The Seven Fat Years of ZIRP

By John Mauldin
 

“The Fed’s emergency policies since 2008 have in one sense been a huge success, though we will never know the counter-factual. A great depression was averted. Output is 10pc above its previous peak. Employment is up by 4.7m.

“Yet zero rates and QE set off torrid credit bubbles in the emerging world, pushing up the global debt ratio by 30pc of GDP beyond their previous record in 2008. The Bank for International Settlements calls this a “Pareto sub-optimal” for the world as a whole. The chickens have not yet come home to roost.”

– Ambrose Evans-Pritchard, The Telegraph
 

For seven long years, under two presidents and two chairpersons, the Federal Reserve kept its key policy rate effectively at zero. Now those years are over. We’re entering a new era – but new isn’t necessarily better.

Just for fun, I looked back to Thoughts from the Frontline for December 19, 2008 – right after the Fed first dropped rates to zero. You can read it here: “I Meant to Do That.” The theme with which I opened that issue could have worked just as well today, although we now have a different circumstance: rising rates.

The Fed has taken interest rates to zero. They have clearly started a program of quantitative easing. What exactly does that mean? Are we all now Japanese? Is the Fed pushing on a string, as Japan has done for almost two decades? The quick answer is no, but the quick answer doesn't tell us much. We may not be in for a two-decades-long Japanese malaise, but we will experience a whole new set of circumstances.

Indeed, we now face that whole new set of circumstances. The Federal Reserve has created a series of debt and credit bubbles all over the world. The Bank for International Settlements terms this a “Pareto sub-optimal” for the global economy.

On the other hand, to say that the Fed “tightened” this week amounts to a very generous use of the word. They still own a multi-trillion-dollar Treasury and mortgage-bond portfolio in which they continue to reinvest anything that matures or pays interest. Last week’s FOMC statement pledged to “maintain accommodative financial conditions.” No one should call this crew hawkish – just marginally less dovish now.

In today’s letter we are going to examine the problematic credit markets, and I want to focus on something that is happening off the radar screen: the continuing rise of credit in private lending. I predicted the rise of private credit back in 2007 and said that it would become a major force in the world, but I got strange looks from audiences when I talked about the arcane subject of private credit. Today the shadow banking system is taking significant market share from traditional banking. Thus the market is gaining greater control over many of the traditional levers that central banks like to push and pull. While I think that trend is generally a good thing, it means that central banks are going to have to lean even harder in their policy directions if they want to affect the markets. And since they do like to interfere, it won’t be long before we embark on a “whole new set of circumstances.”

But before we turn to the ups and downs of credit, in keeping with my pre-Christmas tradition, I want to commend to you a most worthy cause that will pay fabulous dividends in the future and help bring peace to our troubled world.

My friend Niall Ferguson introduced me to a young former hedge fund manager, Jonathan Starr, who in 2009 started a prep school called the Abaarso School of Science and Technology in Somaliland with a sizable personal donation and the investment of his time. When Jonathan first went there, he and the completely volunteer staff of foreigners did not know the local customs, did not speak the language, and were not professional educators. To say their task was challenging is a huge understatement. The local Muslim community looked on them with suspicion, and there were efforts to close them down. But they persevered and have been wildly successful. If you meet Jonathan and his team, you quickly understand why they have prevailed. Jonathan has invested 100% of his time in Abaarso and has had no other job for 6+ years.

In 2013 one Abaarso grad became the first student from Somaliland in three decades to earn a scholarship to a US college. Graduates of Abaarso have since gone on to Harvard and MIT, Georgetown and Oberlin, and many other colleges. Thus far this year, in the early-decision period for US colleges, Abaarso students have already received a handful of acceptances, including from Brown, Swarthmore, Brandeis, and TCU.  

The school is intense, with 60-hour weeks for the teachers and a massively strong academic program. They have driven the cost down to about $1800 per year per student. The school focuses on training the future leaders of Somaliland, stressing community service and the need for students to give back to their countrymen. The school is growing rapidly: there have been 95 graduates from the first three classes. Each class now numbers between 40 and 50 students; and Starr, who is not only the school’s founder but also its headmaster, expects that nearly all of those students will receive scholarships to study abroad. He projects that within 15 years nearly 500 Abaarso graduates will have earned bachelor’s degrees at foreign institutions. In a small country like Somaliland, that will have a major impact.

In the first few years Abaarso had trouble getting female students to school, but this year the incoming class is 50% male, 50% female. There are now some 60 students studying abroad. In a region known for its violence, the school is giving hope to young men and women. Some of the stories of the orphans and homeless students who have gone on from Abaarso to Ivy League schools in the US and major universities around the world are both heartbreaking and inspiring.

You can visit their website here, where you can easily donate to their cause. I also hope that some of my readers will drop an email to Jonathan Starr at jstarr@abaarsoschool.org. Ask him to send you his PowerPoint presentation and other materials. Some of you could easily think about sponsoring one of their older students in a prep school here in the US. We are talking about kids who are making spectacular contributions to colleges and prep schools when they are just given the chance.

Now, let’s look at the world of credit.

Breaking the Bonds

The Fed’s reversal comes at an interesting (pun intended) time for credit markets. If the financial crisis ripped the fixed-income sector apart, the years of ZIRP served to reassemble it. However, the new version only superficially resembles the old one. A fixed-income market in which the only fixed element is an interest rate fixed at zero is not something that would arise naturally. It exists only because someone twisted nature into a new shape. And as we all know, it’s not nice to fool with Mother Nature. She always takes her revenge.

ZIRP distorted the economy and the financial markets in countless ways. Remember when we had a “risk-free rate of return?” We used to regard the 30-day Treasury bill rate as a benchmark. It figured into metrics like the Sharpe ratio. If you could make 5% on your money with no risk, any manager who only delivered 3% would have to polish his résumé.

I hear you asking, what is this 5% return you speak of? Believe it or not, Treasury bills really yielded 5% as recently as 2006, right before the Fed began the easing cycle that ended this week. Everyone, myself included, thought that was perfectly normal. Returns in that range or even much higher had been our experience for 50 years, other than a brief stay just below 1% in the early-2000s recession. T-bills had always given us a nicely positive yield. No one imagined any other possibility.

