Tuning Out the Noise

Addison Wiggin – July 29, 2011

  • Tuned out: Knuckman on staying away from the TV, Barry Ritholtz on critical reading of the media… how attendees become better independent investors…
  • Consumer Electronics Association (CEA) chief urges innovation to save America; BioTime CEO innovates while moving major operations overseas…
  • “You can’t make this stuff up”… a list of snafus by public officials… plus Chris Mayer’s four-part test for every stock he evaluates…
  • Gold $10,000: a Vancouver presenter explains how we get there…
  • Stripping America like a vacant house… reader feels trapped in a 401(k)… thoughts about living to 150… and on terrorism as a “tactic”… and more!

   Turns out this is an excellent week to be hosting our annual symposium in Vancouver. But for a brief interview with BBC World radios, we’re thankful to have had so little time we haven’t kept up at all with “debt ceiling” drama in Washington.

Apparently, we’re not alone in the sentiment.

“The bond market hasn’t shown any concern” over the debt ceiling, said Resource Trader Alert editor Alan Knuckman, who worked the bond pit in Chicago, among a list of items on his lengthy resume.

Indeed, the yield on a 10-year Treasury note has traded all week below 3%. This morning it’s down to 2.86%

“I don’t watch TV,” Alan adds, “it puts you in the wrong place emotionally. They do what they do to keep you engaged. That doesn’t help you make money.”

   “Your cognitive processes,” said Barry Ritholtz by way of agreeing with Alan and likewise helping attendees become better independent investors, “the way you think about the world, the way you behave as an investor, is wildly flawed.”

“It’s not your fault — it’s how we’re wired.”

Barry unpacked the original meaning of “fight or flight” for a small group of attendees — the limbic system’s primitive responses. “Stocks, commodities, options — whatever it is that’s your bag — they tickle the dopamine in your brain. They excite your pleasure centers.”

Not a good state of mind in which to make investing decisions.

   One obvious pitfall Barry points out is what he calls the “recency effect,” or the mind’s tendency to extrapolate recent events far into the future. For proof, Barry offered two Wall Street Journal headlines from within the last four years…

(Click to enlarge)

The first headline came within four days of the Dow’s all-time high. The second came a few days after the “flash crash” last year. What was seen as impossible in 2007 was seen as inevitable less than three years later.

Of the first headline, Barry quips, “Who says they don’t ring a bell at the top?”

   Stocks slid again today. The Dow shed more than 400 points this week. The S&P is back below 1,300.

More nerves over the debt ceiling? Hardly…

   The Commerce Department’s first stab at second-quarter GDP came in this morning at 1.3%. Economists surveyed by Bloomberg were figuring on 1.8%.

Worse, this morning’s reports include revisions to the numbers going all the way back to 2003. Among the tidbits discovered: Growth during the first quarter of this year, thought to be an anemic 1.9% at this time a month ago… turns out to have been an awful 0.4%.

   “The only way we can grow our economy is to innovate,” Gary Shapiro told our Vancouver audience yesterday, doing his best to be encouraging in light so such statistics…

Shapiro is chief of the Consumer Electronics Association (CEA). The CEA includes Apple, Microsoft, Intel, Dell and 2,200 other producers of gadgets and communications tools for retail buyers like you and me… it is perhaps the only trade group that doesn’t lobby Washington for subsidies or tax breaks.

“Every country, every company, works off a strategy,” Shapiro said, trying to convince the symposium participants economic growth can still pull the United States out of its fiscal morass… if only government would get out of the way. “For 200 years, the U.S. strategy was innovation, risk-taking… and the risk of failure.”

But now, Shapiro says, the government is closing up to the immigrants who made many previous innovations possible. And trade deals — like the one we’ve been following with Colombia — get bottled up in the politics of tribalism in Washington.

For all that, Shapiro still sees his own industry managing to pull off one innovation after another… You can read about some of them here. But for the economy as a whole, Shapiro is nervous… and in our fight-or-flight debate, he says it’s time to fight for the innovation that once made the nation the most prosperous in world history. Or else… we risk more companies going the way of Emerson Electronics and offshoring 30,000 jobs at a whack.

