Legacies of Wealth

Dave Gonigam – July 27, 2012

  • Making money is hard, hanging onto it even harder: Bill Bonner on how to make the wealth you build up last for generations to come
  • Stepping onto an ice floe: A line-item evaluation of the federal budget (yawn) as delivered by Doug Casey (ooh…)
  • Barry Ritholtz on how your politics can get in the way of your profits
  • The resource boom you’ve never heard of, and a track record better than Buffett: Two far-flung opportunities revealed to the Vancouver audience.
  • The evil book that’s (indirectly) responsible for low-flow toilets… the good book that had Obama figured out before he was even born… an informed Canadian’s take on the Canadian housing market… and more!

   “We’re totally unqualified to give advice on old money, because we never had any!” quipped Bill Bonner. “Our money is so new the ink isn’t even dry yet.”

There’s a saying about family businesses that grow into large enterprises: “The first generation enjoys, the second generation employs and the third generation destroys.” Bill has had decades of enjoyment building up Agora Inc. from scratch. The company is on to its second generation, particularly his eldest son Will, and it employs many hundreds of people on every continent.

Bill and Will Bonner are determined to defy the odds and extend the life cycle far beyond three generations. Last night, a sizeable contingent of the crowd at this year’s Agora Financial Investment Symposium gathered to hear them describe how they plan to turn their “new money” into “old money.”

   “Nobody else is doing this,” Bill explained of his Bonner and Partners Family Office. “Typically, family offices are vehicles in which families manage their wealth. Typically, they’re almost forced into an arrangement with a private bank.”

Such arrangements cost up to $1 million just to set up… plus, fees into perpetuity.

Then there are the folks Bill calls “the patsy rich.” Someone builds a business, sells it and retires and suddenly sits on a pile of money. “He knows how to make it, but not how to hold onto it. There’s a whole industry out there, Wall Street people whose job is to separate him from his money. They’re parasites.”

The idea of a family office as Bill and Will are developing it keeps the parasites at bay… while ensuring the money isn’t dissipated. “This is family money, not spendable money,” Bill explains.

“What do you use it for? You use it to start a business, for education — you can use it for emergencies. You can use it for all kinds of things, but not to spend. Each generation has to live on what it can earn.”

There’s a lot to unpack in these ideas. Bill and Will barely scratched the surface last night. We’ll get into it more next week.

By the way, this wasn’t Bill’s main talk here in Vancouver. Per custom, that comes at the end of the conference today, and has the intriguing title The Declining Marginal Utility of Stuff. Details on Monday!

   The typical Medicaid beneficiary is “the morbidly obese type that you see on Black Friday at Wal-Mart jostling to spend their welfare checks,” said the inimitable Doug Casey earlier in the day.

Mr. Casey performed a rather, um, unconventional analysis of a chart that’s familiar to 5 readers: the pie chart of the federal budget…

Medicaid takes up the lion’s share of the “health” category on this chart. Medicare? That’s its own category… and its own point of discussion. “It’s a philosophical issue, really.”

“When you reach a certain age,” Doug explained, “your body starts to desert you and you become an active liability to your fellows. In preindustrial cultures, what used to happen was the honorable course. If you became a liability to your fellows, you’d walk off into the forest or step onto an ice floe. It was only the most cowardly and despicable and degraded people who would hang around and cause everybody else to take care of them.”

The scariest part of the chart isn’t the biggest, though: “Our $16 trillion national debt currently costs $200 million a year to finance,” which works out to a “blended” interest rate of only 1.25%. “Interest rates in the future will not go just to the level they did 30 years ago. I think they’ll go higher,” Doug suggests.

What can you do? “You should have a lot of gold. It’s the only asset that’s not someone else’s liability.” He also recommends “diversifying politically,” or having your assets under the jurisdiction of more than one government — spread the risk. And finally, he says “learn to speculate effectively” and take advantage of the market distortions wrought by governments and central bankers.

   U.S. stock indexes are adding to yesterday’s big gains. The S&P is within reach of 1,370.

The Commerce Department is out this morning with its first guess on second-quarter GDP. At an annualized 1.5%, it’s weak, but it beat the “expert consensus.” Risk on, baby!

   Politics are “a luxurious indulgence,” counsels fund manager and blogging sensation Barry Ritholtz. “I can’t afford it.”