That world in which 5% was the minimum return you’d expect from any manager worth his salt is pure fantasy now. We just finished seven years in which achieving returns with a + sign in front of them required taking on risk.

We’ve been able to choose our poison. We could take credit risk, inflation risk, equity risk, hedge fund risk, hurricane risk (seriously, you can) – any risk we liked. The one thing we weren’t allowed to have was daily liquidity with returns above zero as a certainty. It was the Age of the Guessing Game.

The ways in which the Fed has changed investor behavior are legion. By creating an environment that forced everyone to take risks, Ben Bernanke moved liabilities (i.e., deposits) out of the banking system and into risk assets. This helped the banks rebuild their mortgage-laden balance sheets.

Quite naturally, and as a direct consequence, the price of risk assets rose as everyone piled into them. Stocks were only one example. Look at housing, as well as most natural resources. They rose nicely while ZIRP reigned, as did assets all over the emerging-market world, setting up the crash of the past year. Bernanke’s 2013 QE “taper” comment was a big hint that change was coming. It took longer than anyone thought, but now that change is here.

As Ambrose points out, the Fed typically needs about 350 basis points of rate cuts to be able to work its “magic” on the economy. Although Fed governors project about 100 basis points of interest-rate hikes in the coming year, the market is seeing only two hikes of 25 basis points apiece. I’ll go with the market.

The Federal Reserve economists and board members’ projections assume no recession through 2019. If history has anything to say, they will be wrong. And while my opinion carries nothing like the weight of history, I personally think they will be wrong, too. We have already had the third longest “recovery” (weak as it is) following a recession since World War II. To think we can go without a recession for another full two years, through 2017, strains credibility. We will need to get well into 2018 or 2019 before we see the Fed’s projected funds rate of 3.5%.

I will repeat my wager from earlier this week: I think the chances that we’ll see 0% interest rates before we see 2% interest rates are better than 50-50, and I will give odds that we don’t see 3% before we are back to 0%.

That means the Fed will not have enough “bullets” in its interest-rate-cut arsenal. If the US goes into recession, a global recession is likely to follow. The world has never seen a full-blown recession with interest rates this close to 0% in both the US and Europe. The stimulus central banks would apply to stave off that recession would be staggering. Whether or not their Hail Mary pass would work is another question. That last-ditch effort would make the previous period of QE look like a stroll in the park.

Sucking Out Liquidity

A sideshow to this grand monetary experiment played out on Capitol Hill. Congress, as it often does, observed the horses escaping to the north 40 and decided it should close the barn door. It did this with the Dodd-Frank financial reform law.

Like much legislation, Dodd-Frank has given rise to major unintended consequences. For instance, the “Volcker Rule” has sucked liquidity out of the bond markets. Liquidity does not materialize from nowhere; someone has to provide it. That person or institution doesn’t work for free. Yet the Volcker Rule leaves little room for profit, for banks at least.

The result, for now at least, is that banks hold a fraction of the bonds in inventory that they used to. You may applaud or decry this outcome, but it is a reality, and it reduces banks’ ability to fill the market-making role they once did. Which means that when there is forced selling in the credit market, like we’ve seen the past month, the banks aren’t there to provide liquidity. Over time, new private institutions will develop to provide that liquidity, at a price. But until that time, volatility will be the rule.

Focused Failure

This month’s thunderbolt liquidity event struck with the announcement that Third Avenue Focused Credit Fund (TFCVX) would close and liquidate. Recent results had been awful – down 27% this year. Investors withdrew two-thirds of the mutual fund’s assets in the seven months before it closed, leaving it with only $788 million.

What happened? Third Avenue focused on the riskiest end of the debt market, mainly companies that had gone bankrupt or were in distress. In other words, it owned bonds with such horrible prospects that even high-yield funds wouldn’t touch them.

Believe it or not, this can be a good business. Howard Marks of Oaktree (a huge distressed-debt hedge fund) is positively ebullient when talking about the opportunities in distressed debt today. It’s a different kind of investing. A fund might buy bonds issued by a company that is edging toward bankruptcy. Maybe they pay 30 cents on the dollar but figure they can get out at 50 cents on the dollar after the company restructures. That’s a good deal. Sniffing opportunity out takes a whole different kind of analysis and battalions of sharp-eyed lawyers.

You see this kind of investing more often in private hedge funds – and with good reason: those sort of bonds are not very liquid. Mutual funds like Third Avenue have to let investors redeem at net asset value every day. They apparently reached a point where they couldn’t do it.

I can only imagine what sort of meetings lead up to a decision like this one. They could have kept the fund going and raised cash by selling off the holdings at fire-sale prices. They decided instead to halt redemptions completely, distribute the cash on hand, and place the remaining bonds in a liquidating trust. Investors will get periodic payments as the trust sells its bond holdings over the next year or two.

Some investors are displeased, but this move was the right one. They should be able to “work out” of the remaining positions on better terms than they would have been able to do by selling those positions all at once.

This brings up a key point I think many investors forget: liquidity is never free. You pay for it, usually in the form of lower returns.

Back when banks actually paid interest, you could have a savings account or a certificate of deposit (CD). What was the difference? Well, the savings account allowed you to take your money out whenever you wanted. The CD kept it locked up for a defined number of months or years.

Which one paid higher interest? The CD, of course. The extra return was your reward for giving up liquidity. The interest forgone for owning a savings account instead of a CD was essentially a penalty. You paid it in exchange for the right to demand your cash at any time.

The same principles apply to securities. Open-end mutual funds and ETFs have to be prepared to meet redemptions at any time. That forces them to keep some uninvested cash and to buy only liquid securities that they can unload on short notice. Furthermore, if they are forced to sell due to redemption requests, buyers know this and lower their bids. This further reduces any potential profit and, as we saw in the case of Third Avenue, can lead to very large losses.

A closed-end fund or a private hedge fund offers less liquidity to investors but greater flexibility to managers. These funds can take advantage of opportunities a public fund can’t. Other things being equal, this usually translates into higher returns over time.

