November 26, 2012
- When “smart money” looks dense: Typical hedge fund underperforms the S&P
- Fabulously successful gold mining exec on the one factor that will drive gold to $13,000 (and it’s not the Fed)
- A “great unraveling” in Japan that could be less than a month away: Dan Amoss outlines your best defense
- Busting a suggestive Internet myth… The 5 readership begins to turn on one another… one couple’s unique solution to 2013’s higher taxes… and more!
Here’s a factoid that might shake you out of your leftover turkey-tryptophan stupor: You’re better off putting money in an index fund than a hedge fund.
That was the most interesting tidbit to emerge over the long holiday weekend: “Occupy Wal-Mart” was a bust. “Black Friday” sales improved on last year — barely. And Greece was fixed for the umpteenth time. Thus, the euro soared on Friday, and the dollar got stomped — which drove up stocks and precious metals alike.
According to a Goldman Sachs report, a mere 13% of hedge funds have outperformed the S&P 500 during 2012. A fifth of hedge funds are in the red. For the record, the S&P is up 14% year to date. The average hedge fund is up only 6%.
For “2 and 20” — handing over 2% of assets and 20% of profits to the fund manager — you’d expect better.
The Goldman report blames a host of factors — among them, timid managers still spooked by 2008 and low interest rates leading to high correlations between stocks, bonds, gold and currencies.
We’d suggest another cause: Hedge funds have proliferated to the point that collectively they can no longer outperform the market. At the dawn of the new millennium, there were fewer than 4,000 hedge funds. As of two years ago, there were more than 9,000. As Bill Bonner has been wont to point out lately, “more” does not always equate with “better.”
“Analyst forecasts on gold have been wrong for years,” says Chris Mayer, busting still more conventional wisdom this morning. “And they’ve been wrong always in the same direction — too low!”
Chris is reviewing his notes from Grant’s Fall Investment Conference — which includes the following chart from a presentation by Pierre Lassonde. Lassonde founded the original Franco-Nevada Mining Corp. — which delivered an annualized 36% return over a 20-year stretch before he sold out to Newmont in 2001. (He’s also chairman of a revived Franco-Nevada, up 50% year to date.)
“The way to read this chart,” says Chris, “is to start on the far left. That first line, the lowest line, is a plot of the 2007 forecasts. You can see analysts projected a gold price of less than $600 an ounce by 2012. The next line up, which begins in 2008, is a plot of the 2008 predictions. Same thing. You can see the predicted gold price was under $800 an ounce. In each set of predictions, analysts not only forecast gold prices too low, but they forecast gold prices to decline a few years out.
“Basically, the market consensus is that gold prices are going to fall beginning in 2014.”
“If the consensus is wrong — as it consistently has been — then you stand to make a lot of money taking the opposite view,” Chris adds.
Why might the consensus be wrong? In part, the consensus is betting the Federal Reserve will trim back on “quantitative easing.” Another speaker at the conference said as much.
“What I find interesting in coming to the U.S. is the views of gold are very U.S.-centric,” Lassonde told the crowd. “I spend three months per year in Europe. I’ve lived in Canada and tour the world on a regular basis. I want to give you a more worldly view of the gold market.”
“What he gave us,” Chris goes on, “was a pretty imposing fact: China and India account for 47% of the demand for gold. The rest of the world, excluding the U.S. and Middle East, account for 41% of the demand for gold. This is in sharp contrast to the state of affairs that existed as recently as 2002, when the U.S. and Middle East represented 25% of demand. China and India then made up only 23% of demand.”
Lassonde’s parting thought: “Don’t think that the fiscal and economic policies of the U.S. will have everything to do with the gold market. China and India will have a heck of a lot more to do with what happens in the gold market than Washington.” He sees gold hitting $2,000 an ounce by next spring… and a staggering $13,000 an ounce over the next 10 years.
This morning, gold is holding onto most of its gains from Friday. At $1,751 the metal is near a one-month high. Silver’s at $34.18.
Stocks, on the other hand, are giving up ground. After touching 13,000 on Friday, the Dow has settled back to 12,937. The S&P has a tenuous hold on 1,400.
The dollar index is flat at 80.2.
The Chicago Fed National Activity Index — a reliable recession indicator the last 40 years — is getting uncomfortably close to… indicating a recession.
The index crunches 85 economic indicators and turned in a subzero reading — “below historical trend” —
for eight straight months. The October report out this morning reveals the three-month moving average slumped to -0.56. Readings of -0.7 have coincided with nearly every recession going back to 1970.
“Japan’s financial crisis is accelerating at a breathtaking pace,” warns Dan Amoss — following up on a dispatch here in The 5 three weeks ago.
Exports have slumped for five straight months; they’re now down 6.5% from a year ago. Elections are three weeks away and the candidate most likely to become prime minister will exert massive pressure on the Bank of Japan. “Unlimited yen printing and government bond buying is inevitable,” says Dan. “A great unraveling could occur faster than anyone expects.
“Bond selling will accelerate; an aging demographic profile and fear of rising consumer prices will drive local investors to exchange bonds for cash. From there, it’s unlikely that the yen cash will remain idle — sitting inside the banking system — for very long.
