economy

Shorting the US dollar

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I continue my winning strategy of shorting the U.S. dollar.  Since about the summer of 2009, I devised a strategy whereby I use the available margin in my combined US/Canadian trading accounts to borrow US dollars to buy CDN oil & gas and mining companies.  This trade has been a consistent winner.  Then in the Spring of 2010, I started to sell option puts on ABX, GG, NGD, PWE, PGH, ERF–Canadian companies which trade in the US stock exchanges and options markets.  This trade has been consistently profitable as well.  Indeed, I’ve only had two assignments on the US side, and within a week in each case, I was able to trade out of the assignment (with a small profit) and to sell another put on the same position.  As of today, puts in the Canadian market have been a net losing venture (on paper) and I still  own assignments in PBN, PBG, and DAY.  But it is just a matter of time before these companies recover.  Selling the puts has given me downside protection which I don’t have in my junior oil exposure or in my long positions that have gone south (e.g., TOL, PMT).

Questrade has made it easier for me to implement my strategy as a DIY investor, because their platform, unlike TD Waterhouse, gives the DIY investor direct access to OTC (over the counter) markets in the US.  With Waterhouse, I had to call the trade in, and while they gave me the discount brokerage commission rate, I could not change a bid in mid-stream without also calling them.  So, for example, I was able to use today my available margin to buy CDN equities in US dollars directly–and the OTC markets give me access to the companies too small to be listed on the New York stock exchanges.  Today, I bought LSG/LSGGF (Lake Shore Gold) at US $2.25, which has a NAV and book value now exceeding its share price.  They are having current production issues.  Raymond Brown downgraded it yesterday, but still considers it to have a one year target price of $3.40.

Macro Trends Supporting this Trade

Let’s just face it.  The US dollar is a failed currency.  It’s buying power must wane because in three short years, Ben Bernanke has created 3x the adjusted money base.  It is now only a matter of time before the dollar dies.  I doubt that anything can be done to save it now, even if Congress were to balance the budget.  But balancing the budget won’t be enough.  They would have to go and arrest Ben Bernanke and replace this tired out Keynesian with an Austrian, because nothing will stop him from creating more money out of nothing.  Sure, keep the debt ceiling where it is and Bernanke will simply monetize the old debt as it turns over.  Almost a half trillion dollars of debt will come due by the end of August, and Bernanke has been buying 70% US debt in the last few months.  Where is the US going to find buyers for this debt now?  Furthermore, nothing will stop Bernanke from buying the debt owed to the Social Security Trust Fund so that Obama can continue his spending spree.

The Canadian Loonie is climbing against US dollar.  It reached $1.06 today.  And this is not because it is a good currency; it is a terrible currency with the Bank of Canada holding interest rates below what is reasonable.  This has caused a housing bubble in Canada.  But the Canadian debt to GDP (30% acc. to the link) is much lower than in the US, which stands 350% according to the following chart (supplied by Lacy Hunt, Hoisington Asset Management):

Now we are hearing rumours that there is a debt deal between Boehner and Obama which will really disappoint a lot of hard-working Americans with savings:  3 trillion in spending cuts over 10 years for a 2.5 trillion ceiling raise.  When hyperinflation takes over and the dollar sinks to nothing, hopefully then, there will be some responsible adults who can take over the government of the United States.  Now it’s being run by children and criminals.

Ultimately, to do well in investing you have to own what the people who have money want. The creditors have told the world explicitly that they don’t want US dollars any more (and that’s why Bernanke is buying 70% of US debt)–though they continue to prop up the dollar,  biding their time so that they may exit this trade with the least damage to themselves; what they really want are hard assets: oil, gold, silver, rare earths, food and all other commodities. That’s why I am long physical gold and silver (Sprott Physical Gold and Silver Trusts) and Canadian oil & gas and gold mining.  This is how the Chinese are investing, you know the people with the largest currency reserves in the world that I am aware of.  What are they buying?  The Chinese are sinking another 2.1 billion into Canadian oil.

Meanwhile the American consumer is using his credit card to buy staples.  When that’s no longer possible, many people will be facing starvation.  Don’t look to the government for help because all they will be able to do is hand out debit cards (the new food stamps) filled with worthless dollars or welfare cheques likewise denominated in worthless dollars.

Ron Paul should have asked Bernanke if the US dollar was money.  If Bernanke had said it isn’t, he would finally show some understanding about economics.

Thank-you Ben “gold-is-not-money” Bernanke: Celebrating $1600 gold

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In this video (towards end), Ron Paul asks that colossus of economic brilliance, Chairman Ben Bernanke, if gold is money and he answer with a flat “no”.  Even though it has been money for “6000 years” according to Ron Paul, Bernanke says that the only reason central banks hold this asset is “tradition”.

I have to thank Ben Bernanke for his ignorance about gold.  He is the main reason that it is now selling at $1600 per ounce and this is a great boon to my portfolio.  He is the one who is responsible for adding nearly 2 trillion dollars to the adjusted money supply in less than three years; he has also ripped off retirees and other creditors by keeping interest rates at near zero.  I don’t suppose Chairman Bernanke could possibly admit that the following two charts have any relationship.

