Yesterday, Jonathan Chevreau, one of Canada’s finest financial columnists, wrote about how women are generally more “conservative” prefering safe investments, “defined as” GICs, bonds, mutual funds. Obviously, the term “conservative” has a somewhat different meaning in conventional investment lingo than when I refer to myself as a conservative investor. For to me, a conservative investor has to mean something different than putting your money at interest in an inflationary environment. That should be called “risk adverse” not conservative. But alas, risk adverse investors expose themselves to the worst asset class of all, fiat currency at low interest rates, which is not likely but certain to destroy wealth. A conservative investor looks at a the bad monetary policy and devises strategies to beat it.
Author: Petros
Aggresivity or Gold: what is needed in the current investment climate
These are difficult times for investors. They are wonderful times for speculators. Speculators will make (and lose) a lot of money over the next couple of years. In my opinion, investors are likely to lose. Prudent investors might better avoid financial assets for awhile. Traditional wisdom is apt not to apply to what is coming. Monty Pelerin, “Speculators Only”
There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.” It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings. But as Pelerin says, speculators will make and lose a lot of money. The biggest winners today are those upon whom Bernanke shines his favor, such as the big banks that borrow money from the Fed and lend it back to the US federal government, which is perhaps the biggest Sopranos-type racket going: but it’s not some kind of under the table payoffs, but it’s being done right in front of all of us and with impunity.
The 2008 market crash has been particularly devastating on people’s savings. They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade. Stung by this double whammy to their savings, many are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world are robbing them blind through their loose monetary policies; the euphemism for excess money creation is “Quantitative Easing”–it used to be called just simply “inflation”.
Loose money is also created by low interest rates. In Canada, for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the rates at ridiculously low rates. So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%. Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold. Commodity prices on world markets are rising rapidly too. Or rather, fiat currencies are losing their symbolic value quickly. A interest bearing GIC, savings account or bond is recipe for a portfolio with a rapidly declining buying power.
I’ve devised an aggressive and flexible investment style to beat the coming inflation, if possible. The stock portfolio I manage is now almost all commodities (oil and gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies. I am selling cash or margin covered puts on oil and gas, gold-mining companies (etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit (notably my HELOC) as my hedge against deflation,with the view of seizing the day if there is a market crash. I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes). The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary. Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it).
Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts. It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s. Or as Dickens says, “It was the best of times, it was the worst of times … ”
This post is a revised comment that was featured today at Monty Pelerin’s blog, “One man’s approach to investing in dangerous times“. Thanks Monty!!
Please read my financial disclaimer, if you haven’t already.
Marcellus disappoints
An important report from Oil Drum, published at the Business Insider, explains that the Marcellus shale play will not break even when natural gas is selling at less than $7/Mcf, as the result of faster than expected decline rates for the wells. Why then do companies continue to drill? The report says:
Returning to the broader subject of shale plays in general, why do operators keep drilling while their own over-production has depressed the price of natural gas by half of its value since January 2010? It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.
Foreign companies invest in U.S. shale plays for different reasons but the most often-stated reason is to learn about the technology that they may be able use to their advantage in future shale plays around the world. It is possible that some companies enter into joint ventures with U.S. shale operators for strategic reasons based on fears of future resource scarcity particularly as China expands its efforts to control everything from petroleum and minerals to rare earth metals around the world.
Read more: http://www.businessinsider.com/marcellus-shale-disappointment-2010-10#ixzz144mz6QDy
But with currently reported natural gas futures at $3.84, it does not seem like this play is going to be viable. Indeed, the report explains that while debt for Marcellus-focused companies has gone up and reserves have increased somewhat, shareholders’ equity has dropped dramatically. To add insult to injury, the states of Pennsylvania and New York are placing moratoriums on new drilling in the play for fear of the new fracking technology that is used to exploit these wells, and in the case of Pennsylvania, because of a dispute between the republican legislature and the democrat Governor Edward Rendell over the drilling tax; of course, it’s the democrat who is insisting on a higher rate and has thus issued the moratorium. I wonder if Governor Rendell has read the Oil Drum report showing that the drilling is largely unprofitable in the region. This is no golden goose. But I suppose a brass goose can also be strangled by taxes.
As a result of this, I’ve decided to sell 50% 75% 100% (update 11 Nov) of my holdings in Enerplus (ERF.un: TSX; ERF: NY) which has a large Marcellus shale operation. This follows an excellent run for Enerplus, which still has many other great holdings. Along with Marcellus, Enerplus recently acquired some lands on the US side of the Bakken. I am uncomfortable with their large stake in the US with Obama at the helm–he illegally shut down drilling in the Gulf and he and the other democrats in the US intend to destroy the US-based energy industry, all while subsidizing Brazil and Soros. I will probably sink the funds that are now freed up into Pengrowth Energy and Penn West Energy, which are both listed as Action-List Buys by TD Newcrest. These can also be bought on the New York Stock exchange and they can thus add to my US dollar carry trade.
The bad news for Marcellus shale may turn out to be good news for conventional natural gas plays in Canada, and it would come at an excellent moment. The shale plays in the US have put great pressure on the prices causing a glut of available gas. I am maintaining my shares of Perpetual Energy (PMT:TSX) which dropped about 7% immediately after being trashed on BNN by Eric Nuttall of Sprott Asset Management (hat tip: Devon Shire), who said it is due for a dividend cut if natural gas prices don’t improve soon. Some think that dividend cut is already factored into the current price. I’m looking to buy in at $3.85-4.00. Nuttall, a cognoscente of the Canadian oil industry, claims that no managed funds own Perpetual, only retail investors because of its high dividend yield. Ouch! He excused himself for previously recommending Terra Energy (TT:TSX), a natural gas weighted junior (which I started buying recently). So Nuttall is not inerrant.
Life imitates the Simpsons
Liberals often accuse conservatives of doing the same things that they themselves do (see my comment here). Compare this news report with Homer Simpson’s attempt to vote for Barack Obama:
The Tuesday election is an important crossroads for America, as Thomas Sowell writes in his most recent column. Liberty itself is at stake. If there is mass voter fraud like this, then there will be a ground swell of anger.
I have a PhD in Theology: Would you like fries with that? (The education bubble V)
Well, I’ve never waited on tables. But I have driven a delivery truck all around the provinces of Ontario (Nakina, Geraldton, North Bay, Ottawa) and Quebec, (Quebec City, Montreal, Amos, Maniwaki), and as far south as Piqua, Ohio. So far my total gross pay for work related to my field of study, theology, has been $21,600–or less than the cost of my first-year at Cambridge.
The Chronicle of Higher Education has an article about how 17 million people with a college education are doing menial jobs. An astounding 8,000 PhDs in the US are are working as waiters and waitresses.
The Righteous Investor 