A visual description showing how much silver has been mined in human history,
Sunday, March 3, 2013
Thursday, February 14, 2013
Why I am angry at having a 20% return in one day
This morning I was listening to NPR when I heard that Warren Buffett and a private equity group had just bought Heinz Corporation, the ketchup company, for cash, and that the Board of Directors had agreed to sell out for a price of 20% over previous closing.
My first reaction was that me and other long-term shareholders (I have held for over 10 years) were being taken for a ride. The more I have read today, the more I am certain that other factors are in play here. I don't know what these are, but this clearly could not have been for sound business reasons. The board needs to be sent to the farm for such a dismal premium.
The reason I bought HNZ is because the business has so many safeguards against inflation or recession. It is a staple product found in restaurants and refrigerators. McDonald's condiment packets, Ore-Ida potatoes, Smart Ones.. it is a staple business that is everywhere without being recognized overtly... but when it is absent or replaced with cheaper brands.. people notice.
That is what makes this a brilliant brand. How do you be everywhere, implicitly recognized as quality, but not visible enough to trip anyone's radar? Freakin genius.
In terms of inflationary pressures HNZ is susceptible to a wide range of commodity price pressures, including corn yields and futures trading for the corn syrup in their mainline products. But while shoppers may readily watch the price of gas at the pump like a hawk.. bleating when it goes up 10 cents a gallon (or ditto for a gallon of milk).. no one notices when a bottle of Heinz goes up in kind.
Did I mention this is a brilliant brand?
It has been able to raise its price over the years to keep margin over production costs steadily growing. And its marketshare remains strong.
Partly due to activist investor Nelson Peltz, Heinz has also improved its operations aggressively and pressured the Board to increase its dividends as well. Growing at double-digit rates these dividend payments helped buoy a rather attractive stock price that started clocking steady returns, year after year.
What makes me angry here is that based upon the past 4-5 years of activity, Heinz Corporation would have reached this magic 20% premium by 2014 or 2015, just a couple of years from now. There has been nothing untoward in its business model and its internal growth would have kept the stock on track towards the $72 buyout price.
The Board is malfeasant. No one sells out an entire company and betrays long-term shareholders for a price you would have hit in 8-12 quarters with business as usual. It is unconscionable that they would have found a 20% premium to be in the best long-term interests of the shareholders.
I hope that class-action suits are filed and these Directors held accountable for their actions. There has been nothing disclosed by the Company in any recent filings that would indicate Heinz has reached a peak valuation or is unlikely to continue growth in the next several years. Something is afoul in Pittsburgh, and it ain't the Monongahela.
So that's it world. I'm pissed for getting an extra 20% pop today. So mad.. I may actually buy Hunt's now in protest.
My first reaction was that me and other long-term shareholders (I have held for over 10 years) were being taken for a ride. The more I have read today, the more I am certain that other factors are in play here. I don't know what these are, but this clearly could not have been for sound business reasons. The board needs to be sent to the farm for such a dismal premium.
The reason I bought HNZ is because the business has so many safeguards against inflation or recession. It is a staple product found in restaurants and refrigerators. McDonald's condiment packets, Ore-Ida potatoes, Smart Ones.. it is a staple business that is everywhere without being recognized overtly... but when it is absent or replaced with cheaper brands.. people notice.
That is what makes this a brilliant brand. How do you be everywhere, implicitly recognized as quality, but not visible enough to trip anyone's radar? Freakin genius.
In terms of inflationary pressures HNZ is susceptible to a wide range of commodity price pressures, including corn yields and futures trading for the corn syrup in their mainline products. But while shoppers may readily watch the price of gas at the pump like a hawk.. bleating when it goes up 10 cents a gallon (or ditto for a gallon of milk).. no one notices when a bottle of Heinz goes up in kind.
Did I mention this is a brilliant brand?
It has been able to raise its price over the years to keep margin over production costs steadily growing. And its marketshare remains strong.
Partly due to activist investor Nelson Peltz, Heinz has also improved its operations aggressively and pressured the Board to increase its dividends as well. Growing at double-digit rates these dividend payments helped buoy a rather attractive stock price that started clocking steady returns, year after year.
What makes me angry here is that based upon the past 4-5 years of activity, Heinz Corporation would have reached this magic 20% premium by 2014 or 2015, just a couple of years from now. There has been nothing untoward in its business model and its internal growth would have kept the stock on track towards the $72 buyout price.
The Board is malfeasant. No one sells out an entire company and betrays long-term shareholders for a price you would have hit in 8-12 quarters with business as usual. It is unconscionable that they would have found a 20% premium to be in the best long-term interests of the shareholders.
I hope that class-action suits are filed and these Directors held accountable for their actions. There has been nothing disclosed by the Company in any recent filings that would indicate Heinz has reached a peak valuation or is unlikely to continue growth in the next several years. Something is afoul in Pittsburgh, and it ain't the Monongahela.
So that's it world. I'm pissed for getting an extra 20% pop today. So mad.. I may actually buy Hunt's now in protest.
