gold and silver mining companies. You know, it could be junior mining companies, or it could be the large caps, and we have, right now in terms of our equity portfolios, the highest share of gold and silver that it’s ever had before. So we are putting our money where our mouth is, and it’s one of the reasons why. You know, people look at Canada as an oil play, but actually if you take a look at the Canadian stock market, 13% of the Canadian stock market right now is comprised of gold and silver, where it’s less than 1% in the U.S. and one of the reasons why that’s adding more allure for the Canadian dollar.
We talked about dividends. We talked about income. We talked about gold and silver, but we should also be discussing what currency should you be in. You want to be in a good currency.
CONSUELO MACK: So tell us.
DAVE ROSENBERG: Well, I think that there’s a handful of them around the world for countries that really have true triple-A government balance sheets, where there was conservative governments. You know, it’s very interesting that in the U.S. the pendulum has shifted to the left. We’ll see after the November elections, mid term elections, how it shifts back to the center. Canada has got a conservative government, a very pro business, pro capitalist government. This is actually very rare that we’ve ever seen a right of center government in Canada.
CONSUELO MACK: In Canada.
DAVE ROSENBERG: Well, for decades, Canada was viewed as almost like European, and so Canada shifted to the right politically and economically, and the U.S. has tilted more to the left. That does not happen very regularly. But you know what? Global capital will flow to where it is treated the best, and when you take a look at where pro business policies are right now, it’s in Canada.
CONSUELO MACK: So one of the things that you’ve told clients, you’ve been quoted saying, is that this is a rent-a-rally market; that you don’t really want to go long for prolonged periods of time. Is that right? Or explain to me what you mean by this is a rent-a-rally market.
DAVE ROSENBERG: Well, it comes down to the title I’ve been using in my presentation package now for over a year. I’ve never done that. I’ve never gone a full year and never changed the title. It’s called “Focus on the Forest, Not the Trees.” So I start first principles. What is the primary trend line? What does that look like? Because if you can get the primary trend correctly, it’s going to look after a lot of other things. So for example, we have to understand that the stock market moves in long cycles. Okay? So we’re getting into the real technical analysis right now, but the stock market has had this historical pattern of moving in long cycles.
CONSUELO MACK: Eighteen years.
DAVE ROSENBERG: Yeah, roughly 18 years, and so, boy, do I wish this was back to 1982 to 2000, 18-year secular bull market. Boy, do I ever. I can’t wait to turn bullish again, but who would have known in 1987, as the stock market went down 23% in one day in October 1987? That was really– if you look at it today, it’s like a thumbnail on the long-term chart. It was a great buying opportunity. Who knew back then that there was another 13 years to go before we’d hit the peak, and that’s the story. The story is that in the secular primary uptrend in the stock market, sell-offs are opportunities to get in the better price. Now, we’re in a secular bear market where it’s different, and it means you aren’t going to get rallies, but these are rallies that you rent. You don’t own them.
CONSUELO MACK: So the point is, don’t buy on the dip, but should we sell on the rally?
DAVE ROSENBERG: Yes. Even in this treacherous, tumultuous environment, and even though there’s fewer needles in the haystack than there have been in the past, there are still different ways that you could grow your capital prudently, even in today’s environment.
CONSUELO MACK: So Dave Rosenberg from Gluskin Sheff in Canada, thank you so much for joining us here back in the States for Wealth Track.
DAVE ROSENBERG: Thank you for inviting me back.
CONSUELO MACK: We also asked Dave Rosenberg for his One Investment recommendation for a long term diversified portfolio. His answer: Canadian corporate bonds for their strong balance sheets, high quality, income, and that Canadian currency which he believes is going to continue to appreciate against the U.S. dollar for the foreseeable future.
And with that idea, we will conclude this edition of WealthTrack. If you are interested in seeing more of our interview with other Financial Thought Leaders and Great Investor guests, go to our website, wealthtrack.com, and click on our WealthTrack Extra feature. We have added some new ones to our selection. Thank you for visiting with us and make the week ahead a profitable and a productive one.
www.saveriomanzo.com
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham & Merrill Lynch Fund Managers Survey
Friday, September 10, 2010
Gold Fever?
