Are Buffett and Gates Losing It?

by Addison Wiggin & Ian Mathias

  • Gold touches another record… The 5 discovers several answers to the question “Why now?”

  • The return of the commercial mortgage monster… and how to play it conservatively for a double-digit gain

  • California lawmaker devises new kind of dividend… Jim Nelson on how it could easily backfire

  • Gates and Buffett as “morons”… Readers overwhelm The 5 with their take on the billionaires’ charitable impulses


Gold has reached record territory on this Friday in June.

The spot price briefly broke through $1,260 this morning. Gold for August delivery rose $8.70, to $1,257.40 on the Comex.

Now… some of this is simply because it’s, well, a Friday in June. Volume is generally thinner in the summer, thinner still as traders take a three-day weekend. But some powerful longer-term trends are at work, too. To wit…

  GLD, the king of the gold ETFs, accounted for more than half the net inflows to all ETFs in May, according to Bloomberg. Investors snapped up $4.2 billion of GLD last month. That’s nearly double the take of the No. 2 performer in this category, SPY (which tracks the S&P 500).

  Banks are running short on vault space for gold… so they’re building new space. According to the Financial Times, J.P. Morgan just opened a new vault in Singapore, Switzerland’s Via Mat Intl. just opened a silver vault in London, and Deutsche Bank is considering opening a new vault.

“The trend to build new vaults reverses the dismantling in the early 1990s of the elaborate — and expensive — infrastructure of vaults put in place during the last gold boom of the late 1970s,” says the FT.

  Add another hedge fund manager who’s coming around to gold. Joining John Paulson and David Einhorn is Daniel Arbess, who manages the $2 billion-plus Xerion Fund for Perella Weinberg.

“Indebted countries may soon be forced to choose among three politically difficult alternatives: sharp cuts in expenditures, debt default or printing money to pay off debt,” he tells The New York Times, and he sees protection in gold — an asset he says he didn’t give a second thought a few years ago.

 If you’re looking for a powerful new catalyst that could drive gold higher, here it is…

You know all that talk we’ve heard for more than a year about how U.S. banks are sitting on their reserves, instead of lending them out? How it’s been safer to borrow from the Fed at next to nothing and buy Treasuries?

Check out this latest chart, courtesy of James Turk…

“After many months of sitting on their hands while trying to repair their overleveraged balance sheets,” says James, “banks are making new loans. They also continue to buy U.S. government paper, though those purchases tapered off over the past month.”

That’s a whole lot of new money starting to flood into the “real economy”… and it’s a whole lot of potential for the inflation Daniel Arbess sees — if not now, then down the road.

Sums up John Hathaway, manager of the Tocqueville Gold Fund: "I just think you're in a world where a lot of chickens are coming home to roost. Gold is an escape hatch."

Indeed. And a well-chosen basket of gold stocks can deliver outsize gains, while your bullion preserves your purchasing power. Byron King describes a few of his favorites in his short book, The Curse of the Incas. 40,000 copies are in print… You can read a special online edition here.

  The rate of commercial mortgage delinquencies ballooned more than 25% in the first quarter of 2010.

New numbers from the Mortgage Bankers Association reveal the commercial real estate problem has not gone away… it’s just being swept under the rug. Still, this is hard to ignore: 5.7% of loans contained in commercial mortgage-backed securities were at least 30 days in arrears during Q4 2009. And the number exploded to over 7.2% in Q1 2010. That’s the blue line in this chart…

Yes, a year earlier, the figure was still under 2%. And that red line? Those are loans more than 90 days overdue that sit in the portfolios of banks and thrifts. After 90 days, you might as well consider it defaulted. And that rate has doubled in the space of a year.

"Economic growth, specifically in areas of jobs and consumer spending, will be key to stabilizing the commercial property and mortgage markets going forward,” reads a statement from the Mortgage Bankers Association that accompanied this data. The news we relayed yesterday about jobless claims rising and leading economic indicators flattening? That won’t help.

  “We face an epidemic of negative equity in commercial real estate,” says our stock market vigilante Dan Amoss. “Most commercial properties purchased with high leverage during the bubble — if they haven’t yet been foreclosed on — now carry debt-to-asset ratios of well over 100%. In other words, the investors are underwater, like a homeowner with negative equity.

“Just like underwater homeowners, these investors have little incentive to properly maintain properties. In turn, those properties shed many tenants as leases roll off, which accelerates a liquidity crisis. If lenders don’t foreclose early on, and just roll over loans to insolvent borrowers, the ultimate loan charge-offs — when foreclosure becomes unavoidable — will be even larger.

“This negative equity epidemic is bad news for companies that cater to ‘cubicle’ style offices, including office furniture makers. Thanks to the commercial real estate bubble, there’s no shortage of cubicles and office furniture. I wouldn’t want to own any business that relied on sales into the commercial real estate market — especially not at the lofty valuations Mr. Market now charges.”

As you might guess, Dan is building up to his latest Strategic Short Report recommendation, which comes out today. He gives you two ways to play it — the conservative way for 40% gains, and a more aggressive approach for a potential triple.

You can still get a trial membership to Strategic Short Report and check out this recommendation for just $1. But you want to move on it quickly… We’ve left this offer open far too long, and it expires tonight at midnight.

  Major U.S. stock indexes opened mixed this morning. It’s shaping up to be a third day of indecisive action. Volatility, meanwhile, is taking a breather… The VIX has slipped below 25 for the first time since early May.

  Remember how Pimco was cutting its positions in U.S. Treasuries at the start of the year? Never mind. Holdings of government-related debt in the firm’s flagship Total Return Fund grew from 36% of assets in April to 51% in May.