Monday, January 28, 2013
The Mauna Loa Inflection: 400 ppm in 2014
Mauna Loa is the largest volcano by volume on Earth, one of the five volcanoes that form the Big Island of Hawaii. And near its summit at over 11,000 feet above sea level lies a complex of instruments that collect atmospheric data, including levels of carbon dioxide.
This has been done more or less every day since 1958, and is considered the scientific standard for the globe since (1) being in the middle of the Pacific Ocean it is far away from all major land-based sources of pollution, natural and man-made, and (2) at two miles into the atmosphere is not affected by lower-atmospheric circulation. It is literally, the temperature of the planet as far as these readings are concerned.
This has been done more or less every day since 1958, and is considered the scientific standard for the globe since (1) being in the middle of the Pacific Ocean it is far away from all major land-based sources of pollution, natural and man-made, and (2) at two miles into the atmosphere is not affected by lower-atmospheric circulation. It is literally, the temperature of the planet as far as these readings are concerned.
Fact #1: Physics dictates that carbon dioxide be a greenhouse gas.
Carbon dioxide is an output gas of all breathing animals, decaying matter, and combustion of fossil fuels. Carbon dioxide is a highly stable molecular arrangement of one carbon atom binding with two oxygen atoms. It is very difficult to split apart because the nuclear bonds are so strong.
Whenever you have strong bonds in a molecule you can add more heat than molecules with less stable bonds before it splits apart. The 'heat capacity' of carbon dioxide means that when it absorbs energy from the sun, it 'holds' on to a part of that energy moreso than oxygen and water vapor (graph):
The graph above shows relative heat capacity of major gas components of our atmosphere. Carbon dioxide is at all temperature levels capable of storing more heat than its nearest competitor, water.
Fact #2: The amount of carbon dioxide gas is rising
It is an established scientific fact that the amount of carbon dioxide gas in our atmosphere has been rising:
In the above graph the red line is the monthly readings of carbon dioxide since 1958 (horizontal axis), whereas the black line is the trend line. The vertical axis corresponds to the measured level of the gas, expressed in parts per million.
This upward trend in readings looks steady but this rise when viewed in context with longer time frames is striking. The below graph shows estimates of carbon dioxide readings as measured in Antarctic ice cores, going back a thousand years:
Prior sustained warming periods that are related to increased levels that took centuries and millennia... not years or decades.
Building a Simple Forecast Model
I downloaded the monthly data from the National Oceanic and Atmospheric Association (NOAA).
Next I input and conditioned the data for a Time Series model in IBM-SPSS Modeler, which located a Winter's Multiplicative best-fit:
This model excluded the first 12 months, as well as the most recent 48 months for holdout verification. Additionally the model was instructed to iterate forward an additional 24 months for look-ahead forecasting.
The figure above shows the model results against the actual historic data. Notice at the far right the 'blue' segment; this is the three-year look-ahead forecast.
For clarity, the below shows the same series as above, but restricted to all time periods after the year 2000, this time looking ahead a full 48 months.
In this close-up view above, the 'blue' shaded area represents the forecast range. Notice that it gets wider the further out in time you look; this is a natural effect of the simple time series method being applied. But overall the future pattern looks to fit the historic series with decent accuracy.
The level of 400 parts per million (ppm) for carbon dioxide is a dangerously high level. In terms of planetary chemistry it signifies that the heat retention capacity of the atmosphere has now reached very high levels. When you have high heat capacity in the atmosphere roiling about, increased volatility in localized weather patterns is far more likely.
The level of 400 ppm has never been seen at the Mauna Loa Observatory (but it has started to sporadically be measured in other parts of the globe).
According to the forecast model above there is a 1 in 20 chance it will cross that boundary in Q2 of 2013.
NOAA's Earth Systems Research Laboratory (ESRL) in Boulder, CO puts the time of this threshold several years later, however:
“We will likely see global average CO2 concentrations reach 400 ppm about 2016.” -- Pieter Tans.
One problem with any statistical forecast is uncertainty, of unexplained variance. This means that despite all the best techniques, there is always going to be some margin of error.
But the margin of error can also be analyzed for patterns and trends.
This is where it starts to get interesting.
We now have two series of data for each month, the historic reading and the forecast value. By taking the historic reading and subtracting the forecast value we get a residual value:
In the above I highlighted a few months data (2012-Q4) to show (1) historic data, (2) model forecast, and (3) the residual value.
The values for residuals are all positive. This means that the model underestimated the actual levels that were recorded at Mauna Loa.
What is important to identify is whether or not the model is underestimating the actual data for long periods of time, or if this is a temporary effect.
To look at this scenario I plot all the residuals for every month. Keep in mind that residuals are a measure of my forecast error; positive values mean that the actual readings were higher than the forecast and negative values mean my model over-estimated the actuals.
This should not look like much to the casual eye. In order to make sense of this we want to draw a line that represents the 'average' of all the points, as below:
What I see in this graph is interesting.