Gordon Pape does have some excellent insight. His most recent piece focuses on the prescious metal, Gold, and is worthy of a read.
Gold fever
by Gordon Pape
The price of bullion has experienced a huge run-up in the past decade. In 2000, you could have purchased an ounce of the yellow metal for less than $300 (U.S.). By early 2008, it had broken through the $1,000 an ounce barrier, only to pull back to below $750 in the fall of that year. But once stock markets went into a deep dive and the recession took hold, bullion rallied strongly. It moved back over $1,000 in late summer 2009 and by year-end had topped the $1,200 mark. After another pull-back early this year, it recovered its momentum and hit a record high of over $1,250.
Investors who had added precious metals funds to their portfolios were delighted as the profits piled up. The average fund in this category advanced almost 38 per cent in the year to July 31 and several returned more than 40 per cent.
There could be more gains to come. I have never been a gold bug but I now think there is at least a 50-50 chance that bullion could top $1,400 by the end of 2011. Some forecasts are much more aggressive; one commentator pointed out that in order to match the $850 price reached in the 1980s in inflation-adjusted terms, gold would have to trade around $2,250. That is a real possibility, he suggested.
While I don't expect we'll see that level any time soon, gold appears to have more upside at this stage. One reason is the on-going weakness of the American dollar. Bullion and the greenback have an inverse relationship and Washington's unofficial devaluation of its currency has been one of the main drivers in gold's rise. There is no reason to expect that policy to change soon as the U.S. struggles to raise its exports and recapture lost overseas markets. A weaker currency will help greatly.
In these circumstances, you may want to consider adding a precious metals fund to your portfolio, if you don't already have one. There are two in particular that I like.
RBC Global Precious Metals Fund. This is a long-time favourite of mine (my family owns units) and one of the best in the category. Chris Beer has done a great job with the fund, producing handsome profits in every year but two since he took over the managerial duties in 2003.
Gold fell into a slump in 2004, Beer's first full year at the helm, and like all funds in the category this one struggled. However, it rebounded strongly in 2005 and 2006, gaining 25 per cent and then 52 per cent. It tailed off in 2007 and after gold passed US$1,000 an ounce in March 2008, the bottom fell out of the market and the fund ended the year with a loss of 26.2 per cent. But 2009 was a different story with the fund gaining almost 66 per cent and it added almost 30 per cent more in the first eight months of 2010. The one-year return to July 31 was 37.6 per cent but the real eye-popping number is the ten-year average annual compound rate of return of 28.4 per cent. Long-term results of that magnitude are almost unheard-of in the fund industry.
The portfolio is heavily concentrated in Canadian mining stocks (86 per cent) with Australia, the U.K., and the U.S. the only other significant geographic positions.
Sentry Precious Metals Growth Fund/Class. This fund turned in an amazing performance over the 12 months to July 31 with a gain of 67.6 per cent. The 10-year average annual compound rate of return is 22.9 per cent, not as good as that of the RBC entry but impressive enough.
The portfolio is quite different from that of the RBC fund. You won't find any of the major companies such as Agnico-Eagle and Goldcorp in the top 10 holdings (they account for about 10 per cent of the assets in the RBC fund). Instead, manager Kevin MacLean places large bets on a few small companies. For example, the largest single holding at more than 20 per cent of the portfolio is Semafo Inc., a Canadian company that operates three gold mines in West Africa. The fund also has large positions in Red Back Mining (12.2 per cent of assets) and Golden Star Resources (10.8 per cent). Those stocks have all been doing well but that kind of concentration makes this fund riskier than one which is more diversified. So this fund is likely to be much more volatile – it is not for faint-hearted investors who will undoubtedly feel more comfortable with the RBC fund.
