Staying clear of certain countries

News that First Quantum’s mineral rights in Congo have been overturned is hardly surprising.  Personally, in my investments I try to steer clear of highly volatile regions where war, bribery and theft are more common than sound business practices.  The other day I sold my shares of Centerra Gold because the coup in the Krygyz Republic, where CG has a huge percentage of its NAV, created too much volatility for my liking.   Nor would I ever invest in Venezuela with its kleptocratic dictator, Chavez.

First Quantum’s mistake was taking on too big a risk–as long as the governments in Africa remain corrupt and violent, investors need to be wary and not stick their necks out no matter how lucrative the deal may seem to be.  Africa’s riches, gold, uranium, diamonds, and oil, are indeed tempting and lucrative.  Indeed, the more lucrative, the more you have to be worried that the corrupt government will want to rescind their contract, so that they can get a bigger piece of the action–or in the case of Chavez, all of the action!   This is what happened to Kosmos Energy in Ghana. If it happens in “safe” places to invest like Australia and Alberta, how much more is it going to happen in volatile regions like Congo.  Australia recently announced a 40 per cent “profit” tax on mining companies (the latest is that the government may relent on that plan).  Alberta has repented of its increased royalty structure on oil and gas in order to try to get things back the way they were before when oil companies found the province attractive for new investment.

When in Chad, I stayed in an “air conditioned” house of a Exxon employee.  The air conditioning worked about 2/3s of my stay. The rest of the time you bake because Ndjamena is in the desert.  My friend said that he was in charge of a 24 hour plan, planned to the minute, to evacuate all Exxon employees in case of an outbreak of violence in the country.  A few short months after my visit, rebels stormed the city of Ndjamena and thousands of refugees fled across the river into Cameroon.  The rebels later fled, even though they were on the brink of successful coup, and the refugees returned a few days later to pick up the pieces of their lives.  Why, for heaven’s sake, would you want to send your employees to a country like that?  The Chinese and Koreans are finding that there are still plenty of places to invest their billions of dollar right here in “safe” Canada.  I say “safe” because no place is immune to kleptocracy and war.  It is just that some regions present far less risk than others.

USA debt 13 trillion

Congratulations to Barack Obama and the Congress led by the Democratic party.  You have now increased USA debt to 13 trillion (by this coming Tuesday).  That’s $41,900 per man, woman, and child.  That is higher than the per capita income.  Since the democrats took control of Congress after 2006 election, the US National debt has increased from 8.67 trillion to 13 trillion.  That is a 50% increase, or $14,000 per capita.  Well, debt was a bad thing at 8.67 trillion.  Why?  Because US government debt is bad debt. At the household level, it is equivalent to consumer debt–debt that is spent and afterward you have nothing to show for it nor any income coming in as a result–all you have is increasing costs due to interest payments.  It is stupid debt.

The April USA deficit and buying gold

The Obama administration borrowed $82.69 billion in April, 2010.  That’s about $8.90 per day per every man, woman and child in the USA.  In my humble conservative opinion, such deficits have led and will lead to the devaluing of the US dollar, particularly because the Federal Reserve is keeping interest rates at artificially low levels.

What is the investor to do?

Gold hit a new high $1241.25 yesterday.  Gold may decline in the short term but it is experiencing a secular bull market because of the inflation of all paper currencies.  I don’t buy gold because I don’t have a safe place to store it and I don’t want to pay an army to guard it.  I’ve instead traded gold mining stocks.  At my discount brokerage, the commissions are lower than for buying and selling gold bullion or coins.   I’ve had a lot of success averaging down and selling off a little at a time as the prices improve.  My best buy was WGI (Western Goldfields), which later became NGD (New Gold), on October 23, 2008, at 88 cents; my ngd is up 183% over my average cost price.

In the last few weeks, since I learned about trading options, I’ve been selling near the money put options of abx and gg (Oct, Jan’11, Jan’12 contracts). If current trends continue, these contracts will all expire worthless (even the ABX put Jan’12 at $45) and I will simply keep the premiums.  When doing this, it is important to reserve sufficient cash or credit to buy the stock at the strike price.  But even if assigned, the purchase of the shares becomes part of the averaging down strategy.  So for example, the $45 January 2012 put on Barrick Gold paid me $8.90 premium.  The average cost price (after commissions) of the shares if assigned then is $36.29–a 22% discount off the current $46 market price.