I’m quite familiar with one private credit hedge fund whose returns were down almost 30% in 2009; but as it turned out, not one investor lost money. There was a rolling three-year lockup so nobody could withdraw money during the crisis. The fund was back at a high-water mark in a little over two years; and by the time anybody could redeem, the fund had garnered a reasonable profit for the full three-year cycle. Lack of liquidity imposed a huge cost on those who sold their assets in a private sale (which was possible in private markets, at a significant discount to the already reduced NAV).

If you are investing for retirement or some other long-term goal, do you really need instant liquidity? Probably not. So why pay for it? The usual answer is “just in case.” That’s a perfectly respectable answer, too. Just realize that you’re paying a lot for a privilege you probably won’t avail yourself of very often.

 This principle points to an opportunity: your willingness to give up liquidity is an asset that will buy you a shot at significantly higher returns.

Private Credit Reaching Maturity

More than eight years ago I predicted that the private-credit world would explode into equal prominence with private equity within a few decades. I’m clearly on target for that prediction. It may happen a lot sooner. I’ve been a fan of private credit for a long time.

Recently, I have once again been exploring the private-credit world. The term encompasses a whole range of investments. The common thread is that they involve non-bank lending. This market is far bigger than I had thought.

Much of the growth in private credit is a direct consequence of declining bank lending. Between the financial crisis and new restrictions like Dodd-Frank, banks have had to seriously tighten their lending standards. Moreover, they’ve had to cut back in ways that don’t make sense. I talk to a lot of small-bank executives and directors. They constantly complain that the regulators are forcing them out of profitable markets and making it impossible for them to do business. I can’t help but sympathize, because they are right. But this regulatory restriction is creating a huge opportunity for the creation of private lending.


Meanwhile, not only are banks operating illogically, they are centralizing the illogic. The giant Wall Street banks have been snapping up local and regional banks, thereby eliminating the hands-on, personalized approach to lending. Most banks are now highly centralized bureaucracies. That’s great if your need is shaped like their cookie cutter. If it isn’t, the big bank can’t help you.

Fortunately, the economy is still free enough to create alternatives to fill the gaps. Non-bank lenders are leveraging technology to supply credit in the niches banks ignore.

You might have heard of the online peer-to-peer lending platforms like Prosper and Lending Club. They connect people and businesses that need to borrow money with investors who have money to lend. They make a match that can give both sides the terms they want.

Here is an example I ran into last week on Lending Club. Say you want a $25,000 debt-consolidation loan. Your FICO score is in the “good” range – 660-720 – and you have annual income over $100,000. With Lending Club you can get a five-year loan at 7.89% with a 3% origination fee. That works out to a 9.63% APR, less (and in some cases much less) than most credit cards charge.

Where does this money come from? Investors buy packages of loans that may contain thousands of loans like the one outlined above. Lending Club claims its top three credit groups have delivered historical returns ranging from 5.23% to 8.82% with very modest risk.

Modest risk is not the same as no risk, of course, but we’ve already established that risk-free investing pays you little or nothing. It certainly doesn’t pay 5% or more. Peer-to-peer lending through these platforms can earn you a substantially higher income than a corporate bond fund with similar maturity.

The difference is liquidity. You can escape the corporate bond fund or ETF with a few mouse clicks any time the markets are open. You can’t do that with P2P. Giving up that liquidity earns you a higher return.

(I use Lending Club only as an example, by the way. I have no affiliation with them, nor have I done any significant due diligence. Do your own homework, or have your investment advisor do it, if you want to consider investing in P2P loans.)

P2P is only the surface layer of the private-credit market. It can be a good option for people with relatively small portfolios. Accredited investors and institutions have many more choices. These are hard to find, but the ones I’ve seen are even more compelling than P2P.

Bye-Bye, Bank Branches 

McKinsey did a study on P2P lending last year. They projected that by the end of 2015 (i.e., now) P2P platforms would be able to offer loans at 400–500 basis points less than an equivalent bank could. (That rate is for small borrowers. Large borrowers with good credit can get amazingly low rates from banks today.)

Private credit firms can do this because they have lower expenses than banks do. They don’t need brick-and-mortar branches all over the place. They don’t have decades-old computer systems and cumbersome, lawyer-driven processes. They don’t have to service checking and savings accounts. They do one thing, and they do it very efficiently.

In many cases, private-credit lenders specialize in a particular industry or market segment. They might be experts in equipment leasing, real estate, education financing, vehicle loans, or countless other niches. This specialization matters, because knowing the niche lets them control risk and offer the most competitive terms.

Banks are fully aware of this challenge. They also seem to know how deeply stuck in the mud they are. Their main response so far is to partner with private lenders. The money you deposit in a bank might well end up in some of these private-credit loans.

Earlier this month, JPMorgan Chase announced a strategic relationship with OnDeck Capital. Together they will offer “small-dollar” loans in an online portal. (A small-dollar loan means less than $250,000.)

I can see the attraction for JPM. They will keep loans above the $250,000 level in-house and have their own employees do the credit analysis and other work on them. They’ve probably concluded that the small-fry loans aren’t profitable for the bank, but they also don’t want to sacrifice those relationships. Their deal with OnDeck is a compromise toward that end.

Such partnerships may be the legacy bank’s best shot at remaining relevant, by the way. They are getting squeezed from both directions. Regulators have made it harder for them to make money in commercial lending to large businesses. The low-cost private-credit lenders are locking them out of smaller loans. The walls are closing in, so they need to do something.

They have a short list of choices. Your list is much longer.

Sniffing for Opportunities

People I’ve talked to in the private-credit space tell me it is quite possible, even routine, for investors to earn 300-600 basis points in additional yield simply by giving up the daily liquidity that they may not really need.

Private-credit investment vehicles come in many flavors. Some require you to lock up your money for several years. Others have quarterly or annual redemption opportunities. There is a direct relationship between the amount of liquidity you sacrifice and the yield you can earn. Patience is rewarded well.

I know of one private fund, available right now to accredited investors with a $50,000 minimum, that pays out a 10% annualized fixed interest rate each quarter. The average maturity is only two years, and the credit risk is very diversified. (I have no affiliation with this fund and legally can’t mention its name; nor will I tell you, so don’t ask. It is simply against the rules for me to do so.)