Of course, precious metals funds can be volatile at times so they won't be appropriate for anyone who is extremely risk-averse. But the long-term returns speak for themselves – the 10-year average annual gain for the category is 21.4 per cent. So the potential rewards are high but you must be willing to live with the inevitable ups and downs. Talk to your financial advisor about whether this type of fund is right for you.
by Gordon Pape
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Gold fever
by Gordon Pape
The price of bullion has experienced a huge run-up in the past decade. In 2000, you could have purchased an ounce of the yellow metal for less than $300 (U.S.). By early 2008, it had broken through the $1,000 an ounce barrier, only to pull back to below $750 in the fall of that year. But once stock markets went into a deep dive and the recession took hold, bullion rallied strongly. It moved back over $1,000 in late summer 2009 and by year-end had topped the $1,200 mark. After another pull-back early this year, it recovered its momentum and hit a record high of over $1,250.
Investors who had added precious metals funds to their portfolios were delighted as the profits piled up. The average fund in this category advanced almost 38 per cent in the year to July 31 and several returned more than 40 per cent.
There could be more gains to come. I have never been a gold bug but I now think there is at least a 50-50 chance that bullion could top $1,400 by the end of 2011. Some forecasts are much more aggressive; one commentator pointed out that in order to match the $850 price reached in the 1980s in inflation-adjusted terms, gold would have to trade around $2,250. That is a real possibility, he suggested.
While I don't expect we'll see that level any time soon, gold appears to have more upside at this stage. One reason is the on-going weakness of the American dollar. Bullion and the greenback have an inverse relationship and Washington's unofficial devaluation of its currency has been one of the main drivers in gold's rise. There is no reason to expect that policy to change soon as the U.S. struggles to raise its exports and recapture lost overseas markets. A weaker currency will help greatly.
In these circumstances, you may want to consider adding a precious metals fund to your portfolio, if you don't already have one. There are two in particular that I like.
RBC Global Precious Metals Fund. This is a long-time favourite of mine (my family owns units) and one of the best in the category. Chris Beer has done a great job with the fund, producing handsome profits in every year but two since he took over the managerial duties in 2003.
Gold fell into a slump in 2004, Beer's first full year at the helm, and like all funds in the category this one struggled. However, it rebounded strongly in 2005 and 2006, gaining 25 per cent and then 52 per cent. It tailed off in 2007 and after gold passed US$1,000 an ounce in March 2008, the bottom fell out of the market and the fund ended the year with a loss of 26.2 per cent. But 2009 was a different story with the fund gaining almost 66 per cent and it added almost 30 per cent more in the first eight months of 2010. The one-year return to July 31 was 37.6 per cent but the real eye-popping number is the ten-year average annual compound rate of return of 28.4 per cent. Long-term results of that magnitude are almost unheard-of in the fund industry.
The portfolio is heavily concentrated in Canadian mining stocks (86 per cent) with Australia, the U.K., and the U.S. the only other significant geographic positions.
Sentry Precious Metals Growth Fund/Class. This fund turned in an amazing performance over the 12 months to July 31 with a gain of 67.6 per cent. The 10-year average annual compound rate of return is 22.9 per cent, not as good as that of the RBC entry but impressive enough.
The portfolio is quite different from that of the RBC fund. You won't find any of the major companies such as Agnico-Eagle and Goldcorp in the top 10 holdings (they account for about 10 per cent of the assets in the RBC fund). Instead, manager Kevin MacLean places large bets on a few small companies. For example, the largest single holding at more than 20 per cent of the portfolio is Semafo Inc., a Canadian company that operates three gold mines in West Africa. The fund also has large positions in Red Back Mining (12.2 per cent of assets) and Golden Star Resources (10.8 per cent). Those stocks have all been doing well but that kind of concentration makes this fund riskier than one which is more diversified. So this fund is likely to be much more volatile – it is not for faint-hearted investors who will undoubtedly feel more comfortable with the RBC fund.
Of course, precious metals funds can be volatile at times so they won't be appropriate for anyone who is extremely risk-averse. But the long-term returns speak for themselves – the 10-year average annual gain for the category is 21.4 per cent. So the potential rewards are high but you must be willing to live with the inevitable ups and downs. Talk to your financial advisor about whether this type of fund is right for you.
by Gordon Pape
www.saveriomanzo.com
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
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