“Some of the cash will bid up tangible assets inside of Japan. Some will flow to bonds denominated in other key global currencies. Investors will then realize that most governments are following the same debasement program and buy gold. Some will flow to relative safe havens in U.S. markets — including blue chip stocks. In other words, after trying to jump-start inflation for decades, Japanese policymakers will get it, good and hard.”
What to do? “A healthy allocation to gold and silver is my highest-confidence recommendation to protect your capital through this event,” says Dan. “Institutions, once they appreciate the fragility of the global monetary system, will rush toward gold. They’ll pay almost any price to reinforce bond portfolios sitting on a shaky foundation of government promises.
“Considering that most institutions still view gold as a barbarous relic, there is plenty of potential buying power heading gold’s way.”
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However, Japan is not — repeat not — resorting to outright sexism in an effort to sell Japanese government bonds (JGBs) to young men.
For reasons still not fully apparent, an Internet satire more than two years old caught fire again last week. In mid-2010, Japan’s Ministry of Finance did indeed run a magazine ad targeting single men. It did indeed feature young women saying things like, “I want my future husband to be diligent about money.” And it did indeed conclude, “Men who hold JGBs are popular with women!!”
It did not, however, feature a photo of a man with two women in a bathtub full of cash. That was Photoshop…
CNBC was taken in by the parody. It has since been scrubbed from the network’s website… but the original remains preserved for the ages.
“If this was ever the case of ‘it takes one to know one’…” a reader prefaces his email.
He is taking issue with the reader who said last week, “I believe the ‘tax the rich’ crowd can’t think further than a dachshund dodo. It’s really simple: A) The rich create jobs, B) The less money they have, the fewer jobs they create.”
“The ‘rich,'” says today’s reader, “don’t create jobs, they use wealth to invest in collectibles, diamonds, art, stamps…”
The 5: For what it’s worth, we note the email came from a “dfas.mil” domain — Defense Finance and Accounting Services.
“Seriously?” writes another reader picking the same bone from a different direction.
“The bulk of new jobs come from small business owners. The majority of small business owners are not rich. That typically happens if they are fortunate enough to see their businesses grow and take on more employees.
“Some rich people are indeed business owners — and for more than just a tax break — but most are just wealth hoarders, and employing a pool cleaner and a part-time accountant doesn’t really qualify as ‘job creation.’ Steve Jobs had $7 billion gathering dust in his bank account at the time of his passing. Most rich people are like Steve Jobs, but without Apple. Their money does not create (ahem) jobs. A flat tax is probably the fairest answer. Tax breaks, if any, should be given to people, and especially businesses, that will increase employment.”
“The melodramatic squeals of the chiropractor and her husband obscure the fact that small businesses, unlike standard wage slaves, pay taxes on their net business income,” writes a reader identifying himself as an “actual small businessman in Arizona.”
“If she’s worried about having a taxable income of $250,000, then her gross revenue is probably two or three times that much. As a small business owner myself, I would be happy to have a net $250,000 to be taxed. Let’s get real and save some sympathy for those who are actually struggling financially.”
The 5: Oy… After the “War on The 5” took a breather, it appears our readers are starting to turn on each other!
It’s time to revisit a favorite passage from Endless Money, the book by friend of The 5 Bill Baker.
Referring to Warren Buffett’s ceaseless agitation for higher tax rates on “the rich,” Baker writes that Buffett knows “full well the burden [for higher progressive taxation] would fall primarily on members of the upper middle class, who have not yet achieved the threshold that would permit them to shift income to tax-minimizing structures.
“Once a certain threshold of wealth is achieved,” Bill explains — and this is a guy who manages money for such people – “taxpayers have some latitude in structuring when and where income originates.” Thus can Google executives Larry Page and Sergey Brin “pay themselves just $1 in W-2 income, but each year, they may accrue millions or even billions in unrealized capital gain.”
“These options,” Addison wrote last year, “are not open to the group usually targeted as the ‘rich’ — your typical six-figure or even low-seven figure earner — i.e., the small business owners who generate the preponderance of job growth that still takes place in this country.”
“My wife and I make approximately $450,000 per year living in a high-cost area and are by no means living the high life,” writes a reader who evidently won’t get much sympathy from a segment of our readership.
“With four kids in college or graduate school, it seems you can never make enough money. We determined that for the last two years, it cost us an additional $25,000 or so to be married. With Obamacare and all of the other wealth-sucking soon/sure to ensue, we believe the cost to be married will be closer to $40,000 per year (I will better determine this in January after doing 2012 taxes).
“Our answer? Divorce! With only three more years or so in the workforce, that’s at least $120,000! We’ll use that money to fund our five children’s weddings. Fleeing the institution of marriage is sure easier than expatriating… although increasing the distance between us and the children is quite enticing at times.
“Love The 5!”
The 5: Careful… Don’t forget to factor the cost of a divorce lawyer into your calculations!
Cheers,
Dave Gonigam
The 5 Min. Forecast
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