“The U.S. is the least dirty shirt.” Bill Gross told Bloomberg Radio recently. “The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight-to-quality haven.”

Not a bad trade. The yield on a 10-year Treasury note fell steadily in May, from 3.7% to 3.3%. This morning, it’s even lower, at 3.21%.

  The dollar index has barely budged in the last 24 hours, sitting near 85.7 as we write. The euro is holding up at $1.237 as the IMF makes approving noises about Spanish austerity measures.

  “We just came across a potential new type of dividend,” writes our income investing specialist Jim Nelson. It’s only for Californians, but it could soon come to a state near you.


“Due to the recent U.S. Supreme Court case, Citizens United v. Federal Election Commission,” Jim explains, “California Assemblyman Pedro Nava introduced legislation to limit corporate influence in politics. The court case leading to this bill created an enormous stir throughout the country on whether or not corporations should have the right to free speech through unlimited political contributions. Many, like Nava, disagree with the court’s decision.”

From the text of the bill: “Most shareholders have no means by which they may learn of, influence or object to the political activities of the corporations in which they have invested. Moreover, most shareholders have no means by which they may demand reimbursement or demand that their invested funds not be used to make political contributions or expenditures to support candidates, ballot measures, political parties or political causes to which the shareholders are opposed.”

So under this proposal, Jim says, “publicly traded corporations incorporated in the state of California would have to regularly send all of their California shareholders a thorough explanation of who and what they have contributed to. At that point, the shareholder would have 60 days to send a reply form asking to opt out of this expense. The company would then send the investor a pro rata dividend equal to his or her share of the political contribution.”

Assuming the bill passes, there remains a host of unanswered questions — like what the penalty would be for noncompliance, and as Jim puts it, “whether this bill will actually diminish shareholder value by increasing processing costs of dividends. These dividends will be practically nothing compared with the ones we look for.”

No doubt… Jim just tracked down a dividend so powerful, he labels it the “other” government-backed retirement program… because it has a foundation far more solid than Social Security. Learn how it works by going here.

  “These guys are MORONS,” a reader writes, agreeing with the gentleman who wrote in yesterday about Bill Gates, Warren Buffett and their challenge to fellow billionaires to pledge half their assets to charity.

“Maybe the lofty air they’ve been breathing at the top of the financial ladder all these years has addled their brains. I get nauseous every time I see Buffett doing an interview and sucking up to the liberal socialists in the media. But it’s a perfect picture of what’s wrong with America today. They’ve forgotten what made them great in the first place — hard work, great ideas and invested capital.”

The 5: Readers of The 5 darn near crashed our inbox after we posed the question yesterday, “Are Gates and Buffett onto something or are they losing it?” A sampling of your responses follows…

  “Your reader who criticized Gates and Buffet's philanthropy stoops to using emotionally charged and inaccurate words to make his point. Neither Gates nor Buffett would make his point that way. They would, as they always have, back up their actions with reasoned arguments. Unfortunately, your reader offers no such rationales. Your reader obviously has never lived in Africa, where malaria kills more people than AIDS. The Gates Foundation is making meaningful investments that could bring an end to this scourge. The humanitarian and capitalistic benefits are pretty obvious.”

  “They are losing out. They will be leaving their money to fascist, communist or socialist running of their foundations to piss away in the future. Frankly, they are both globalist (so-called new world/communitarian values types) and are no friends to American sovereignty and our Constitution. I hate so much money will end up in the hands of folks looking to do so much harm to America.”

  “Warren Buffett has been a master at avoiding taxes his entire life. By investing using an insurance company, he can make his investments using insurance reserves and avoid most taxes. And now that he nears the end of his life, he pledges his wealth to Bill Gates’ foundation to avoid all death taxes. He has gotten rich avoiding taxes, but he thinks you and I are not paying enough. Can you say ‘hypocrite’?

“This economy needs all the possible capital it can get invested in the private sector to avoid collapse.”

  “Let's all send them a copies of Atlas Shrugged and The Road to Serfdom. Seriously, it is hard to understand how they could have come so far yet now be so deluded. Or is it just an overwhelming need for what they may perceive as public acceptance?”

  “While I'm all for people contributing to various charities, using 50% of your excess wealth to do so seems excessive, even for billionaires. However, if they need a charitable target, I propose this: Send $10,000 (The maximum charitable gift you can give to an individual without incurring a tax liability) to people such as me who have continued making their mortgage payments on time (even though I am greatly underwater).

“People like me are proving that there are still responsible Americans who are trying to pay off their debts in an honorable manner. They just have to stipulate that all of the $10,000 go to debt repayment. I'd be happy with that.”

  “Was Andrew Carnegie a socialist? In ‘The Gospel of Wealth,’ he said first accumulate, and then distribute. It makes life worthwhile.”

  “I admire both those men immensely, and I’m sure they’re not just going to throw their money away on worthless charities. The other reader has a point in that giving that to charities almost government-style ends up being squandered in worthless causes. It would be nice to see some of that as venture capital, but the risks of seeing zero return on that are even greater. Why not just start Guffet University with some of that money? After all, the saying is about teaching how to fish, not giving out the fish…”

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

P.S. As we write, barely 13 hours remain to take advantage of Strategic Short Report for just $1. Less than that by the time you read this. See Dan’s new recommendation, coming out today, by going here.

P.P.S. Addison returns to this space on Monday after a few days of R&R. In the meantime, he’s out this week with an updated take on “The Wall Street Fandango” that he and Bill Bonner wrote about in Empire of Debt. Learn how to turn the Street’s games to your advantage with three plays identified in the new beta issue of Apogee Advisory.


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