A musing day
Most days, you catch me in my typical workaday productive mood, ready to throw ideas your way, and back them up with as much evidence as I think they need. I'm usually trying to convince you I'm right based on this or that fact.
But today, you've caught me in a contemplative mood. Aristotle says the contemplative life is the best, so maybe I should do this more often. (Aristotle doesn't say whether you'll keep reading my stuff if I do... just that I'll be happier.)
Questions, questions. They're swirling all around us these days. For example, everybody wants to know if gold is a bubble... and if bonds are a bubble...
They're peculiar questions when you think about them. Isn't a bubble by nature a big, ugly disaster waiting to happen? For example, a bubble in stocks isn't hard to spot. If the S&P is trading for 35 times earnings, you've got a bubble.
Even more curious, from the looks of it, millions of people want to know the answers. It's strange to think millions of people want to know the answer to a question that ought to be rather obvious. It's like they're in line at a Rolling Stones concert with furrowed brows asking, "Is Mick going to be here?"
If you're asking whether gold is in a bubble, you'll likely benefit from a new perspective on gold.
If the price of physical gold fell 50% tomorrow (I'm not saying it will. In fact, that's highly unlikely), I'd just go out and buy more of it. I buy physical gold as a method of savings. It's real money. I buy it when it's on its way from $850 to $250, and I buy when it's on its way from $250 to $1,350. Buying physical gold is not a speculation on the gold price. It's a method of preserving wealth.
For those of you who did a double take as I gleefully admitted buying gold from $850 to $250, let me point out what ought to be obvious. At $250, my dollars bought me a lot more gold. In other words, it was possible to trade my bad money for a lot more good money. It looked stupid to buy it then. Probably doesn't look so stupid now. I've never sold an ounce of gold in my life. I doubt I ever will.
If you're worried about the gold price, remember, when you're pricing it in dollars, you have to take the supply of dollars into account. How quickly can we increase the gold supply by 20%? How quickly can we print 20% more dollars? Simple questions. Easy answers.
With Ben Bernanke's finger hovering menacingly over the "Print Money" button, it's hard to conclude holding physical gold is a bad idea. Will he suddenly hit the "Burn Money" button at some point soon? I doubt it.
It's not just the money Bernanke will print and spend. It's the effect huge amounts of it might have... or more to the point, the effect it might not have. Some folks, like Laurence Meyer, co-founder of St. Louis-based Macroeconomic Advisers, think Bernanke will spend as much as $2 trillion buying Treasury bonds and other securities... and the effect of all that new money will be so slight, we'll hardly notice it. That's really dangerous. The more the Fed's quantitative easing doesn't work, the more likely it will keep doing it.
When they kick the printing presses into high gear, you'll stop asking if gold's in a bubble and thank God you didn't sell any.
Of course, I don't need to make a prediction like Mr. Meyer. I'm not in the prediction business. I don't know what the Fed will do. There's no telling. And isn't that a great reason... perhaps the ultimate reason... to own gold?
So I ask you, a gold bubble? Who cares? I'm not selling. Let George Soros sell, if he thinks it's a bubble. I'm keeping my gold. Don't ask if it's a good time to sell your gold. Rephrase the question. Ask if it's a good time to dump good money in favor of bad. Suddenly, the bubble issue disappears.
Then there's all this concern over bonds, with Warren Buffett coming down decidedly in the "avoid bonds" camp.
Bonds aren't that hard, either. In a system that runs on money printing, bonds are rarely a good deal unless you can get them really cheap. The fixed-income stream is always vulnerable to erosion by inflation. Better to hold cash and wait for something good to come along.
But I have to admit that it's not quite that simple because some investors are great with bonds. Mike Williams, who edits our True Income advisory, spends his whole life searching for bonds cheap enough to make you some real money. And he's found plenty of them. He's got gains in his portfolio right now of 39%, 55%, 65%... even 187%... from investing in bonds.
I don't know why everyone in the country isn't reading True Income. But until they do, it'll be our little secret. (If you aren't reading it, you can click here to try it out.)
Whether bonds are in a bubble isn't a question you really need to answer. All you need to answer is whether or not they represent an attractive investment proposition. In other words, are they paying you enough to compensate you for the risk and the opportunity cost?