If my model were perfectly in balance in terms of forecast errors, then this line should be perfectly straight. A straight, level line would mean that my model both over and underestimates actual readings in balance to each other, and that the rise in readings is happening more or less in steady fashion.
But looking closer at the graph there is a discrete inflection point:
The arrow is pointing to the time period of late 1999, where the residual line (based upon decades of data) inflects or bends upwards. This means that after 1999, the forecast built with decades worth of data appears to be underperforming the actual readings taken at Mauna Loa.
When this line bends up it may likely mean that the increase in carbon dioxide levels is accelerating beyond forecast parameters.
If this is correct then it means we could hit 400 ppm earlier than 2016. The only way 2016 could be the correct date would be if that residual line above is straight, and that the future rise in levels will continue more or less as it has for decades. And the chart above shows that since 2000 the recorded levels have been higher than forecast.
I re-ran the model just for 1999 to end of 2012, to see what a shorter-term forecast would show, this time holding out the earliest and latest 12 months data for as holdouts:
In the above table are a few rows highlighted showing that 400 ppm is likely to be reached with good confidence around Q2 of 2014.
This would be 1-2 years ahead of official forecasts for 400 ppm, and underscores the need to convert our energy and transportation systems away from fossil fuels and towards more renewable sources.
This windfarm on the south tip of Hawaii won't power the island, but it is the direction we need to move towards at a pace rivaling the Manhattan Project, or the Apollo Program.
There is no debate in the scientific community about climate change. The evidence is more sound than the science used for most medical procedures today. The only serious debate should be how to construct a new world that is less dependent upon systems that generate excess carbon dioxide, and rejuvenate the potential of ecosystems to absorb excess greenhouse gas already in circulation.
Sunday, November 4, 2012
Buying a home at a 95% discount
I recently moved from San Francisco to Sacramento.
Chief among the reasons, was the imminent realization of an investment hypothesis I had been awaiting for quite some time. In fact, since the housing market began its devastating ascent into bubble territory in the early 2000's.
The home I purchased this summer last sold for $200,000 in the year 2005. I purchased it for $50,000. (values are not actual, but proportional for this post)
This would then appear to be a 75% percentage discount relative to peak price (and a good deal!)
But this discount calculation is wrong.
This is because the percentage is being measured in dollars. I don't believe that is the correct denominator to use for these kinds of calculations.
In my Sept 2010 post on the Faith-Based Currency I concluded with a statement regarding how to evaluate investment opportunities between investment media:
Back in the late 1990's and early 2000's I regarded bullion as severely undervalued, especially silver. It was more of a casual finding but I grew more interested in the asset class:
By way of reminding the reader, global interest in the US housing price bubble had reached a frenzied, mob-like pitch that eventually hit maximum overdrive by the middle of the last decade. When prices had peaked it was too late, for by this time truly surreal finance mechanisms had ensnared not just the upside down mortgage holder, but most of the worlds' banking system, hedge funds, pension funds, and government agencies from DC to Peoria. The net effect of the collapse was a massive global recession that is still ricocheting throughout the global system, seven years later. Among many bad results was the catastrophic issuance of paper fiat currency (and more sovereign debt) in clumsy, ill-advised attempts to mitigate the collapse. The architects of the bubble for the most part kept their jobs, and their bonus packages, courtesy of Joe Taxpayer (and Joe's children, grand-children etc.)
But all that is another story.
What also happened was a rebalancing of value of real stuff, in this case silver bullion. Not because silver became scarce (though it has, modestly). Not because the world woke up to the investment thesis (though maybe a few percent of people did, grudgingly). And not because the financial system started pumping the asset class broadly (status quo, that).
No, what happened was that all that extra paper fiat currency that was conjured into existence drove up the exchange value of real stuff, in the time-honored tradition of currency debasement schemes everywhere, all the time.
In 2005 the average price of silver was about $7.50 per troy ounce. This summer the price of silver was about $34 per ounce.
That is an appreciation of ~353% in just seven years, or ~50% return per year (in paper fiat).
Not bad.
Now, let's pretend that home transactions happen not in dollars, but in silver ounces. In order to buy a house, one must exchange dollars for silver and use the silver to make the home purchase. In order to sell a house, one acquires the ounces of silver and then must go and exchange them for dollars.
This may seem cumbersome but there is a point which will become clear shortly, so please bear with me.
Go back to my home. In the year 2005 the dollar trade price for my home in that year (when it sold) was $200,000. In order to make the home trade in silver it would have required $200,000 / $7.50/oz = ~26,667 ounces of silver.
This summer my home price of $50,000 would have required ($50,000 / $34/oz) = 1,470 oz of silver.
By just waiting for 7 years I saved 25,197 ounces of silver, or the better part of a metric ton of bullion.
Put another way, the valuation discount in bullion (1,470 / 26,667) - 1 = ~ -94.5%, meaning my property was acquired for a ~95% silver value discount.
A translation of this into dollar terms yields the same results.
Say I had purchased 1,470 ounces of silver in 2005, at $7.50 per ounce. This would have required $11,025 in fiat currency.