In another raucous presentation, called This is Your Brain on Stocks, Mr. Ritholtz poked fun at all the stupid things investors do, in part because our brains are hard-wired to do so.

He pointed to a classic study of “experts” who appear on TV. Their “predictions” turn out to be no more sound than those of an average member of the general public. No matter: “The more confident an expert sounds, the more likely viewers will believe him. And the more confident he sounds, the more likely it is he’ll have a worse track record.”

As for politics, keep it out of your portfolio. Mr. Ritholtz says he has scads of liberal friends in New York who were convinced the Bush tax cuts would kill stocks in 2003. He also has scads of conservative friends in Greenwich, Conn. who were convinced Obama’s policies would kill stocks in 2009.

Neither assumption worked out very well…

“Each group missed out on an epic bear market rally because of their politics.”

[Ed. Note: Mr. Ritholtz’s presentation is one for which the visuals are essential to the message. Besides, without the visuals, you won’t know half the stuff the crowd is laughing about. We continue to get raves for the fact we’re offering high-definition video of this year’s Symposium, in addition to the customary audio package. Sign up for access here.]

   “If you can’t relocate, emigrate or travel, at least get your money a passport,” advises Brad Farquhar, chief of the suitably named Nomad Capital.

Mr. Farquhar has done business in Tajikistan, Niger, Egypt, Jamaica and Mongolia… but yesterday, he spotlighted an off-the-beaten-path opportunity closer to home: natural resources in Saskatchewan, smack in the middle of the Canada’s three “prairie provinces.”

“Saskatchewan is like Alberta 40 years ago,” he says. That’s a huge promise in light of the boom in Alberta’s oil sands. Saskatchewan is playing catch-up because the provincial government was run by outright socialists from the mid-1940s until 2007. The place is loaded with oil, uranium, potash… and Mr. Farquhar’s focus, quality farmland.

That land is vastly underpriced relative to surrounding provinces — and U.S. states. But a quiet boom is under way. Prices are already up 80% from the bottom, but it’s only the beginning. A similar boom in the 1970s brought a run-up of 690%. Mr. Farquhar has developed multiple ways to play the trend, and one of them is open to U.S. investors.

You can learn a lot more about this unusual opportunity in an interview with Lauren Lyster of RT’s Capital Account; the program has been spotlighting Symposium speakers all week…

Note well: Doug Casey is Lauren’s guest today at 4:30 p.m. EDT, with a replay at 7:30. RT America is streaming at this link.

   Another off-the-beaten-path opportunity: Thailand, where a fund manager has quietly amassed a record that’s “better than Buffett’s.”

From a home base in Bangkok, Doug Barnett launched his Thai Focused Equity Fund in 1990. His earliest investors have made 34 times their money. Berkshire Hathaway has grown its investors’ money a “mere” 18 times in the same period. The Thai stock market, meanwhile, has gone nowhere.

Mr. Barnett brings the same Graham-and-Dodd mentality to the work he does. But while Buffett will buy entire companies and finds himself unable to sell… Barnett is satisfied with large stakes, which he’ll unload once the story’s no longer compelling. (Barnett also doesn’t get sweetheart deals like the one Buffett got with Goldman Sachs in 2009.)

Case in point: On Wednesday, he sold a Thai coal stock. Turns out coal everywhere in the world is getting beaten down because the natural gas boom in North America is cutting into demand for coal-generated electricity. But it was a heck of a ride… since 2001, up 3,392%.

   Precious metals are treading water as the week winds down. Gold is up a bit, to $1,620. Silver’s down a bit, to $27.48.

   After the latest “save the euro” jawboning from European Central Bank chief Mario Draghi, the dollar index is set to end the week around 82.7 — down from 84 on the nose on Tuesday, which was a two-year high.

   “We remain convinced the U.S. dollar will decelerate downward in the next five-10 years,” says EverBank Direct president Frank Trotter.

But there’s much euro-drama to work out first. Frank sees a eurozone breakup as possible, but unlikely. There are too many questions that Draghi and Co. would rather sidestep: How do you keep it a secret? Is it only Greece that goes, or the entire PIIGSty? Will the defaults be phony or real? How do you print replacement currencies (in secret) to avoid bank runs?

Result: “The euro will remain weak, but not crushed, which says a lot about the U.S. dollar.”

