Rogers: 'Agriculture Better Than Gold'

The Other "Black Gold"

I expect to make more money in agriculture than I do in gold.

-- Investor Jim Rogers

Jim Rogers might not be quite the household name that Warren Buffett or George Soros is, but long-time investors know Rogers as an astute, independent market analyst -- who's made gobs of money, for both himself and his clients, spanning several decades.

So, it's noteworthy that Rogers has been beating his investment drum even louder for agriculture the last several years than he has for gold.

His rationale?

Farmland ("black gold?") is the ultimate play on rising inflation and commodity prices.

Gold has skyrocketed the last few years; farmland, not so much (yet).

Farmland isn't my specialty, but if you're an investor who's interested in buying some . . . I'll help you find someone at Edina Realty who's an expert! (and I guaranty, there is one).

Why Gold is Making Record Highs

The Link Between 0% Interest Rates, Spiking Gold

When "risk-free" cash keeps paying a guaranteed loss, then a growing number of people will, in due course, start seeking shelter elsewhere.

--"What The Economist Doesn't Know About Gold"; Seeking Alpha (6/29/2010)

The above quote is from the best piece I've seen yet explaining why gold is setting record highs.

The executive summary?

When cash can be deployed profitably -- think, bonds, CD's, stocks, anything -- the opportunity cost of holding gold is high.

However, when holding cash yields .0001% -- thanks, Federal Reserve -- the opportunity cost of holding gold disappears.

In fact, after taking account of inflation, the cost of holding cash is actually negative (and has been, for much of the last decade).

Make it painful to hold cash . . . and people won't.

Gold has emerged as the alternative for an increasing number of savers (not to mention various Central Banks).

P.S.: the best definition of opportunity cost I know is an anecdote about Cornelius Vanderbilt and real estate investing.

In the early 19th century, Vanderbilt bought a plot of land on Wall Street for $4,000, then re-sold it two years later for $8,000. His perplexed Buyer asked him (after the closing) why he sold a piece of land sure to continue appreciating.

Vanderbilt replied that, in another two years, the Wall Street land was likely to be worth $16,000.

Meanwhile, the 100 lots that he had just purchased in Greenwich Village (north of Wall Street, and then raw land) with his Wall Street proceeds for $80 apiece were then likely to be worth $80,000.

And he was right!

Gold(en) Ambivalence

The Gold Debate

Want to know what to think about gold?

So do I.

As best I can tell, here are the opposing camps' two best arguments:

I hate gold. It does not pay a dividend, it has no value, and you can’t work out what it should or shouldn’t be worth. It is the last refuge of the desperate.

--Investor Jeremy Grantham

Just because the lifeboats leaving the Titanic are crowded doesn't mean you shouldn't be on one of them.

--Commodities trader on CNBC, who was asked whether it was worrisome that gold was becoming "an increasingly crowded trade."

My thoughts on gold are already on record ("The Gold Tax").

As they say, "you pay your money and you take your chances."

The Gold Tax

The $64 Trillion Question

What do rational savers and investors do in an environment of zero percent interest rates, where the daily headlines speculate how long major currencies (like the U.S. dollar) will hold their value as national debts mount?

Switch (at least) a little of their holdings to gold.

Even if that amount is relatively small -- say, 5% of liquid assets -- the effect on global commerce could be huge.

That's because 5% of global liquidity is still a huge number, and it's magnified many times that by something called a "fractional reserve banking system."

"Fractional reserve what???"

If you're not an economics wonk, stop here; however, if you can handle a little bit of brain teasing . . . . read on.

Global Money Supply: How Much?

To figure out how much 5% of the world's money supply is, one first has to estimate . . . the world's money supply.

If you know, send me an email.

However, as best I can tell, a working estimate is about $30 trillion.

That consists of both coins and legal tender, as well as short-term banking deposits, money market funds, CD's, and the like.

While definitions vary, to be included in the foregoing number, the instrument must be liquid -- that is, easily converted to cash and spendable.

Bottom line, defensive savers reaching for financial insurance conceivably could switch something like $1 - $2 trillion of their former paper money reserves into gold.

Or already have.

That's against a backdrop of recession-anxious consumers already upping their "rainy day" funds in case of extended unemployment, unexpected (and uncovered) medical bills, etc.

Cash vs. Gold

What's the big deal if people effectively put a trillion (or two) in their mattress?