This summer those 1,470 ounces of silver would net (at $34 per ounce) $49,980, enough for my property purchase.
Remember, this was the same property that traded for $200,000 in the year 2005, which in effect could have been acquired for a net equivalent spend of $11,025 in silver at that same time.
$11,025 / $200,000 - 1 = ~ -94.5%
*********
I have no idea how long I will remain in Sacto, but so far so good! I'm about 1-2 hours drive from San Francisco, Napa, the Sierras, etc. The space to roam is a welcome change from the City, where I lived for over a decade, and the cost of living has effectively fallen to near zilch.
In essence though this was a trade I could *not* pass up. Had I stayed in the City and watch it fly by I know I would have regretted it for years. This was the buy-low valuation scenario I knew would come one day, be fleeting when it hit.. but I just didn't know when/where it would strike.
Since acquiring valuations have been rising markedly and inventory plunging. In the past 6 months (from Oct 2012) housing inventory for sale has fallen by ~55% and median home asking prices have risen by around 47%.
In just six months.
I don't believe this portends a new bubble, inasmuch as it does a market that overshot fair values in the plunge southwards.
There is also the echo chamber effect of the Bay Area, where cash-rich investors are pooling funds and buying properties to convert into rentals and/or flip in a few months' time... but these are all natural corrective forces in the market place, and soon I expect the rates of growth to stabilize into a more historic oscillation relative to rents, local income, etc.
I hope this was helpful. In most of my posts I offer my opinions and perspective in a general way. The sole reason I am sharing this here is to let you know that I do practice what I preach!
I understand my style is not for everyone. But perhaps there might be elements of what I do/how I think that might help you diversify. Hopefully, at minimum give you new ways to view investment scenarios in new ways and with methods beyond the almighty dollar.
Chief among the reasons, was the imminent realization of an investment hypothesis I had been awaiting for quite some time. In fact, since the housing market began its devastating ascent into bubble territory in the early 2000's.
The home I purchased this summer last sold for $200,000 in the year 2005. I purchased it for $50,000. (values are not actual, but proportional for this post)
This would then appear to be a 75% percentage discount relative to peak price (and a good deal!)
But this discount calculation is wrong.
This is because the percentage is being measured in dollars. I don't believe that is the correct denominator to use for these kinds of calculations.
In my Sept 2010 post on the Faith-Based Currency I concluded with a statement regarding how to evaluate investment opportunities between investment media:
The way to advance personal wealth interests is to advantageously switch among asset classes at the height of their valuation cycle before the mathematical underpinnings fail.
Back in the late 1990's and early 2000's I regarded bullion as severely undervalued, especially silver. It was more of a casual finding but I grew more interested in the asset class:
- The more I learned about its history as a monetary metal,
- The 30-year depletion of world reserves for industrial purposes, and
- The complete lack of interest by the vast majority of people (and/or the ridicule/fear factor heaped on it by mainstream financial/investor media).
By way of reminding the reader, global interest in the US housing price bubble had reached a frenzied, mob-like pitch that eventually hit maximum overdrive by the middle of the last decade. When prices had peaked it was too late, for by this time truly surreal finance mechanisms had ensnared not just the upside down mortgage holder, but most of the worlds' banking system, hedge funds, pension funds, and government agencies from DC to Peoria. The net effect of the collapse was a massive global recession that is still ricocheting throughout the global system, seven years later. Among many bad results was the catastrophic issuance of paper fiat currency (and more sovereign debt) in clumsy, ill-advised attempts to mitigate the collapse. The architects of the bubble for the most part kept their jobs, and their bonus packages, courtesy of Joe Taxpayer (and Joe's children, grand-children etc.)
But all that is another story.
What also happened was a rebalancing of value of real stuff, in this case silver bullion. Not because silver became scarce (though it has, modestly). Not because the world woke up to the investment thesis (though maybe a few percent of people did, grudgingly). And not because the financial system started pumping the asset class broadly (status quo, that).
No, what happened was that all that extra paper fiat currency that was conjured into existence drove up the exchange value of real stuff, in the time-honored tradition of currency debasement schemes everywhere, all the time.
In 2005 the average price of silver was about $7.50 per troy ounce. This summer the price of silver was about $34 per ounce.
That is an appreciation of ~353% in just seven years, or ~50% return per year (in paper fiat).
Not bad.
Now, let's pretend that home transactions happen not in dollars, but in silver ounces. In order to buy a house, one must exchange dollars for silver and use the silver to make the home purchase. In order to sell a house, one acquires the ounces of silver and then must go and exchange them for dollars.
This may seem cumbersome but there is a point which will become clear shortly, so please bear with me.
Go back to my home. In the year 2005 the dollar trade price for my home in that year (when it sold) was $200,000. In order to make the home trade in silver it would have required $200,000 / $7.50/oz = ~26,667 ounces of silver.
This summer my home price of $50,000 would have required ($50,000 / $34/oz) = 1,470 oz of silver.
