Day Two: Failing Upwards

July 25, 2013

  • Vancouver Day Two kicks off with the Committee to Destroy the World: failing up, up and away!
  • Inflation or deflation? Jim Rickards on why the coming collapse isn’t the end of the world.
  • Barry Ritholtz on investing and the “four Fs” — fighting, feeding, fleeing… and the act of propagating the species.
  • How to control the world… the biggest failure yet… if Bernanke were a stock… and more!

  “Robert Rubin destroyed Citigroup. Alan Greenspan destroyed the United States. Larry Summers might aim high to destroy the world.”

So declared Currency Wars author Jim Rickards as he opened his long-awaited talk here in Vancouver.

We get busy chronicling the week’s activities when we’re here, so we follow the news with a bit less alacrity than usual. Evidently, the buzz in Washington is that Lawrence Summers has emerged as the front-runner for Federal Reserve chairman after Ben Bernanke steps down early next year.

This cover is now nearly 15 years old. Will we never be rid of these men?

A quick cruise of the blogosphere today reveals that when Summers ran Harvard, he not only overruled the investment pros in charge of the university’s endowment, he also gambled with the operating budget. Result: $2 billion less with which to meet day-to-day expenses. Even hot breakfasts, according to one account, were not spared.

Nothing like failing upward, we say…

OK, where were we?

  Oh, yes… Rickards brought his unique perspective to the perennial question: Inflation or deflation?

Picture a tug of war, he says, with inflation and deflation as opposing forces. “In a tug of war between evenly matched teams, not much happens at first.”

So the Fed can blow up its balance sheet north of $3 trillion and nothing happens… because on the other side of the rope, too many people are still too scared to part with their money; consumers don’t buy new cars, businesses don’t buy new plant and equipment.

The Fed, Rickards says, is “desperate” to achieve 4% inflation. Its preferred measure is barely 1% now. Nothing it has tried since 2008 has achieved the desired result. But knowing nothing else to do, they’ll keep trying all those measures anyway.

A few more years of this and we reach the collapse of the international monetary system.

100  “It’s not the end of the world,” Rickards hastens to add about said collapse. It’s happened three times in the last 100 years, most recently when Nixon closed the gold window in 1971.

The collapse simply means the major powers reform the system. One likely reform this time, he suggests, will be a return to some form of gold standard — “not because central bankers want it, but because they’ll have no choice.” It will be the only way to restore confidence in the system.

His now-famous projection of $7,000 gold figures into this collapse-and-reform scenario, and he carefully walked the audience through how we get from here to there.

Rickards gives what you might call a “dense” talk — fast paced, filled with facts and figures. He does an excellent job of making it easy to follow… but your editor wouldn’t have minded the ability to pause and rewind to look at some of the charts again. Lucky for you, you’ll have the ability to do that with the high-definition video we’re recording from every session in the main hall. Or if you choose the audio-only option, you’ll have studio-quality recordings for maximum on-the-go convenience. It’s your choice… available at this link.

  Another morning, another mixed bag for U.S. stocks. As we watch Rick Rule’s “dawn patrol” session for die-hard resource investors here in Vancouver, the Dow is down — oscillating around 15,500 — while the Nasdaq and the Russell 2000 are both in the green.

After a two-day decline, gold has stabilized at $1,323. Crude is down about 1%, $104.24.

  It never ceases to get a laugh…

Your brain on drugs

Your brain on stocks

More than once, Fusion IQ chief Barry Ritholtz has used these images to remind us that our brains are singularly poor vehicles with which to make investment choices. Too often, the powers of reason are overwhelmed by the limbic system, the primitive brain driven by the urges known as the “four Fs” — fighting, fleeing, feeding… and the act of propagating the species.

And hedge fund managers are not immune.

For the insanely high fees they command, their performance has been abysmal, says Barry: up 3.5% last year versus the S&P’s 16%. Nor do they shine across a wider time span including the financial crisis, from 2007-12: They lost 13.6% versus the S&P’s 8.6%. This year, they’re underperforming again.

Barry brought a list of 10 tried-and-true guidelines to help you overcome all the tricks your primitive brain plays on you. It’s all there in the recordings; get yours here.

  “We think this just changed the world,” EverBank’s Frank Trotter says of the pop in Treasury rates that began in May.

Already, Bank of America and Wells Fargo have announced layoffs. The wave of mortgage refinancings is definitively over. Look for stagnation in the United States — indeed, throughout the developed world.

In contrast, Frank sees new growth in emerging markets — or, more to the point, continued growth. They’ll generate 74% of world growth through 2017, he says. Remarkably, he points out that emerging-market stocks have outperformed the developed world every year since 1995… and he has a table to prove it.

In his talk here last year, Frank identified six currencies set to rise against the U.S. dollar. If you’d gotten the recordings and followed his guidance, you’d have made money on five of the six. Best heed his guidance this time around: Make sure you’re signed up to receive the recordings as soon as they’re ready.

  “Control oil and you control nations,” Henry Kissinger allegedly said 40 years ago. “Control food and you control people.”

We can’t vouch for the accuracy of that quotation, but it was as good a way as any for Sprott Resource Corp.’s Steve Yuzpe to get into his talk about the investment opportunity in farmland.