Mr. Trotter’s presentation here in Vancouver built nicely on his colleague Chuck Butler’s talk the day before. While Chuck spelled out the reasons you need to diversify out of the U.S. dollar, Frank identified six currencies that offer the biggest upside with minimum risk.

Listing the six, and the reasons they’d do well, takes up more time than we have in our mere 5 Mins…. but with access to the recordings of this year’s Symposium talks, you’ll take in everything you need to make an informed decision.

   “They’re on the verge of ruining indoor plumbing,” said Laissez Faire Books executive editor Jeffrey Tucker in a talk that went over extremely well with the Vancouver audience.

Mr. Tucker recalled a time when statists of all stripes had the goal of “progress” and greater material prosperity. Fabian socialists sought to spread the wealth. The Bolsheviks aimed to electrify all of Russia. New Deal projects promised a higher quality of life.

No more. Attitudes changed with the publication of John Kenneth Galbraith’s The Affluent Society in 1958. Material progress took a back seat to three concerns — health, the environment and “security.”

It’s this shift, Jeffrey explained, that’s responsible for everything from low-flow toilets to “energy-efficient” light bulbs that induce migraine headaches. “It is now the ethos of government to deny us.”

The one saving grace — and it’s a huge one — was the privatization of the Internet in 1995. “This is the thing that has saved our civilization. We talk about the Great Recession — if it weren’t for the emergence of digital economic life, I can’t even imagine where we would be today. We could be approaching Stone Age levels.”

Jeffrey’s talk was packed with interesting nuances that I want to go back and listen to again… and this is a guy I talk with on a daily conference call! You’ll no doubt get a lot out of it too. And other speakers from the Thursday lineup… like the always colorful Marcio Mello, CEO of HRT Petroleo. He delivered a candid talk relevant both to shareholders of his firm and anyone with money in the energy space. And there was another round of afternoon workshops in which the names and ticker symbols flew.

If you can’t be with us, we always offer the next best thing — our high-quality recordings of the conference. And this year, the next best thing is even better, with a high-definition video option. So whether you want to watch at your desktop or listen on the go, we have you covered. Take advantage of your “virtual entry pass” to Vancouver right here.

   “My parents,” writes a reader weighing in on the Canadian housing market, “purchased their three-bedroom bungalow in Vancouver in 1966 for $17,000.”

“Yesterday it was sold for $1,768,000. It is considered a ‘tear-down’ and another million will be invested in that little city lot for a new dwelling.”

“I don’t see the market cooling at all. There are some very wealthy people out there.”

The 5: “The Canadian real estate debate,” writes the aforementioned Brad Farquhar, “would also benefit from the info that Canadians cannot get fixed-rate 30-year mortgages like you can.

“At CIBC, where I bank, the current posted seven-year fixed rate is 6.35%, although they are having a ‘sale’ at 3.99%. The posted 10-year rate is 6.75%, and it is likely possible to negotiate this down.”

“The average homeowner has a floating-rate mortgage or a much-shorter term. Even assuming they all had seven-year 3.99% mortgages, what happens in seven years when everybody’s mortgage resets at 8% or 10%?”

   “Give the writer a big bravo,” says a reader who agrees with a reader’s assessment yesterday that the current U.S. president hews not to socialism, but to fascism.

“Sounds like someone else has read As We Go Marching by John T. Flynn (1944). In the book, Mr. Flynn sets out the differences between communists, socialists and fascists — and does so quite well. After reading As We Go Marching, there is really no question as to whether or not the U. S. government is on a fascist course. Then it is up to each reader to decide for himself/herself how far down the road we are.”

“Thank you for being there. Enjoy it every day.”

The 5: Our own Byron King wrote the introduction to Laissez Faire Books’ reissue of Flynn’s essential volume. He was signing copies here in Vancouver this week. You can get your own here.

Regards from Vancouver,

Dave Gonigam
The 5 Min. Forecast

P.S. “Everyone was glued to the six big screens hanging from the ceiling,” writes our roving reporter Jim Amrhein, “eager to see what their own minds look like as they pick trades and investments.” Jim is describing Barry Ritholtz’s talk about how your brain’s wiring can sabotage your investment strategy.

The funny thing is that while Jim and I are covering the same conference — heck, we’ve sat next to each other most of this week — our dispatches end up completely different, even when we’re writing about the same speaker!

But it’s always good to see things from another perspective: Jim carries on our “team coverage” of yesterday’s Symposium activities at this link.

rspertzel

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