By just waiting for 7 years I saved 25,197 ounces of silver, or the better part of a metric ton of bullion.
Put another way, the valuation discount in bullion (1,470 / 26,667) - 1 = ~ -94.5%, meaning my property was acquired for a ~95% silver value discount.
A translation of this into dollar terms yields the same results.
Say I had purchased 1,470 ounces of silver in 2005, at $7.50 per ounce. This would have required $11,025 in fiat currency.
This summer those 1,470 ounces of silver would net (at $34 per ounce) $49,980, enough for my property purchase.
Remember, this was the same property that traded for $200,000 in the year 2005, which in effect could have been acquired for a net equivalent spend of $11,025 in silver at that same time.
$11,025 / $200,000 - 1 = ~ -94.5%
*********
I have no idea how long I will remain in Sacto, but so far so good! I'm about 1-2 hours drive from San Francisco, Napa, the Sierras, etc. The space to roam is a welcome change from the City, where I lived for over a decade, and the cost of living has effectively fallen to near zilch.
In essence though this was a trade I could *not* pass up. Had I stayed in the City and watch it fly by I know I would have regretted it for years. This was the buy-low valuation scenario I knew would come one day, be fleeting when it hit.. but I just didn't know when/where it would strike.
Since acquiring valuations have been rising markedly and inventory plunging. In the past 6 months (from Oct 2012) housing inventory for sale has fallen by ~55% and median home asking prices have risen by around 47%.
In just six months.
I don't believe this portends a new bubble, inasmuch as it does a market that overshot fair values in the plunge southwards.
There is also the echo chamber effect of the Bay Area, where cash-rich investors are pooling funds and buying properties to convert into rentals and/or flip in a few months' time... but these are all natural corrective forces in the market place, and soon I expect the rates of growth to stabilize into a more historic oscillation relative to rents, local income, etc.
I hope this was helpful. In most of my posts I offer my opinions and perspective in a general way. The sole reason I am sharing this here is to let you know that I do practice what I preach!
I understand my style is not for everyone. But perhaps there might be elements of what I do/how I think that might help you diversify. Hopefully, at minimum give you new ways to view investment scenarios in new ways and with methods beyond the almighty dollar.
Saturday, September 8, 2012
The barbarous relic..
In ancient times the Romans held the gold,
not the Barbarian race.
Now the elites cry only Barbarians hold gold,
Run kid!
Fetch me my mace.
*********
"The Subprime Crisis will not affect the economy overall."- US Federal Reserve Chairman Ben Bernanke, June 20th, 2007
"Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned."- US Federal Reserve Chairman Ben Bernanke, June 9th, 2008.
"At this juncture . . . the impact [of the housing bubble bursting] on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." – Ben Bernanke, March 28, 2007.
“I don’t fully understand movements in the gold price,” -- Ben Bernanke, June 2010.
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." - Alan Greenspan, 1966.
"Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don't think so, because we're acting as though we were there." -- Alan Greenspan, 2005.
(translation: 'we're playing make-believe, which is just the same as reality').
not the Barbarian race.
Now the elites cry only Barbarians hold gold,
Run kid!
Fetch me my mace.
*********
"The Subprime Crisis will not affect the economy overall."- US Federal Reserve Chairman Ben Bernanke, June 20th, 2007
"Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned."- US Federal Reserve Chairman Ben Bernanke, June 9th, 2008.
"At this juncture . . . the impact [of the housing bubble bursting] on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." – Ben Bernanke, March 28, 2007.
“I don’t fully understand movements in the gold price,” -- Ben Bernanke, June 2010.
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." - Alan Greenspan, 1966.
"Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don't think so, because we're acting as though we were there." -- Alan Greenspan, 2005.
(translation: 'we're playing make-believe, which is just the same as reality').
“. . . . In reviewing the conflicts which have taken place between
different interests in the United States and the policy pursued since
the adoption of our present form of Government, we find nothing that has
produced such deep-seated evil as the course of legislation in relation
to the currency. The Constitution of the United States unquestionably
intended to secure to the people a circulating medium of gold and
silver. But the establishment of a national bank by Congress, with the
privilege of issuing paper money receivable in the payment of the public
dues, and the unfortunate course of legislation in the several States
upon the same subject, drove from general circulation the constitutional
currency and substituted one of paper in its place."
--Andrew Jackson, from his farewell address in 1837
--Andrew Jackson, from his farewell address in 1837
Thursday, August 23, 2012
Discussing the unprintable
This post is just a summary of ten thoughts I have about silver, as a hedge. An investment class. A refuge, an allocation, a safe harbor, a non-correlated asset class. If you read this and want to buy silver, buy the bullion not paper. If you do not want to buy, well that is also fine, it is a free country.. just please let us know what the latest buzz from the herd happens to be these days.
Salud!
*********************
I. An ounce is an ounce is an ounce.
Metal is metal. It can't be deflated. It can't be devalued. It can't be tossed out like a drachma and replaced with a new piece of paper with cute face. An ounce of bullion was, is, and always shall be one ounce of bullion. An ounce of silver from Roman times remains an ounce of silver today, exchangeable into completely modern forms of paper no less!