   “I’ve never seen an area of medicine, or any endeavor, so full of misunderstanding and misrepresentation,” says Dr. Michael West, moving on to what he calls tongue-in-cheek “the stem cell thing.”

The Daily Reckoning’s Eric Fry, who is also serving are our emcee this week, calls Dr. West “Buck Rogers in a lab coat.” John Mauldin avers he’s “the most brilliant man in the world.” He is both a scientist and CEO of BioTime — a company that has delivered 547% gains, and counting, for readers of Patrick Cox’s Breakthrough Technology Alert.

“For the first time ever,” says Dr. West, “we’ve captured cells in the laboratory dish that can be turned into any cell type in the human body on an industrial scale. We’re made of cells — trillions of them glued together. They’re alive.

“If your car breaks an axle,” Dr. West continues by way of explaining the application of his new science, “you get a new one. If you lose heart muscle from a heart attack, you’re out of luck.” But no more.

Drugs as we know them can treat only about 10% of diseases. Regenerative medicine can treat about 60% by replacing the diseased tissue or malfunctioning joints. “If you lose heart muscle from a heart attack? We’re going to give you new heart muscle.” This is the promise of regenerative medicine.

Dr. West is a key figure in our documentary project. And a pleasant dinner companion, we might add. Alas, he has come down on the “flight” side of our fight-or-flight debate — moving significant portions of his operations to a subsidiary in Singapore.

   Gold is back in record territory this morning, the spot price $1,622. Silver is oscillating around the $40 mark. The dollar index is back below 74.

   “No major group of investors has taken part in gold’s run-up over the last decade,” remarked Gold Switzerland proprietor Egon von Greyerz to the Vancouver crowd.

“Pension funds, family offices, asset managers — none of them have any gold. Despite growing 6½ times!” But the day is coming, Egon is convinced, when institutional buyers enter the gold market. With that in mind, “gold is very cheap at $1,600.”

Egon points out that gold and gold stocks made up less than 1% of global assets in 2009. Back in 1981, it was 26%. If gold’s share of global assets move up to only 5%, Egon sees a gold price of $10,000 an ounce.

“That’s in today’s dollars, of course,” he added. “In a hyperinflationary scenario” — which he considers inevitable — “the sky’s the limit.”

   To help address its own fiscal deficiencies, the Irish Finance Ministry is considering selling T-shirts that say “Ireland Is Not Greece.”

The U.S. Department of Agriculture recently issued a press release touting the virtues of the food stamp program. “It is estimated that at least 8,900 full-time equivalent jobs are created from $1 billion of SNAP benefits.”

Uhhh, $112,360 per job created? Nice return on investment.

You really can’t make this stuff up…

“People should understand,” declared Russian Finance Minister Alexei Kudrin earlier this year. “Those who drink, those who smoke are doing more to help the state” (by generating tax revenue for social services, which was unfortunately left off the statement).

Mr. Kudrin, as you might suspect, did not say this at our conference yesterday. But our managing editor Chris Mayer brought this gem to the audience’s attention as he shared his “you can’t make this stuff up” clip file built up over the last year.

After sharing a few more instances of such madness, Chris deftly pivoted to a host of investment ideas that can withstand the folly of governments anywhere.

   If you’re not familiar with Chris’ outlook, the former banker runs all of his stock picks through a four-part checklist. As we’ve shared it with you only in passing, we reprise Chris’ madness here:

  • Cheap: Low entry price, better upside potential
  • Owner-operators: History shows that managers who have skin in the game turn in better performance; their interests coincide with your own
  • Disclosures: The business must be “easy to understand” and make their financial statements accessible
  • Excellent financial condition: Must have cash limited debt and the cash reserves to withstand rough seas in the economy

Following these criteria, Chris rattled off four names here in Vancouver that meet his CODE criteria — two gold miners, a shipper and a unique player in renewable energy.

You can get the names and ticker symbols of all four — plus every other recommendation of every other speaker this week — for a stunningly low price.