Is that interesting to you? It certainly is to me. This ought to really interest the many Baby Boomers who are approaching retirement with inadequate savings. An extra 3–6% yield can make up for a lot of lost time.

Better yet, think of the many underfunded public and private pension plans. Their managers should be all over this opportunity. They should have no problem giving up liquidity, and the extra yield will bring them closer to meeting their obligations.

Like all opportunities, this one will become less attractive as it gains popularity. At some point you can have investors wanting to lend more dollars than qualified borrowers need to borrow. That imbalance will push down the yields. Sadly, I am watching that happen in market after market. Once a credit risk becomes well-known and understood, it gets gobbled up to the point that the credit spreads become thin when compared to the risk.

Meanwhile, the biggest challenge is finding the opportunities. Securities regulations prevent some of the best ones from advertising publicly. Others have all the cash they can handle and don’t need to advertise.

I am planning to include a session or two on private lending at my 2016 Strategic Investing Conference next May. Income planning is a hot topic, and I’ve had many requests to cover it more systematically.

To do this, I’d like to ask readers for help. If you are somehow involved in private credit or know of good opportunities, send me an email at business@2000wave.com.
 
Give me as much information as you can. My team will explore these opportunities in the private-credit space and see how they can fit into the conference agenda. We might have a special session limited to accredited investors, but I’ll try to keep it open to everyone if possible.

Speaking of my conference, we opened the SIC Registration Page last week. You can save $500 off the walkup rate by registering before January 15. We’ve moved the event to Dallas this year. The dates are May 24-27. Click here for more details. And if you’re interested in being an exhibitor sponsor at the conference, drop me a note.

Hong Kong, Hollywood (Florida), and the Cayman
 
Islands

With the holidays at hand, I’m not scheduled to fly until early January, when I will spend five days in Hong Kong, speaking with clients of Merrill Lynch. Later in January, the 24th–27th, I will be the keynote speaker at the big ETF conference (ETF.com), where a few thousand people will gather to talk about portfolio design in the world of ETFs. I’m really looking forward to that. Then I’ll return to the Cayman Islands for a speech in early February. I know I have to get to New York and maybe Washington DC sometime betwixt and between; but for me that is a rather sedate travel schedule – which is good, because I need to be spending most of my time researching and writing my new book.

Speaking of that book, I’m doing three to four conference calls a day with the people who volunteered to help me research the various chapters of the book. We’ve done about 15 groups so far this week and will do the remainder (hopefully) this coming week. I am simply amazed at the quality and enthusiasm of the people in what is now The Transformation Project. It has been a huge learning curve for me to try to organize something this complex. If it works, the “secret” will be that I have designed the overall project but am basically expecting the individual participants to self-organize their groups. I just don’t see how one-size-fits-all would work for so many varieties of people and topics. So far, the method in the madness seems to be working. This will expand the research that I’m capable of doing by several orders of magnitude, I think, and most of the people involved have far more experience in their various topics than I do. I will keep you informed as we make progress. My “mental date” for finishing the first draft of the book is the end of April, with May dedicated to rewriting and then handing it off to one of the best old-school editors in the world, Terry Coxon, who will whip it into shape. I’m actually quite energized by the whole process.

This will be the last Thoughts from the Frontline of 2015. I really don’t want to be sending a letter out over the Christmas weekend, so the next letter will be my annual predictions letter, arriving over New Year’s weekend. I have traditionally sent my prediction letter out the second week of January, but I’m going to try to do it earlier this year.

It’s hard to believe that we will be closing the curtain on another year. Looking back over my life, it seems I am always optimistic about a new year, and this year is no different. More often than not, my optimism is been rewarded. I have had a truly blessed life. As a parting gift, I give you a link to Dallas-based Vocal Majority, the world’s premier barbershop harmony group (150 members), which has won more gold medals than any other such group in the world, offering their amazing version of “Auld Lang Syne.” Here’s raising my cup of kindness to you.

I want to thank you from the bottom of my heart for your gift of time and attention. I realize that in a world where we have ever more information coming at us from every direction, your time is the most valuable commodity of all.

Your thinking this will be our best year ever analyst,

John Mauldin


Political uprising in Spain shatters illusion of eurozone recovery

"Our message to Europe is clear. Spain will never again be the periphery of Germany. We will restore the meaning of sovereignty," said Podemos

By Ambrose Evans-Pritchard


Podemos leader Pablo Iglesias Photo: Reuters
 
 
Spain risks months of political paralysis and a corrosive showdown with Germany over fiscal austerity after insurgent movements smashed the traditional two-party system, leaving the country almost ungovernable.

The electoral earthquake over the weekend in one of the eurozone’s ‘big four’ states has echoes of the shock upsets in Greece and Portugal this year, a reminder that the delayed political fuse from years of economic depression and mass unemployment can detonate even once the worst seems to be over.
 
Bank stocks plummeted on the Madrid bourse as startled investors awoke to the possibility of a Left-wing coalition that included the ultra-radical Podemos party, which won 20.7pc of the votes with threats to overturn the government’s bank bail-out and to restructure financial debt.
 
Pablo Iglesias, the pony-tailed leader of the Podemos rebellion, warned Brussels, Berlin, and Frankfurt that Spain was retaking control over its own destiny after years of kowtowing to eurozone demands.
 
“Our message to Europe is clear. Spain will never again be the periphery of Germany. We will strive to restore the meaning of the word sovereignty to our country,” he said.



The risk spread on Spanish 10-year bonds jumped eight basis points to 123 over German Bunds, though there is no imminent danger of a fresh debt crisis as long as the European Central Bank is buying Spanish bonds under quantitative easing. The IBEX index of equities slid 2.5pc, with Banco Popular and Caixabank both off 7pc.

Premier Mariano Rajoy has lost his absolute majority in the Cortes. Support for the conservative Partido Popular crashed from 44pc to 29pc, costing Mr Rajoy 5m votes as a festering corruption scandal took its toll.

The electorate punished the two mainstream parties that have dominated Spanish politics since the end of the Franco dictatorship in the 1970s, and which by turns became the reluctant enforcers of eurozone austerity.