II. Paper is infinitely expandable
We treat money like paper.. talk about "printing" it and so forth.
But in fact most money these days is electronic. Only about 7% of it exists in physical form and that number is shrinking every year as the Fed "prints" more money by increasing the amount of Money on servers and electronic ledgers.
In the past governments and banks were constrained by the limitations of the printing press on how much money they could make... resorting to adding zeros to the bills to compensate for hyperinflation.
Today it is different, they no longer need to add zeros to the physical money. They just add zeros to the total amount of money in existence. Most are fooled by this hat trick. But the effects are intimately felt in the form of inflation. Remember when a bottle of soda could be had for $0.75? A gallon of milk for $1.10?
The price of real stuff goes up whenever the amount of money printed expands faster than real stuff can be made, produced, or mined.
Always.
And silver is in that category of 'real stuff'.
III. Silver is not infinitely expandable like paper.. it is literally unprintable.
Silver must be found in the ground.
The ground where it is found is often way out in the middle of nowhere, or high up in Mount Somewhere.
Big pieces of rock and earth must be moved, pulled and hoisted and shoved into giant rock crushing machines and smelters that require lots of electric power and water to run, in a multi-phase process to get the little bits of silver out of them and refined into silver metal form. Something like 2-3 oz of silver per ton of rock is considered very good ore strike.
This puts a natural limit on how much silver can be pulled out and made available for the humans mining it... no matter how badly we may want it. The price could go to $1000 tomorrow and it would take a long time for every silver-rushin prospector runnin for the hills to find it, get it out, and bring it to the market.
IV. Silver is not money. Silver is money.
Excepting the past few decades, silver has been considered money for as long as human civilization has been in existence. In nearly every place. It ended in the United States under Johnson in 1965, eventually phasing out by 1968.
Gen X and later? We are a rare generation indeed.. born into a dominant world power where silver was NOT an official form of monetary exchange (no matter how debased the coinage).. this has almost never happened anywhere, anytime.
To say that silver will never again be money, never be used to anchor the printing of paper in a fixed exchange rate (metal standards) is folly; at least.. the weight of human existence is against the proposition.
V. Silver is mostly used, not saved.
Almost all silver mined every year is immediately used for industrial fabrication, as bits and conductors in machines. Cell phones. TV Screens. Medical devices (antimicrobial). And so on. A small portion is used for coins and metals, and a small fraction demanded by "investors" for saving in the form of ingots, coins and bars.
VI. Silver is not on anyone's radar screens.
The annual amount of production purchased by investors comes to around 140 million ounces worldwide. This equates to about $4.7 billion dollars (US). World-wide Gross Domestic Product is about $70 Trillion Dollars. This makes the effective demand for silver just 0.0066% of total WW GDP. Question: what would be the impact of a shift in investment psychology of just 0.001% of worldwide priorities? How about a shift 10 times greater (0.01%)? Of 1%? 5?
VII. Silver is a hedge against stupidity.
We have many dedicated, well-meaning public servants. Elected Leaders. Many good bankers. Business leaders. Traders.
And some not so good.
Sometimes, somewhere, in some part of the market with certain people.. things get out of hand. They get greedy and try to change the rules. Make exceptions for themselves and their patrons. Game the system. Do things that puts stuff out of whack. Alter the balance. Upset the apple cart.
Bubbles form. Fantasy asset classes get more attention than they deserve. Manias develop. The masses pile in. Things pop. Economic crises set in.
The very system that created/enabled/stood-silent during this mess is howled at to fix it. So they clumsily step in and start waving their arms.
Sometimes they have a good impact. Mostly they do not. But in all situations more money is printed.. as the cure (which as previously stated is not actually printed but created somewhere in electronic ether like so much dark matter) fails to fix the problem.
VIII. On the Dark Matter
Dark matter is thought to be holding the universe in place and helping drive its expansion. Expansion of M2 gives surreal powers to bankers, politicians, traders... to do things that would otherwise fail (Too Big to Fail, wash, print, repeat).
Meanwhile real stuff, bullion, well that remains unprintable.
Every month the ratio of electronic money dollars to real silver available grows. More dollars to chase fewer ounces. The ratio expands.
IX. Herein lies the value proposition of silver.
The rate of printing means that cash dollars held will lose 2-4% of their value every year. I have read many financial economists state that such rates are small, and manageable and not worth worry.
Over 20 years at 3% inflation my cash dollar today will have lost 45% of its value.
It matters not how well meaning someone may be, economist or not. Any statements like that are wrong. Was it just not a few years ago that may of these experts were assuring us there was no housing bubble, that real estate never goes down, and that GDP would not fall into even a mild recession?
So yes, 2-4% annual debasement is a worry for me.
Meanwhile an ounce is an ounce is an ounce. It's not getting smaller. Inflated. Debased with zinc. Split apart. It is still there.