   Perusing the headlines back in the states, we might be excused for wondering if the entire country is being stripped like a vacant house…

  • Thieves in Los Angeles County have stolen more than 100 bronze vases from a cemetery, each worth $125
  • Two men in Tuolumne County, Calif., are charged with ripping up guardrails from the side of a road — presumably to sell them as scrap for about $2,000
  • Thieves in Eugene, Ore.,disrupted landline phone service this week when they stole 600 feet of copper wire worth around $1,400

When the stories become this pervasive, it’s about more than just, say, copper prices rebounding this month to $4.45 — only 15 cents off the record in February. These are early signs of people trying to get their hands on something — anything — that can hold its value better than a U.S. dollar.

If our recent forecast bears out… there will be a lot more where this comes from. To see where we think things are going… and what you can do about it… look here.

   “Our tax situation is untenable,” Craig Donohue tells Reuters.

Donohue is the CEO of the Chicago Mercantile Exchange (CME). He’s considering moving some of its operations to Texas, Florida or Tennessee. They’re fed up with Illinois’ high taxes.

“I don’t think CME Group is different from other companies” that relocate to more business-friendly states, Donohue added.

Here’s a forecast you can take to the bank: The Chicago Mercantile Exchange won’t be leaving Chicago. Because of CME Group’s size and stature. Behind the scenes, we’re confident CME Group will get a sweetheart deal from the legislature and the governor’s office.

Smaller businesses that are likewise facing a stiff tax burden in Illinois? Forget it.

   Meanwhile, as Illinois continues to scramble for tax revenue, they’ve just hit on the new hot idea — selling ad space on license plates.

Gov. Pat Quinn signed a bill ordering up a feasibility study yesterday.

The logos will look even better covered up with road grime…

“Everyone wins,” says state Sen. John Mulroe, whose idea this is. Drivers who agree to this would get a $15 break on their $99 annual registration fee. The sponsors would cover that $15 and fork over an additional $25 to the state.

Hmmmn…

“Illinois already has… so many different styles of specialty license plates,” reports the persnickety St. Louis Post-Dispatch, “that police sometimes have problems quickly identifying what state the cars are from.”

Police union kickbacks versus corporate sponsorships. Who wins? Not you.

   “Unfortunately,” writes a reader who caught our forecast of dramatically extended life spans, “that means that the scumbags who game the system and steal from the rest of us will also live to continue their nefarious ways. From Wall Street traders to welfare queens to despots.

“A chilling thought!”

   “Ha, ha, ha,” writes a reader sardonically after seeing John Mauldin’s forecast that European government debt will eventually take down the S&P 500 hard.

“The great 401(k) saving debacle. That is all they offer, Bonds and big baskets of mutual funds, the majority of which are big, medium or small-cap funds. And then to cap it all off, if you it move to cash, it is in money market funds, all invested in……hmmm… European banks. I am just giddy about my retirement future.”

“What do you folks think? Does an over-55 employee bail out of the plan give up the matching funds from the standpoint of capital preservation, and, let’s say, move over to someone such as EverBank?”

The 5: We address this very subject in The Secret to Set It and Forget It Wealth. It’s free to new readers of Apogee Advisory. Have a look. We’ll be back in touch on Monday… happily rested. We hope.

Have a safe weekend,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.“Terrorism is not an enemy — it’s a tactic,” declared Doug Casey to our assembled crowd yesterday. “You can’t have a war on terrorism any more than you can have a war on artillery barrages, cavalry charges — or a war on war, for that matter. The first step in winning a conflict is to identify the actual enemy. And the fools in D.C. can’t even do that.”

There is investment advice that follows on from this analysis. But the symposium is not always entirely about investing… it’s often an entertaining and free exchange of ideas. Doug’s talk is always one of the highlights of our annual gathering. You can hear it… and everyone else’s… in just a few days if you act now. And we do mean now… The price of these invaluable recordings — available on MP3, CD or as a combo set — goes up next Tuesday.

P.P.S. “I think it was the best (and funniest) Whiskey Bar event I’ve ever seen,” writes our colleague Jim Amrhein of our rollicking roundtable on Wednesday night. We offered a small sample in yesterday’s issue… but you can see a fuller and even funnier account at this link.

rspertzel

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