The Socialists (PSOE) averted electoral collapse but have lost their hegemony over the Left and risk being outflanked and ultimately destroyed by Podemos, just as Syriza annihilated the once-dominant PASOK party in Greece.

It had been widely assumed that Mr Rajoy would have enough seats to form a coalition with the free-market and anti-corruption party Ciudadanos, but this new reform movement stalled in the closing weeks of the campaign.



“There is enormous austerity fatigue and the country as a whole has clearly shifted to the Left,” said sovereign bond strategist Nicholas Spiro. Yet the Left has not won enough votes either to form a clear government.

“The issue now is whether Spain is governable. All the parties are at daggers drawn and this could drag on for weeks. I don’t see any sustainable solution. We can certainly forget about reform,” he said.

Mr Spiro said Spain has already seen a “dramatic deterioration” in the underlying public finances over the last eighteen months, although this has been disguised by a cyclical rebound, the stimulus of cheap oil and a weak euro, and QE from Frankfurt. “They have simply gone for growth,” he said.
 
Yvan Mamalet from Societe Generale said Spain’s potential growth rate has fallen to 1pc, from over 3pc before the crisis, a sign of how much damage has been done by the ‘hysteresis’ effects of long-term unemployment and lack of investment.

A new disease is spreading across Europe: hysteresis



Public debt has jumped to 100pc of GDP and is nearing the safe limit for a country in a currency union with no sovereign central bank. “Spain now has very limited fiscal space and any external shock could push debt towards less sustainable levels, above 130pc,” he said.

Spain has been held up as the poster-child of austerity and reform in southern Europe. But while it is true that growth has rebounded, output is still 5pc below its previous peak. The deeper pathologies and imbalances of the pre-crisis era are still there.

The International Monetary Fund says the “structural deficit” has risen from 1.8pc of GDP last year to 2.5pc this year. This is courting fate given that Spain’s net international investment position (NIIP) is minus 90pc of GDP, far beyond the 30pc safety limit. “Deep structural problems remain and vulnerabilities persist,” it said.



The IMF warned that Spain still needs radical reform of the labour laws to raise low productivity levels and move up the value-chain, and cited “reversal of past reforms” as the key risk. That is exactly what may now happen.

If a Socialist-Podemos coalition takes charge at the head of a Left alliance, it will not be singing the IMF tune.

It would also be foreign policy disaster for German Chancellor Angela Merkel, who has already lost Italy, Greece, and Portugal to the Left, and faces the growing risk of anti-austerity 'Latin bloc' led by the Socialists in France.

A swing to the Left in Spain would change the balance of power in the European Council and spell the end of Mrs Merkel's control over the EMU policy machinery.

Mr Iglesias has toned down his hard-line views, trying to strike a tone of authority in foreign affairs and economics. “When you want to be leader of your country, you have to be credible,” he said.


The party has dropped its call for the seizure of telecommunications, transport, the banks, energy companies, and the commanding heights of the economy, limiting nationalisation to “exceptional” circumstances.

It no longer demands restructuring of the country’s €1.1 trillion public debt, opting instead for an audit to determine which parts of the bank bail-out debt is odious and should be repudiated.

It still wants a 35-hour week, but now accepts that the retirement age must rise to 65. Plans to leave NATO have been shelved.

Yet Podemos, a child of the ‘Indignados’ revolt against austerity, is led by young university professors steeped in the theories of Italy’s former Communist guru Antonio Gramsci. They have learned a lesson watching Syriza make blunders in Greece, but they are no less radical.

Simon Tilford from the Centre for European Reform said Spain is not out of the woods and the eurozone’s elites are “mistaking a modest cyclical upturn for something more profound”.



There has been an export miracle of sorts, led by a surge in car output as multinational companies switch plant from France to Spain to take advantage of wage cuts, reaching 27pc for new workers at plants in Valladolid.

But what has really eliminated the current account deficit is a 12pc collapse in internal demand. Imports have been choked. The country can barely balance its external books with unemployment at 22pc. A full recovery would quickly expose Spain's chronic lack of competitiveness within the euro structure.

Mr Tilford warns that the country will enter the next global downturn with its economic defences largely exhausted and few tools left to fight recession, and above all with populist parties already gaining a deep foothold. The political shock over the weekend is the first thunderclap.


How the Fed Just Reduced Inequality

Alexander Friedman
. Janet Yellen


NEW YORK – The US Federal Reserve has finally done it, raising interest rates for the first time in almost a decade. The ramifications for interest-rate spreads, emerging-market equities, and housing demand, among much else, are the subject of widespread debate. But, as markets learn to cope with a less accommodative monetary policy, there could be an important silver lining, which most people have ignored.
 
Income and wealth inequality in the United States has grown steadily since the global financial crisis erupted in 2008, but monetary-policy normalization could mark the beginning of the end of this trend. Indeed, it should serve to accelerate its reversal.
 
Consider a few dismal statistics reflecting the current state of affairs. Real (inflation-adjusted) median household income in the US is about the same as in 1979. A recent study by the Pew Research Center noted that Americans earned 4% less income in 2014 than they did in 2000, and for the first time in more than 40 years, middle-class Americans no longer constitute a majority of the population.
 
America’s 20 wealthiest people now own more wealth than the bottom half of the entire population The wealth gap between America’s high-income group and everyone else has never been more extreme; rich households account for more than one in five of the entire US population. Strikingly, one hour north of Wall Street, in Bridgeport, Connecticut, the Gini coefficient – a standard measurement of income distribution and inequality – is worse than in Zimbabwe.
 
Ironically, this trend was exacerbated by the policy response to the financial crisis. While the recession of 2007-2008 caused higher-income groups to suffer more than lower-income groups (because the former tend to derive relatively more of their income from more volatile sources of capital income, as opposed to labor income), the opposite has been true since 2009. Since then, about 95% of all income gains have gone to the top 1%.
 
The causes of rising income and wealth inequality are multiple and nuanced; but the unintended consequences of the recent unprecedented period of ultra-loose monetary policy deserves a chunk of the blame. Negative real interest rates and quantitative easing have enforced financial repression on holders of cash, hurting savers, while broadly boosting prices of riskier financial assets, most commonly held by the rich. When there is no yield in fixed income, even the most conservative pension funds pile into risk assets, driving prices higher and higher.
 