X. In retrospect, investment changes are sudden and disjointed. They tend not to be gradual.
What if the government planners lose control of the inflation/debasement scheme? Just a shift in a tiny part of the market could cause huge swings in the availability of silver for investment by the masses. What happens if that shift doubles investment demand?
What if delivery delays occur, and are widespread and lengthy? What would that do to create a wholly new mania, warranted or not? We are certainly no strangers to investment manias.
The basic truth to all of this is that you can't print metal. It can only be mined.
We can however alter the exchange rate of metal to other asset classes by debasing these other asset classes with inflation, debasement and reckless production.
The time to acquire is when the exchange value into silver from these classes is absurdly imbalanced (as now), and then exchange from silver back out to these other classes when the rates come fair or overshoot the mark and render them out of favor.
************
Remember, while silver is unprintable it is not unattainable. It is in fact quite easy to acquire in bullion form (for now) through reputable sites, from local coin shops, from trade shows. But just remember the best time to acquire any asset class is when few are paying attention to it (buy low) than when everyone is rushing for the last bar (buy high).
Salud!
*********************
I. An ounce is an ounce is an ounce.
Metal is metal. It can't be deflated. It can't be devalued. It can't be tossed out like a drachma and replaced with a new piece of paper with cute face. An ounce of bullion was, is, and always shall be one ounce of bullion. An ounce of silver from Roman times remains an ounce of silver today, exchangeable into completely modern forms of paper no less!
II. Paper is infinitely expandable
We treat money like paper.. talk about "printing" it and so forth.
But in fact most money these days is electronic. Only about 7% of it exists in physical form and that number is shrinking every year as the Fed "prints" more money by increasing the amount of Money on servers and electronic ledgers.
In the past governments and banks were constrained by the limitations of the printing press on how much money they could make... resorting to adding zeros to the bills to compensate for hyperinflation.
Today it is different, they no longer need to add zeros to the physical money. They just add zeros to the total amount of money in existence. Most are fooled by this hat trick. But the effects are intimately felt in the form of inflation. Remember when a bottle of soda could be had for $0.75? A gallon of milk for $1.10?
The price of real stuff goes up whenever the amount of money printed expands faster than real stuff can be made, produced, or mined.
Always.
And silver is in that category of 'real stuff'.
III. Silver is not infinitely expandable like paper.. it is literally unprintable.
Silver must be found in the ground.
The ground where it is found is often way out in the middle of nowhere, or high up in Mount Somewhere.
Big pieces of rock and earth must be moved, pulled and hoisted and shoved into giant rock crushing machines and smelters that require lots of electric power and water to run, in a multi-phase process to get the little bits of silver out of them and refined into silver metal form. Something like 2-3 oz of silver per ton of rock is considered very good ore strike.
This puts a natural limit on how much silver can be pulled out and made available for the humans mining it... no matter how badly we may want it. The price could go to $1000 tomorrow and it would take a long time for every silver-rushin prospector runnin for the hills to find it, get it out, and bring it to the market.
IV. Silver is not money. Silver is money.
Excepting the past few decades, silver has been considered money for as long as human civilization has been in existence. In nearly every place. It ended in the United States under Johnson in 1965, eventually phasing out by 1968.
Gen X and later? We are a rare generation indeed.. born into a dominant world power where silver was NOT an official form of monetary exchange (no matter how debased the coinage).. this has almost never happened anywhere, anytime.
To say that silver will never again be money, never be used to anchor the printing of paper in a fixed exchange rate (metal standards) is folly; at least.. the weight of human existence is against the proposition.
V. Silver is mostly used, not saved.
Almost all silver mined every year is immediately used for industrial fabrication, as bits and conductors in machines. Cell phones. TV Screens. Medical devices (antimicrobial). And so on. A small portion is used for coins and metals, and a small fraction demanded by "investors" for saving in the form of ingots, coins and bars.
VI. Silver is not on anyone's radar screens.
The annual amount of production purchased by investors comes to around 140 million ounces worldwide. This equates to about $4.7 billion dollars (US). World-wide Gross Domestic Product is about $70 Trillion Dollars. This makes the effective demand for silver just 0.0066% of total WW GDP. Question: what would be the impact of a shift in investment psychology of just 0.001% of worldwide priorities? How about a shift 10 times greater (0.01%)? Of 1%? 5?
VII. Silver is a hedge against stupidity.
We have many dedicated, well-meaning public servants. Elected Leaders. Many good bankers. Business leaders. Traders.
And some not so good.
Sometimes, somewhere, in some part of the market with certain people.. things get out of hand. They get greedy and try to change the rules. Make exceptions for themselves and their patrons. Game the system. Do things that puts stuff out of whack. Alter the balance. Upset the apple cart.
Bubbles form. Fantasy asset classes get more attention than they deserve. Manias develop. The masses pile in. Things pop. Economic crises set in.
The very system that created/enabled/stood-silent during this mess is howled at to fix it. So they clumsily step in and start waving their arms.