Thoughts on Inflation

Andrew wrote at the City of God about inflation as welfare for the rich:

(I’m using “inflation” in the Austrian sense here: increase in the money supply, rather than increase in CPI price levels)

I just heard this recently, and it made sense to me:

1. The entire Keynesian scheme of monetary/fiscal spending to stimulate the economy only works because it takes time for people to catch on to the reality that newly printed paper is not real wealth. That is, people don’t immediately realize that they are spending fiat-money, and thus act based on thinking they have more money than they really do.
2. This temporarily causes greater investment, which has the potential to create real wealth and real economic growth.
3. However, as time goes on, sellers realize that buyers have more money, and thus prices rise accordingly, bringing the economy back to status quo ante, except with possibly increased debt (if enough real economic growth did not occur before the sellers caught on).
4. In the case of monetary policy specifically, newly printed money inevitably goes to the rich first: to banks, and from there to massive corporate investments.
5. As time goes on, more of the poor get the new cash, but it also simultaneously becomes less valuable, since prices are rising.

Thus, monetary policy seems to be, inevitably, welfare for the rich.

(Note that none of this would be an argument against government welfare, based on tax-hikes (not spending fiat money), for the poor.)

I responded with some thoughts as an investor:

(1) CPI has not been affected by the inflation of fiat money because there has been no velocity (MV=PQ). Instead of lending money, banks have bought safe US treasury notes to pad their reserves. They have used TARP money to do this. Essentially the US government lends TARP to banks which lend it back to the US government. Also the Federal Reserve bank has bought CDOs from the bank, and the banks have used that money to buy US treasury notes as well.

(2) What we’ve seen since the 2008 credit collapse can therefore be better described as reflation–reflating shrunken credit with fiat money. There are still some mortgages that are collapsing so it may be sometime before we see the most serious detrimental effects of current US fiscal policy (1-2 years?).

(3) Investors are probably more aware of the potential dangers than the public. Therefore we have been making moves in anticipation of a US dollar collapse. This is known as the US dollar carry trade.

(4) Gold is an indicator of inflation, but it also experiences the anticipatory effects of panic about the dollar, as well as periods of profit taking. Its price may therefore at times suggest an overcompensation.

(5) The best hedge against inflation is debt. But you have to buy something with the funds you borrow in order to cover the interest: real estate, dividend bearing stocks, or income investments in foreign currencies or countries (a.k.a., carry trade). The risk is that the investment you make with the debt will not maintain its value, but I consider the current risk of loss of holding currency to be an absolute certainty. So better to own anything except money. For this reason, my current non-registered investment portfolio is 150% in stocks.

(6) Inflation caused by government deficits is not really generational theft as suggested so often by conservatives (or those criticizing current deficits). It is theft of current creditors, bank account holders, fixed income earners and workers, whose current paycheques are garnished through the hidden cost of inflation. It is true that CPI lags inflation, but then pay raises lag CPI. I consider inflation to be especially a heist of the retirement accounts of the older generation–financial advisers often recommend subtracting your age from 100 and that remaining number is what you should have in volatile assets like stocks. The remaining is to stay in fixed income. So if you follow this advice and you are over 70 years old, then 70% of your portfolio is subject to government theft by inflation. Many of these retirees just abandoned stocks altogether during the collapse and now they have cash which is being killed by inflation. It is not a pretty picture. But inflation is not a theft of the younger generation because when the enter the workforce they will earn the currency at its current value.

(7) Inflation in the US will be necessary: (i) to be able to pay the interest and principle on the current debt, inflation is the only way–it is a form of bankruptcy; (ii) to create an effective decrease in the recent minimum wage hike which has put millions of teens and other low wage earners out of work. (iii) to use bracket creep in order to increase everyone’s taxes; (iv) to make effective reductions of entitlement obligations which can’t be paid for.

(8) I am not “rich”, but as an investor, I’ve been able to ride this wave, and I’ve done very well thanks to being able to make the right kinds of move in anticipation of current US inflationary policy, but I may have to bite the bullet on an investment I made with my brother in Austin just before the collapse and that hurts.

(9) While not “rich”, we were able to get a huge amount of bank credit just when I needed it in Oct 2008. That has been great boost to my investments. So indeed, the banks were giving credit to some people, contrary to the widely held belief that no one could get loans.

(10) It is much better right now to be in Canada than the US.

(11) Inflation doesn’t rob the poor but the middle class and wealthy who have holdings which are not hedged against inflation.

(12) Ferengis will make money during periods of inflation.

I’ve since learned that CPI (Consumer Price Index) is manipulated and underestimates inflation by about 7% per annum.