For example, I trust Johnson & Johnson to pay me back in 10 years. Lending it money is one of the safest propositions on the planet. It's one of few triple-A credits left. You won't lose money... in nominal terms, anyway... lending to Johnson & Johnson.
But in real terms, you probably will lose purchasing power... J&J is only offering to pay you 2.95% a year for 10 years. And lending it money for 30 years doesn't get you much more, just 4.5% per year. That's not enough. Inflation was 5% a year in the 1970s. Safe? Absolutely. An adequate return? No way, not even close.
Think of it another way. All these big companies, J&J, McDonald's, Microsoft, Hewlett-Packard... They're all selling debt that pays peanuts. They're piling into the debt market because debt is dirt-cheap. Process that for a minute. They're selling it because it pays squat in interest. Do you really want to buy what these guys are selling? How bad do you want J&J's 2.95% a year? Or 0.875% a year, in the case of some recently issued Microsoft bonds?
It's like buying bonds issued by Berkshire Hathaway. Do you ever in your life want to buy what Warren Buffet is selling? Given that yields are so low overall, you can paint most of the bond market with this brush and ask if you want to buy much of anything selling today. My answer: Probably not, unless you've got a guy like Mike Williams working for you.
Do you care if bonds are in a bubble? If you're holding a ton of them, where do you think they'll be in five or 10 years? Not much farther ahead than you are today, that's for sure.
New Highs: Market Vectors Gold ETF (GDX), Sprott Resource Lending (SILU), Anheuser-Busch InBev (BUD), Coca-Cola (KO), Prestige Brands Holdings (PBH), Penn Virginia Resource Partners (PVR), Barrick Gold Corp (ABX), Freeport-McMoRan Copper & Gold (FCX), iShares Silver Trust ETF (SLV), Enterprises Products Partners (EPD), Kinder Morgan Energy Partners (KMP), Vanguard Natural Res LLC (VNR), Altria Group (MO)
I've given you my thoughts on the "bubble" in bonds and gold... If any other questions are troubling you, please send them in to feedback@stansberryresearch.com.
"There is no bond bubble. For nearly 300 years rates on long term (20 YRS) DEBT HAS RANGED BETWEEN 2% AND 4.5%. All that's happened is a return to normalcy; and that is the rub. If we return to historical norms many savers will be harmed as their expenditures exceed their income. I think that high dividend common and preferred stocks with call over write will deliver better income. When yields fluctuate and duration is 10 to 12, weak hands will panic." – Paid-up subscriber Daniel Riviera
"I was reading fellow subscriber MM's comments regarding interest rates in Tuesday's Digest, to quote hey says 'High interest rates are the result of demand for money, which does not exist now, nor will exist in the near future.' This seems to make logical sense to me. He also comments, 'You've lost your bet with Dyson regarding interest rates... In the end, you will be right, but it will be a long time coming.'
"As a recent subscriber, it seems I've missed some background here, but I assume the prediction was the coming inflation will cause interest rate rises. From my developing knowledge, I thought a strong contributing factor also was that at some point the current up trend in bonds will reverse when faith is lost in the Gov's IOUs and the follow on effect will cause a rise in market interest rates.
"Can you comment on the linkage between inflation and interest rates, the probable upcoming government/muni bond defaults, and how you see all this panning out for interest rates?" – Paid-up subscriber Bryan Stephens
Ferris comment: The basic idea is, central banks are expected to raise interest rates to compensate investors for holding what is perceived to be a riskier currency.
"I hold lots of 'preferreds' in my retirement account as a source of much needed income. Would you include them, to any degree, as bonds? And thus, would they be subject to the same caution?" – Paid-up subscriber FCR
Ferris comment: Here's my two cents. All kinds of fixed-income investments have risen dramatically the past year and a half. It's very hard to find one that's priced attractively anymore.
As for whether one ought to sell a given preferred stock, I believe that depends on the issuer. Tom Dyson has recommended a whole slew of preferred stocks in The 12% Letter, none of which I would expect to sell off in a general decline in the bond market. Some preferred issuers, though, are highly leveraged and have complex capital structures with multiple preferred issues and layers of debt. I'd expect those to fare less well in a general bond market decline.
Simply put, stellar credits ought to dramatically outperform poor credits. Also, I suppose there might be a "yield curve" effect, with preferreds that mature later (or never) being perceived as riskier than those that mature sooner.
Regards,
Dan Ferris
Medford, Oregon
October 7, 2010