Sometimes they have a good impact. Mostly they do not. But in all situations more money is printed.. as the cure (which as previously stated is not actually printed but created somewhere in electronic ether like so much dark matter) fails to fix the problem.
VIII. On the Dark Matter
Dark matter is thought to be holding the universe in place and helping drive its expansion. Expansion of M2 gives surreal powers to bankers, politicians, traders... to do things that would otherwise fail (Too Big to Fail, wash, print, repeat).
Meanwhile real stuff, bullion, well that remains unprintable.
Every month the ratio of electronic money dollars to real silver available grows. More dollars to chase fewer ounces. The ratio expands.
IX. Herein lies the value proposition of silver.
The rate of printing means that cash dollars held will lose 2-4% of their value every year. I have read many financial economists state that such rates are small, and manageable and not worth worry.
Over 20 years at 3% inflation my cash dollar today will have lost 45% of its value.
It matters not how well meaning someone may be, economist or not. Any statements like that are wrong. Was it just not a few years ago that may of these experts were assuring us there was no housing bubble, that real estate never goes down, and that GDP would not fall into even a mild recession?
So yes, 2-4% annual debasement is a worry for me.
Meanwhile an ounce is an ounce is an ounce. It's not getting smaller. Inflated. Debased with zinc. Split apart. It is still there.
X. In retrospect, investment changes are sudden and disjointed. They tend not to be gradual.
What if the government planners lose control of the inflation/debasement scheme? Just a shift in a tiny part of the market could cause huge swings in the availability of silver for investment by the masses. What happens if that shift doubles investment demand?
What if delivery delays occur, and are widespread and lengthy? What would that do to create a wholly new mania, warranted or not? We are certainly no strangers to investment manias.
The basic truth to all of this is that you can't print metal. It can only be mined.
We can however alter the exchange rate of metal to other asset classes by debasing these other asset classes with inflation, debasement and reckless production.
The time to acquire is when the exchange value into silver from these classes is absurdly imbalanced (as now), and then exchange from silver back out to these other classes when the rates come fair or overshoot the mark and render them out of favor.
************
Remember, while silver is unprintable it is not unattainable. It is in fact quite easy to acquire in bullion form (for now) through reputable sites, from local coin shops, from trade shows. But just remember the best time to acquire any asset class is when few are paying attention to it (buy low) than when everyone is rushing for the last bar (buy high).
Sunday, August 12, 2012
The Oz-like folly of Financial Planners..
The $2-million dollar bag of gold
Financial planners often throw around some number.. one that comes up again and again in planning articles is how much retirees should have in their portfolios for a 'comfortable' retirement. I often see the value of $2,000,000 floated as a good benchmark... with the implication that if you are not studiously stashing your nuts towards that goal then you're going to be in trouble.
My problem with the figure is that it cannot possibly be true for everyone.
Consider.
There are 75,000,000 (75 million) baby boomers starting to retire. If each of them had two million bucks it would equal 150 trillion dollars in assets.. which is about 10x the total market capitalization of the entire US stock market. (It's also about 10x the total US debt, and 15x the total US currency outstanding.. but who cares).
This number also assumes that no one else in the world is investing in the US.. not younger workers, not foreigners, etc.
No matter. We must all have two-million dollars, it has been decreed.
Whatever.
My point is that one should not blindly adhere to what they see in the press. Most of what is printed is barely fact-checked by the media powers-that-be.. as the above example indicates.
What is important is building an intelligent portfolio for yourself that can provide a reasonable stream of income and stability through good times and bad: such as utilities, staples, real estate, and commodity exposure, for starters.
But the next time a planner tells you what your total should be.. ask them to multiply that figure by the total number of people and explain to you exactly how all that money is going to be created, invested, and tallied. The blank stare should speak volumes.
Financial planners often throw around some number.. one that comes up again and again in planning articles is how much retirees should have in their portfolios for a 'comfortable' retirement. I often see the value of $2,000,000 floated as a good benchmark... with the implication that if you are not studiously stashing your nuts towards that goal then you're going to be in trouble.
My problem with the figure is that it cannot possibly be true for everyone.
Consider.
There are 75,000,000 (75 million) baby boomers starting to retire. If each of them had two million bucks it would equal 150 trillion dollars in assets.. which is about 10x the total market capitalization of the entire US stock market. (It's also about 10x the total US debt, and 15x the total US currency outstanding.. but who cares).
This number also assumes that no one else in the world is investing in the US.. not younger workers, not foreigners, etc.
No matter. We must all have two-million dollars, it has been decreed.
Whatever.
My point is that one should not blindly adhere to what they see in the press. Most of what is printed is barely fact-checked by the media powers-that-be.. as the above example indicates.
What is important is building an intelligent portfolio for yourself that can provide a reasonable stream of income and stability through good times and bad: such as utilities, staples, real estate, and commodity exposure, for starters.
But the next time a planner tells you what your total should be.. ask them to multiply that figure by the total number of people and explain to you exactly how all that money is going to be created, invested, and tallied. The blank stare should speak volumes.
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