Adjusted money base 18 July 2011: source St. Louis Federal Reserve

10 year gold chart: source Kitco.com

It is important to add that although QE2 officially ended at the end of June, there is good reason to think that QE continues.  I.e., there is no need for an announcement, QE3 started where QE2 left off, as the adjusted money supply has not leveled off but continues to expand.  And it must do so, as the United States government must roll over nearly 1/2 trillion dollars of expiring treasury debt by the end of August.  Monty Pelerin, in a must read article, writes:

From Zerohedge is this table of Treasury securities that mature in August:

The US government must fund both its deficits plus the maturing debt. In August that amounts to  $600 billion. Can this be done month after month? Not indefinitely! Annualized, the US government must sell new and rollover debt of about $7 trillion this year. Next year the amount will be larger.

The death debt spiral is coming to a head.  The next couple of months are going to be interesting.

My investment summary:

Long:  Canadian intermediate and junior oil and gas sector, gold mining, physical gold and silver (via Sprott Physical Gold and Silver Trusts).

Short:  US dollar

Also in this series:

April 20, 2011 Stuck on stupid: celebrating $1500 gold and the East Coast geniuses that made it possible

September 24, 2010 The education bubble IV: In celebration of $1300 gold

On why capitalism is better for workers than statism

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An example from Antiquity shows why in principle private enterprise has been historical more humane to its workers than state-run operations.  J. G. Davies, “Condemnation to the Mines: a Neglected Chapter in the History of the Persecutions”, Univ. Birm. Hist. Journal. 6 (1957/8) 104, writes about mines during the Roman period:

The ownership was mainly in the hands of the State, although there were some private concessions, while others were granted to municipalities.  One of the results of this State control was a disregard for the working conditions of the miners.  While the private owner would have to find the money to replace slaves who might die and was therefore concerned not to kill his men by overwork, replacement cost the State nothing since it could merely divert to the mines more prisoners of war or more convicts.  In such a situation, those upon whom this sentence was passed were driven to the limits of their endurance; their lives were cheap and the mortality rate was high.

Human Rights?

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Is this a human right?

[Cross-posted at City of God.]

“Whereas the peoples of the United Nations have in the Charter reaffirmed their faith in fundamental human rights, in the dignity and worth of the human person and in the equal rights of men and women…” ~ From the Preamble to the Universal Declaration of Human Rights

Here is something that I wonder: does Western civilization have a coherent argument for the existence of human rights?

How do we determine what is a right?

An article on the Mises.org blog from a while back raised this question in a vivid manner:

Every once in a while, something comes along that perfectly encapsulates the idea of so-called “social justice” in action. For all the wonderful critiques that have been written about this wretched concept by its many detractors, none quite match the elegant simplicity of a recent work by some of its advocates. I am referring here to a recent video made for the World Day of Social Justice in which students and teachers complete this sentence:

Everyone has the right to _____. Continue reading →

Bernanke the almighty and What are oil stocks worth anyway?

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Andrew at City of God has posted that the Watcher called into question Sue Richard’s calling the Silver Surfer all powerful:  “‘all-powerful? There is only one who deserves that name! And his only weapon… is love’ (Fantastic Four #72; Mar. 1968).”  Well for us investors, we worship at the feet of one and only one, his high and mightiness, Benjamin Bernanke, the chairman of the Federal Reserve Bank.  He is the one who determines what our assets are worth and he wields a weapon called “QE” and another called interest rates  with which he increases our power, our net worth, and we become mighty warriors of investing–but when he refrains from wielding them, suddenly we are all grovelling in the dirt like worms eating skubala (a.k.a., the margin call).

So I wrote to my good friend Mich at Beating the Index, who is fretting about running out of powder for his battle on the investment front:

Bernanke is the first cause of everything in the market today. He is exercising his omnipotent power as head of the Federal chair to influence risk appetite. Well, there will be either more monetization soon or watch hundreds of thousands of government workers in Washington not get their pay cheques and be sent home crying. My Schadenfreude would be so high at that point, it would almost be worth a 50% cut in my portfolio to see it. But it ain’t never gonna happen! Believe me, by August or September, the pols in Washington are going to lose nerve and there will be new debt ceiling (and QE3), based upon a compromise between the left-wing republicans and the democrats in the House.

Meanwhile, fear is palpable.  The companies  in which I am invested have increased their asset values through the development of oil fields but their share prices are way down because the lack of QE3 has diminished risk appetite.  People are rightly afraid to be caught with their margin pants down, like what happened to silver investors when the margin requirements were magically increased.

Devon Shire chides Petrobank (last $14.30)/Petrobakken (last $13.63) for not having a share buyback at these low prices, which puts their market capital at serious multiples below the Net Present Value.  Shire wants them to reward shareholders with a buyback of shares, but of course the management spent that cash on PBN shares starting at $21 and who knew that the price would plummet to these levels? These prices  are not only at multiples below NPV but well below book value (=shareholder’s equity).  I wrote to Mr. Shire the following response:

Net Present Value for other junior and intermediate companies is also currently at extremely high ratios to market value. Midway Energy is reporting NPV10 of 1.7 billion while its market capital is 274.9 million.

Some are angry with Petrobakken for continuing what they consider to be an ill-advised dividend program. Evidently, the buy back of shares is an equivalent use of cash as a dividend–I suppose that the real need is to spend money on developing their resources in order to deliver growth. The sad part is that PBN started the repurchase program at $21 while the price was so high vis-a-vis the current price.

At some point either you and I are going to be considered really stupid for thinking we had found value in the Canadian oil sector, or there is going to be a major correction drastically decreasing the NPV/market capital ratio.

Yet Mich warned me about taking the NPV10 that Midway had presented as a serious indicator of their value and I reproduce here our dialogue:

Continue reading →