Category
Martin Hutchinson
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Gold Bugs Love It, But a New Gold Standard is Just a Dream –For Now
Thanks largely to Ron Paul, the Republicans have suddenly become enamored of gold.
And why not?…It is real money.
These newly-born gold bugs have even gone so far as to include a call for a commission to examine a return to the gold standard in the party platform.
Needless to say, we've come a long way since President Richard Nixon "closed the gold window" in 1971. Forty-one years, and a few financial disasters later, the debate has begun anew.
But it begs the question: How would the gold standard work?
What's more, what would the economic implications be, and is it likely to happen or is it all just a gold bug's dream?
In ancient and medieval times the answers were quite a bit more simple. Since there was no real banking system, there was also no argument.
Kings coined money with gold, silver, or copper, and the people accepted the money at a price based on its metal content. The idea of taking paper instead would have been thought of as sheer madness.
Only in China, an isolated and stable society, was paper money used during the Song Dynasty of the 10th through 13th centuries, but even there the Mongol invasion and fall of the Song regime caused the paper money system to collapse.
Paper money backed by gold only became possible once modern banking got going in Europe in the 16th and 17th centuries.
In fact, the British Gold Standard was devised in 1717 by no less than Isaac Newton, then Master of the Mint. Other countries soon joined Britain in linking their currencies to gold, including the United States from 1878 until its abandonment in 1933.
Of course, countries claimed to be on a gold standard under the Bretton Woods Agreement from 1944-71, but gold was only exchangeable between governments. Indeed, holding gold was prohibited in the U.S. for private individuals.
But inevitably, the Bretton Woods monetary system itself became manipulated and collapsed in inflation.
That brings us to today….
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Election 2012: A Candidate With Economic Heft, Paul Ryan is No Sarah Palin
Win or lose, the most recent vice-presidential choices never mattered much when it came to the economy.
From Joe Biden to Sarah Palin to John Edwards, none of them were ever known for their grasp of economic policy.
But Paul Ryan is different.
His selection as vice presidential nominee last weekend has significant implications for the economy if the Republican ticket wins Election 2012.
In fact, the selection tells us more about Mitt Romney than we knew before, since Ryan is committed to a group of policies difficult to implement but which would change the direction of U.S. fiscal policy.
If you're interested in an adult conversation about the dangers of the fiscal cliff, the selection of Paul Ryan ensures you are going to get one this fall.
As an investor, that means you need to position yourself to benefit from a GOP win, without damaging your wealth if the just about equal possibility occurs of losing to President Barack Obama and Vice-President Biden.
With Ryan now in the race, here's what you need to know about this up-and-comer from Wisconsin.
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Dividend Stocks: Don't Fall For These High Yield Traps
Buying stocks with high dividend yields is an excellent way to invest. But it's not fool-proof.
In fact, if you shop by yield and yield alone, you're playing dangerous game. It's called picking up nickels in front of a steamroller.
Admittedly, it may work for a while, but eventually I can assure you the steamroller will prevail.
That's why in today's low-growth environment, it's critical to know which dividend stocks NOT to buy.
Avoid the real duds and the dividends alone will be enough to bail you out of minor mistakes. Find yourself on the wrong side of the fence, and your high-yield investment could end up being pretty costly.
Success comes from understanding the difference between the two. Here are three ways to separate the winners from the losers.
Avoid Stocks that are "On the Clock"
First, at all costs, investors need to avoid dividend stocks where the source of income will dry up in a few years, and the dividend payout doesn't add up to the amount you're paying for the stock.
You wouldn't think there would be any of those, but there are! Investors fall for them because of their high yields.
Here are a few examples where one day the well will suddenly go dry leaving investors with empty cups.
Great Northern Iron Ore Properties (NYSE:GNI): GNI yields a monster 17% and has a P/E of 4 times. In business since 1906, it looks very attractive-on the outside. However, on the inside its main asset is a lease on iron ore deposit-bearing land in the Mesabi range which runs out in 2015. With three years left on the lease, investors can only earn 51% (3×17) of their money back. I just want to know where's the other 49% is? There are some residual assets, but not enough.
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Try as He Might, Mario Draghi Cannot Save the Euro
Of all the pyramid schemes that governments and banks have perpetrated in the last decade, the Eurozone debt crisis is the most damaging.
No amount of posturing by European Central Bank President Mario Draghi can change that fact.
The market may like what Draghi has to say about the fate of the euro, but tomorrow's big ECB meeting will change little.
The massive amount of money Draghi will need to print is far too great for the German taxpayer or the ECB's balance sheet.
Eventually, the Eurozone will break up and drag the global economy right down with it.
In the long run, that will mark the beginning of the recovery, but in the short run it will precipitate a banking and economic crisis that will make 2008 look like child's play.
As investors, we had better be prepared.
Politicians Doomed the Euro
The Euro was a reasonably sensible idea, although without political integration it was always likely to cause trouble.