Corporations have benefited massively from these stimulus measures, but at the expense of the working population. Profit margins have expanded to record highs as companies have cut costs, delayed infrastructure investments, borrowed at ultra-low rates, and taken advantage of weak labor markets to avoid raising wages.
 
But are we now on the verge of a trend reversal? The S&P 500 has rallied 150% since its 2009 lows, and valuations look rich given weakening growth dynamics (the Shiller price/earnings ratio stands at 26, compared to 15 in 2009). Against this backdrop, the wealthiest Americans are unlikely to enjoy substantial further profits from their financial investments in the near term.
 
At the same time, we should see meaningful upward pressure on wages for the first time in many years. The unemployment rate has dropped to 5%, just above the Fed’s current median estimate for the non-accelerating inflation rate of unemployment (NAIRU). While the true NAIRU level is probably lower, and we are likely witnessing a secular decline in the workforce participation rate, the US labor market should still tighten in 2016.
 
Indeed, the number of those “not in the labor force, currently want a job” category dropped 416,000, to just above 5.6 million, in November; historically, this kind of change has been closely associated with rising wage pressure. And the average hourly wages for all employees on private non-farm payrolls posted an annual increase of 2.5% in October, the biggest since 2009.
 
As the Fed slowly raises interest rates, those middle-class families holding their hard-earned savings at the bank will finally start realizing some return on their deposits. The long-term effects should not be underestimated, given the helpful impact of compound savings.
 
During the last tightening cycle between 2004 and 2006, households’ interest income rose 29%.

Although this time, the gains presumably will be smaller and slower to arrive, owing to the likely pace and extent of Fed tightening, interest paid on savings will move household income in the right direction: up.
 
Of course, a multitude of political reforms, each with potential positive implications for welfare, could reduce the extent of inequality further. But the barriers to such measures – say, to make the tax system more progressive – are well known, especially against the backdrop of a presidential election campaign. This means that an increase in real wages for workers will have the most immediate impact, even if the downside is lower profit margins for corporate America.
 
The Fed’s decision to raise rates is a historic moment for financial markets and is already ushering in a period of increased volatility for asset prices worldwide. Although this may be challenging for investors, we should take comfort in the implications for the real economy.
 
The social contract in the US has frayed badly, and this is likely to play an important role in the upcoming presidential election, as voters express anger that the American Dream is increasingly out of reach. No economic recovery can sustain itself without rising wages and higher consumer spending power. The Fed may have just signaled that the beginning of this necessary dynamic, perhaps the key inflection point of the inequality trend, is finally here. And it may also have done its part to speed its arrival.
 


Debunking Anti-Gold Propaganda

by Doug Casey




A meme is now circulating that gold is the investment equivalent of a pet rock, and that the smart investor should sell gold, and buy stocks. That’s a ridiculous notion. In fact, if you believe in buying low and selling high, this is the time to buy gold, and sell stocks.

It pays to remain as objective as you can be when analyzing any investment. People have a tendency to fall in love with an asset class, usually because it’s treated them so well. We saw that happen most recently with Internet stocks in the late ’90s and with houses up to 2007.

Investment bubbles are driven primarily by emotion, although there’s always some rationale for the emotion to latch on to. Perversely, when it comes to investing, reason is recruited mainly to provide cover for passion and preconception.

In the same way, people tend to hate certain investments unreasonably, usually at the bottom of a bear market, after they’ve lost a lot of money; even thinking about the asset means reliving the pain and loss. Love-and-hate cycles occur for all investment classes.

But there’s only one investment I can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions - especially among people who dislike them.

Nobody has an instinctive hatred of iron, copper, aluminum, or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. Let’s spend a moment looking at how gold’s fundamentals fit in with the psychology of the current market.

What Gold Is - and Why It’s Hated

Let me first disclose that I’ve always been favorably inclined toward gold, simply because I think money is a good thing. Not everyone feels that way, however. Some, with a Platonic view, think that money and commercial activity in general are degrading and beneath the “better” sort of people - although they’re a little hazy about how mankind rose above the level of living hand-to-mouth, grubbing for roots and berries. Some think it’s “the root of all evil,” a view that reflects a certain attitude toward the material world in general. Some better-informed people (who have actually read Paul of Tarsus) think it’s just the love of money that’s the root of all evil. Some others see the utility of money, but think it should be controlled somehow - as if only the proper authorities know how to manage the dangerous substance.

From an economic viewpoint, however, money is just a medium of exchange and a store of value.

Efforts to turn it into a political football invariably are signs of a hidden agenda, or perhaps a psychological aberration.

But, that said, money does have a moral as well as an economic significance. And it’s important to get that out in the open and have it understood. My view is that money is a high moral good.

It represents all the good things you hope to have, do, and provide in the future. In a manner of speaking, it’s distilled life. That’s why it’s important to have a sound money, one that isn’t subject to political manipulation.

Over the centuries, many things have been used as money, prominently including cows, salt, and seashells. Aristotle thought about this in the 4th century BCE and arrived at the five characteristics of a good money:

• It should be durable (which is why, say, wheat isn’t a good money - it rots).

• It should be divisible (which is why artwork isn’t a good money - you can’t cut up the Mona Lisa for change).

• It should be convenient (which is why lead isn’t a good money - it just takes too much to be of value).

• It should be consistent (which is one reason why land can’t be money - each piece is different).

• And it should have value in itself (which is why paper money leads to trouble).

Of the 92 naturally occurring elements, gold has proved the best money (silver is second). It’s not magic or superstition any more than it is for iron to be best for building bridges and aluminum for building airplanes.

Of course, we do use paper as money today, but only because it recently served as a receipt for actual money. Paper money (currency) historically has a half-life that depends on a number of factors. But it rarely lasts longer than the government that issues it. Gold is the best money because it doesn’t need to be “faith based” or rely on a government.

There’s much more that can be said on this topic, and it’s important to grasp the essentials in order to understand the controversy about whether now is a good time to buy. But this isn’t the place for an extended explanation.