He reminded the crowd that food prices have seen both “high prices and high volatility” consistently since 2008. Long-term supply and demand are getting (further) out of whack.

On the supply side, Yuzpe says the world needs 1.75% annual growth in crop yields to keep up with population growth. At present, the figure is 1.4%. And falling. Making matters worse, farmers are aging and their kids are moving to the big city. “All the agriculture technology in the world,” says Mr. Yuzpe, “will be useless without experienced and trained farmers.”

On the demand side, people in emerging markets are still becoming more prosperous, so they’re still consuming more meat. It takes seven pounds of grain to add one pound to a cow. “The math is working against us,” Yuzpe says.

No doubt he suggested some ways to play the trend during the afternoon “breakout” sessions. These small-group gatherings are where some of the most profitable advice of the week turns up. And along with your recordings of all the sessions in the main hall, you’ll get a concise write-up of the afternoon workshops complete with names and ticker symbols. You’ll receive it on or about Friday, Aug. 2 — one week from tomorrow — but only if you act promptly.

  “Technology had better work, because everything else is failing,” was the theme of Byron King’s talk. The biggest failure he said was “that dark technology called debt.”

In contrast, he says the National Ignition Facility (NIF) at the Lawrence Livermore National Laboratory in California works like a charm. We briefly touched on his visit there two days ago. Now Byron has shared remarkable pictures with the audience — we’re talking about a place that was used as the engine room in the latest Star Trek movie.

The NIF is how the government tests nuclear weapons these days without actually blowing them up. Byron regaled the crowd with images of a 40-foot-wide “target chamber” loaded with 192 lasers beams, all aimed at a single location smaller than a pencil point.

Imagine, says Byron, a pitcher at the ballpark in Seattle throwing a fastball off the mound that travels at the speed of light all the way to Los Angeles, where it goes across the middle of the plate… and explodes the catcher’s glove. That’s the level of accuracy we’re talking about.

Really, the pictures must be seen to be believed… and with the high-definition video, you can.

Bottom line: Byron says this is one government program that actually works — comparable to the Erie Canal or the moon landing. Its cost: $10 billion over the last 20 years.

Heck, the Fed blows $85 billion on quantitative easing every month…

  “The U.S. government is going out of its way to make income investing less appealing,” says Neil George.

Seeing as he’s our in-house income specialist, this is a bit of a problem. Fortunately for the crowd in Vancouver, he came armed with solutions. In a low-rate, high-tax environment he says you have two choices: try to increase your income, or get paid but avoid taxes.

Neil’s a big fan of pass-through securities, as we’ve discussed previously in The 5. His favorite vehicle in this space currently yields 6% tax-free. Likewise, he’s fond of what he calls modern-day merchant banks — publicly traded companies that lend to startups. His favorite player here currently yields 9%.

All in all, Neil rattled off five names and tickers during his talk. You get them all when you get the recordings.

  “If Ben Bernanke were a stock,” said the one and only Doug Casey, “I’d buy the hell out of it.”

Doug as usual took part in our Whiskey Bar — the rollicking Wednesday night discussion that can go anywhere, and inevitably does. “Bernanke,” he explained, “was kind of a penniless academic before he was promoted. I promise you after he’s out of office he’ll get giant corporate directorships, book contracts, speaking fees…”

Doug’s undoubtedly accurate forecast came in response to the question, “If Bernanke were a stock symbol, what would it be?” We like Byron King’s reply the best — either HELO… or AFU.

There was some more sober discussion about the least worst place to invest in the world. We were intrigued by Jim Rickards’ suggestion that Canada has the right combination of natural resources, rule of law… and a flood of money from Chinese elites looking for a safe haven. But you’ll want to hear the other panelists’ answers too — along with the investing guidance they’d give to the millennial generation of today’s 20-somethings, and an enlightening give-and-take on Bitcoin, featuring the Laissez Faire Club’s Jeffrey Tucker.

Throughout, there was no shortage of one-liners…

  • Navy veteran Byron King on his least-favorite movie, Top Gun: “I was embarrassed, I wanted to turn my wings in to my commander”
  • The Laissez Faire Club’s Doug French on how he knew the housing bubble in Vegas was out of control: “When sex workers leave the sex industry to sell real estate”
  • Chris Mayer invoking W.C. Fields on why he won’t write off the stock market
  • Barry Ritholtz on love versus a prenup: [Well, you just need to hear it for yourself]
  • Casey on the relative quality of wines from year to year and place to place: “After you have pre-dinner scotch, if you blindfold yourself and serve at the same temperature, you can’t tell the difference between red and white wine.”

And the recurring gag about frozen turkeys as a currency — that’s just one of those things you have to follow along from the beginning. But it’s a scream.

You get the Whiskey Bar along with the serious stuff as part of the Vancouver recordings. Order yours here. Note that we will not be held responsible if you’re seen laughing hysterically while wearing headphones and a loved one decides to have you committed…

Regards from Vancouver,

Dave Gonigam
The 5 Min. Forecast

P.S. Could Bitcoin ever supplant gold? The question inspired some provocative commentary at the Whiskey Bar. For more highlights from last night’s panel, check out today’s Roving Reporter dispatch from our friend Jim Amrhein.


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