What's more, the technical side of it was for the first ten years handled very well by Otmar Issing at the European Central Bank. Issing spent his career in the Deutsche Bundesbank and knew what a decent currency looked like.
However, two decisions taken by politicians doomed the currency.
One was to admit Greece into the union, which to any competent observer was a hopelessly corrupt and uncompetitive economy propped up by giant EU subsidies.
More important, though, was the design of the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) payments system which was replaced in November 2007 by TARGET 2.
As I wrote in an earlier article, it is the secret system that blew another hole in the euro.
Target 2 requires all payments between banks in different countries to go through the national central banks (thus giving those otherwise redundant entities something to do).
Theoretically that's the same system as in the U.S., where many payments are made through the regional Federal Reserve Banks.
However, in the U.S. the larger banks deal direct, and outstanding payments in the regional Fed banks are cleared regularly. What that means is that if Alabama runs a payments deficit with New York, no large balances are allowed to build up.
Conversely, there has been no automatic clearing between the central banks in Europe. This may sound arcane and boring, but I promise you it is not.
These payment imbalances have two nasty side effects.
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A Liberty Investor's Guide to Latin America
Words, indeed, are powerful things. As an Englishman in America, my personal favorite is freedom.
It's embodied by those words penned so long ago by a young Thomas Jefferson…
It's the idea that "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."
That's not only the foundation for what I believe, but it's also the basis for how I invest.
It's a technique I call "Liberty Investing."
As such I like to invest in countries and companies whose operations are compatible with freedom, as defined by the Founding Fathers and the best U.S. political and economic traditions.
To me, this is ultimately the right way to run both societies and companies. And when we follow them, our returns will be consistently superior over the long term.
The Foundation of Liberty Investing
Using my general Liberty Investment principle, I often look for a number of characteristics in the countries where I invest.
For instance, market signals should be paramount and government participation in the markets should be relatively low. The Heritage Foundation Index of Economic Freedom is a good measure of this.
Each country should also have a high level of integrity-meaning they follow the rule of law. A good score on Transparency International's Corruption Perceptions Index is a good measure of this.
They should also be generally free and democratic, and should have a fairly small government and moderate taxation. Interest rates also should be above the level of inflation, so they don't deprive their economies of domestic savings.
Finally the local bureaucracy should be reasonable to deal with. The World Bank has an Ease of Doing Business Survey that tells you this.
You see how this freedom-based investing technique works?
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Is Facebook (Nasdaq: FB) a Replay of the AOL/Time Warner Deal?
I hope you didn't buy shares of Facebook (Nasdaq: FB). The valuation was always too aggressive.
And increasing both the price and amount of Facebook stock at the last moment ensured that both underwriters and retail investors ended up with far more shares than they bargained for.
In fact, the Facebook fiasco reminds me of another deal that marked the peak of the dot-com boom.
No, not the ineffable and rather sweet Pets.com- their IPO was far too small a deal to have genuine market significance.
Instead I'm talking about the AOL and Time Warner merger announced on January 10, 2000.
Like Facebook, the deal was sold as a big success. It was only later that it quickly became clear that AOL had sold itself at the absolute peak of the market.
From there on out it was all downhill as the storied merger practically top-ticked the market.
Before Facebook There Was AOL
AOL had built up a nice business from "dial-up" Internet access, but it was already obvious by January 2000 that the arrival of broadband Internet would make for a difficult transition.
As such, AOL's market capitalization of around $200 billion was purely the result of the frothy market of 1999.
Nevertheless, that rich valuation enabled AOL to become the senior partner in an acquisition of the Time Warner media conglomerate, getting 55% of the merged company in a deal valued at $350 billion. It was the largest merger in U.S. history.
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Eurozone Descends into a Farce as "Grexit" Looms Large
The elections on May 6 only made the Eurozone's problems even worse. The French and the Greeks have rejected sensible policies in favor of self-delusion.
Those elections, and the failure of Greece to form a government, have actually moved the Eurozone crisis one step further – from potential tragedy into a complete farce.
As investors, we can only watch horrified, knowing that a really bad outcome would seriously damage our own wealth.
But at this point, a Greek exit – or "Grexit" as it has come to be known – from the Eurozone would be the best thing that could happen.
Confusion Surrounds the "Grexit"
The Greek election produced a very confused result. But one thing was clear: the Greek electorate has decisively rejected the rescue plan the outgoing government had so painstakingly negotiated with the EU.
The previous ruling party's joint support declined to just 32% of the vote. That might be thought of as just retribution, since those parties produced Greece's appalling fiscal mess by lying for decades about the true position of Greece's public finances. (And let us not forget being abetted by Goldman Sachs in doing so).
However, the winners were not some new paragons of fiscal responsibility and free market government. They were anti-German Nazis (a peculiar combination when you think about it), communists and a truly unpleasant new leftist party, SYRIZA, led by the 37-year-old Alexis Tsipras.
SYRIZA's politics, in that one can fathom them, spell nothing but trouble.