Keep these things in mind, though, as you listen to the current blather from talking heads about where gold is going. Most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations. You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.

So, let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.

Misinformation and Disinformation

Let’s examine some memes floating around.

“Gold is expensive.”

This objection is worth considering - for any asset. In fact, it’s critical. We can determine the price of almost anything; that’s easy. The hard part is figuring out its value. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 to 1971, it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 - but that official number is meaningless, since nobody buys or sells the metal at that price.

More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.

Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold. Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence.

It’s hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.

“The smart money is long gone from gold.”

This is an interesting assertion that I find is based on nothing at all. Who really is the “smart money”? How do you really know that? And how do you know exactly what they own (except for, usually, many months after the fact) or what they plan on buying or selling? The fact is that very few billionaires (John Paulson perhaps being the best known of them) have declared a major position in the metal. Gold is only a tiny proportion of the financial world’s assets, both absolutely or relative to where it has been in the past:



“Gold is risky.”

Risk is largely a function of price. And, as a general rule, the higher the price, the higher the risk, simply because supply is likely to go up and demand down - leading to a lower price. So, yes, gold is riskier at $1,100 than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.

In any event, risk is relative. Stocks are very risky today. Bonds are ultrarisky. Real estate, at least in many major cities, is in a near mania. And the dollar, although it’s cyclically popular, is on its way to reaching its intrinsic value. In fact, stock, bonds, property, and the dollar are all in bubble territory.

Yes, gold is risky now. But it is actually much less risky than most alternatives.

“Gold pays no interest.”

This is kind of true. But only in the sense that a $100 bill pays no interest. You can get interest from anything that functions as money if it is lent out. Interest is the time premium of money. You will not get interest from either your $100 or your gold unless you lend them to someone. But both the dollars and the gold will earn interest if you lend them out. The problem is that once you make a loan (even to a bank, in the form of a savings account), you may not even get your principal back, much less the interest. And, of course, many banks around the world now pay negative interest for loaning them money - an absurd inversion of reality.

“Gold pays no dividends.”

Of course it doesn’t. It also doesn’t yield chocolate syrup. It’s a ridiculous objection, because only corporations pay dividends. It’s like expecting your Toyota in the driveway to pay a dividend, when only the corporation in Japan can do so. But if you want dividends related to gold, you can buy a successful gold mining stock.


“Gold costs you insurance and storage.”

This is arguably true. But it’s really a sophistic misdirection to which many people uncritically nod in agreement. You may very well want to insure and professionally store your gold. Just as you might your jewelry, your artwork, and most valuable things you own. It’s even true of the share certificates for stocks you may own. It’s true of the assets in your mutual fund (where you pay for custody, plus a management fee).

You can avoid the cost of insurance and storage by burying gold in a safe place - something that’s not a practical option with most other valuable assets. But maybe you really don’t want to store and insure your gold, because the government may prove a greater threat than any common thief. And if you pay storage and insurance, they’ll definitely know how much you have and where it is.

“Gold has no real use.”

This assertion stems from a lack of knowledge of basic chemistry as well as economics. Yes, of course people have always liked gold for jewelry, and that’s a genuine use. It’s also good for dentistry and micro-circuitry. Owners of paper money, however, have found the stuff to be absolutely worthless hundreds of times in scores of countries.

In point of fact, gold is useful because it is the most malleable, the most ductile, and the most corrosion resistant of all metals. That means we’re finding new uses for it literally every day. It’s also the second-most conductive of heat and electricity, and the second-most reflective (after silver). Gold is a hi-tech metal for these reasons. It can do things no other substance can and is part of the reason your computer works so well.

But all these reasons are strictly secondary, because gold’s main use has always been (and I’ll wager will be again) as money. Money is its highest and best use, and it’s an extremely important one.

“The U.S. can, or will, sell its gold to pay its debt, depressing the market.”

I find this assertion completely unrealistic. The U.S. government reports that it owns 265 million ounces of gold. Let’s say that’s worth about $300 billion right now. I’m afraid that’s chicken feed in today’s world. It’s only half of this year’s federal deficit alone. It’s only half of one year’s trade deficit. It represents perhaps only 2% of the dollars outside the U.S. The U.S. government may be the largest holder of gold in the world, but it owns less than 5% of the approximately 6 billion ounces above ground.

From the ’60s until about 2000, most Western governments were selling gold from their treasuries, working on the belief it was a “barbarous relic.” Since then, governments in the advancing world - China, India, Russia, and many other ex-socialist states - have been buying massive quantities.

Why? Because their main monetary asset is U.S. dollars, and they have come to realize those dollars are the unbacked liability of a bankrupt government. They’re becoming hot potatoes, Old Maid cards.

But the dollars can be replaced with what? Sovereign wealth funds are using them to buy resources and industries, but those things aren’t money. And in the hands of bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal of gold buying from governments around the world over the next few years. And it will be at much higher dollar prices.

“High gold prices will bring on huge new production, which will depress its price.”

This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 90 million ounces per year and is trending down. That’s partly because, at high prices, miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production. And partly because most production is now unprofitable. Miners aren’t putting any new mines into production.

But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper; its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things - new production is a trivial influence.

That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold; space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists’ dream; perhaps someday this will be economic for gold. And nanotech may soon allow ultralow-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters for years to come.

“You should have only a small amount of gold, for insurance.”

This argument is made by those who think gold is only going to be useful if civilization breaks down, when it could be an asset of last resort. In the meantime, they say, do something productive with your money…

This is poor speculative theory. The intelligent investor allocates his funds where it’s likely they’ll provide the best return, consistent with the risk, liquidity, and volatility profile he wants to maintain.

There are times when you should be greatly overweight in a single asset class - sometimes stocks, sometimes bonds, sometimes real estate, sometimes what-have-you. From 1971 to 1980 and 2001 to 2011, it was wise to be hugely overweight gold. From 1981 to 2000 and 2011 to the present, it was wise to only keep an insurance position. Right now, you again want an overweight position. The idea of keeping a constant, but insignificant, percentage in gold impresses me as poorly thought out.

“Interest rates are near zero; gold will fall as they rise.”

In principle, as interest rates rise, people tend to prefer holding currency deposits. So they tend to sell other assets, including gold, to own interest-earning cash. But there are other factors at work. What if the nominal interest rate is 20%, but the rate of currency depreciation is 40%?

Then the real interest rate is minus 20%. This is more or less what happened in the late ’70s, when both nominal rates and gold went up together. Right now governments all over the world are suppressing rates even while they’re greatly increasing the amount of money outstanding; this will eventually (read: soon) result in both much higher rates and a much higher general price level. At some point, high real rates will be a factor in ending the gold bull market, but that time is many months or years in the future.

“Gold sentiment is dead.”

That’s quite true. Gold sentiment is not just quite subdued among the public; most of them barely know the metal even exists.

You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point. When it arrives, I hope to sell my gold and buy the NYSE.

“Mining stocks are risky.”

This is absolutely true. In general, mining is a horrible business. It requires gigantic fixed capital expense to build a mine, but only after numerous, expensive, and unpredictable permitting issues are handled. Then, the operation is immovable and subject to every political risk imaginable, not infrequently including nationalization. Add in continual and formidable technical issues of every description, compounded by unpredictable fluctuations in the price of the end product. Mining is a horrible business, and you’ll never find Graham-Dodd investors buying mining stocks.

All these problems (and many more that aren’t germane to this brief article), however, make mining stocks excellent speculative vehicles from time to time. Like right now.

“Mineral exploration stocks are very, very risky.”

This is very, very true. There are thousands of little public companies, and some are just a couple steps up from a prospector wandering around with a mule. Others are fairly sophisticated, hi-tech operations. Exploration companies are often classed with mining companies, but they are actually very different animals. They aren’t so much running a business as engaging in a very expensive and long-odds treasure hunt.

That’s the bad news. The good news is that they are not only risky but extraordinarily volatile.

The most you can lose is 100%, but the market cyclically goes up 10 to 1, with some stocks moving 1,000 to 1. That kind of volatility can be your best friend. Speculating in these issues, however, requires both expertise and a good sense of market timing. But they’re likely to be at the epicenter of the gold bubble when it arrives - even though few actually have any gold, except in their names.

“Warren Buffett is a huge gold bear.”

This is true, but irrelevant - entirely apart from suffering from the logical fallacy called “argument from authority.” Nonetheless, when the world’s most successful investor speaks, it’s worth listening.

Here’s what Buffett said about gold in an interview with Ben Stein, another goldphobe:

You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all - not some, all - of the farmland in the United States. Plus, you could buy 10 ExxonMobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

I’ve long considered Buffett an idiot savant - a genius at buying stocks but at nothing else. His statement is accurate, but completely meaningless. The same could be said of the U.S. dollar money supply - or even of the world inventory of steel and copper. These things represent potential, but are not businesses or productive assets in themselves. Buffett is certainly not stupid, but he’s a shameless and intellectually dishonest sophist, despite his disarming and avuncular demeanor. And although a great investor, he’s neither an economist nor someone who believes in free markets.

“Gold is a religious statement.”

Actually, since most religions have an otherworldly orientation, they’re at least subtly (and often stridently) anti-gold. But it is true that some promoters of gold seem to have an Elmer Gantry-like style. That, however, can be said of True Believers in anything, whether or not the belief itself has merit. In point of fact, I think it’s more true to say goldphobes suffer from a kind of religious hysteria, fervently believing in collectivism in general and the state in particular, with no regard to counterarguments. Someone who understands why gold is money and why it is currently a good speculative vehicle is hardly making a religious statement. More likely, he’s taking a scientific approach to economics and thinking for himself.

So Where Are We?

So, these are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools, or the uninformed.

My own view should be clear from the responses I’ve given above. But let me clarify it a bit further. Historically - actually just up until the decades after World War I, when world governments started issuing paper currency with no relation to gold - the metal was cash, and it was used as money everywhere, on a daily basis. I believe that will again be the case in the fairly near future.

The question is: At what price will that occur, relative to other things? It’s not just a question of picking a dollar price, because the relative value of many things - houses, food, commodities, labor - has been distorted by a very long period of currency inflation, increased taxation, and very burdensome regulation that started at the beginning of the last depression. Especially with the fantastic leaps in technology now being made and breathtaking advances that will soon occur, it’s hard to be sure exactly how values will realign after the Greater Depression ends. And we can’t know the exact manner in which it will end. Especially when you factor in the rise of China and India.

A guess? I’ll say the equivalent of about $5,000 an ounce of today’s dollars. And I feel pretty good about that number, considering how shaky the world financial situation is, and that we are - I believe - about to enter another gold bull market. Classic bull markets have three stages.

We’re still in the “Stealth” stage - when few people even remember gold exists, and those who do mock the idea of owning it. Next, we’ll enter the “Wall of Worry” stage, when people notice it and the bulls and bears battle back and forth.

At some point, we’ll enter the “Mania” stage - when everybody, including governments, is buying gold, out of greed and fear. But also out of prudence.

The policies of Bernanke, Yellen, and Obama - and also of almost every other central bank and government in the world - are not just wrong. These people are, perversely, doing just the opposite of what should be done to cure the problems that have built up over decades. One consequence of their actions will be to ignite numerous other bubbles in various markets and countries. I expect the biggest bubble will be in gold, and the wildest one in mining and exploration stocks.

When will I sell out of gold and gold stocks? Of course, they don’t ring a bell at either the top or the bottom of the market. But I expect to be a seller when there really is a bubble, a mania, in all things gold related. There’s a good chance that will coincide to some degree with a real bottom in conventional stocks. I don’t know what level that might be on the DJIA, but I think its average dividend yield might then be in the 6% to 8% area.

The bottom line is that gold and its friends are again cheap, and they have a long way - in both time and price - to run. Until they’re done, I suggest you be right and sit tight.

Editor’s Note: Most people have no idea what really happens when a currency collapses, let alone how to prepare…

Owning gold is essential.

But there’s more to do to make sure your wealth doesn’t get wiped out in the coming financial tidal wave.

How will you protect your savings in the event of a currency crisis?

This video we just released will show you exactly how. Click here to watch it now.