Due to something called "fractional reserve" banking -- the system in developed countries today -- $1 on deposit at a bank theoretically can support $20 of loans. That's because banks typically only need to keep $1 in reserve for every $20 they lend.

So, a $1 trillion withdrawal potentially has the effect of reducing lending activity by $20 trillion.

That, in an economy where assets like stocks and housing have already taken multi-trillion dollar hits the last two years or so.

Missing Drain Plug?

To combat this contractionary dynamic, the Federal Reserve and other central banks have been, shall we say, "aggressively" increasing liquidity -- printing money.

Unfortunately, as central bankers have poured money into the global currency "bath tub," they haven't seem to notice that there's a big hole in the drain plug -- if indeed there still is a drain plug.

Ironically, it may even be the case that the more "fiat" (paper) money central bankers create, the more people defensively convert that money to non-fiat forms -- like gold -- to protect themselves.

Addressing this vicious circle -- and removing the "gold tax" -- would seem to be the biggest imperative for today's monetary policy makers.

P.S.: economists have various terms for times -- like now -- when monetary policy seems to be impotent (or worse). They include "pushing on a string," "liquidity trap," etc.

In Gold We Trust

Do I hear $10,000 an ounce??

There seems to be a "can you top that?" competition going on at the moment regarding gold prices.

As gold has inexorably risen to about $1,200 an ounce today -- up 15% just in the last month, and four-fold since 2000 -- analysts have scrambled to raise their projected price targets.

Predicting $2,000 an ounce now barely raises eyebrows; to get anyone's attention, you have to double or triple that.

Going for the Gold

So, just to get ahead of the pack . . . you heard it here first: I predict that gold is going to $10,000 an ounce.

When, I have no idea.

P.S.: Actually, it's not true that no one has yet predicted $10,000 an ounce gold: run a Google search, and you'll get dozens of hits. The catch? Many of them go back years.

In fact, most of the "gold $10,000" Google hits relate to fundraising. It turns out that $10,000 is the "gold" level for literally hundreds of charities nationwide. You'll have to fork over another $5k- $15k to rate "platinum."

Biggest U.S. Export? Bubbles

FIFO, LIFO & LILO

"Where is the money [created by the U.S.] going? Where the problem's going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals."

--Donald Tsang, Hong Kong executive; "A Dollar Warning From Asia," The Wall Street Journal (11/17/09)

Cheap U.S. money is stimulating the economy, all right.

It's just that the economies being stimulated the most . . . aren't in the U.S.

Rather, they're in places like China, India, and Brazil.

Like flood waters flowing over already saturated land, a tsunami of U.S. dollars is pouring into those economies because . . . that's where the growth is.

A dropping dollar makes this play even more profitable.

ABC's of the Carry Trade

Through the magic of something called "the carry trade," sophisticated investors can borrow depreciating dollars, make a higher return elsewhere, then essentially re-pay less than what they borrowed (that's what depreciation means).

Say it all at once: 'last one into the carry trade pool is a rotten egg!'

The only problem with that is . . . all the splashing.

The carry trade magnifies the downward pressure on the dollar, creating a vicious, bubble-inflating cycle.

Its balloon-inflating effects are most pronounced on the smaller, developing and emerging economies, where capital inflows can "move the dial" more than they would in a bigger economy.
Just think of it as the sovereign equivalent of the stock market, where "mega caps" like the U.S. and China typically are harder to move up -- or down -- than "small" and "micro-cap countries" like Malaysia or Peru.

Also inflating: many of the old bubbles, including worldwide stocks, gold, and other commodities such as oil and silver.

"FIFO and LIFO"

Who are the losers?

For starters, all the casualties of the old bubbles, including residential (and coming soon) commercial real estate, and before that, high tech stocks.

Next come all the risk-averse savers, whose money market yields and interest on savings have vanished.

Most at risk now?

Anyone who's last into any of the new bubbles.

Call them the Last-in-Last-Out's, or "LILO's" (vs. the more connected and favored FIFO's).

The Fed & Unintended Consequences

The Fed, Commodity Prices & Economic Recovery

Twelve hundred miles (give or take) from Wall Street, me thinks that a not-so virtuous cycle has emerged regarding the government's various and sundry efforts to nurse the economy back to health.

The dynamic goes something like this:

Step 1: the Federal Reserve and Treasury essentially borrow and/or create money -- at this point, trillions of it -- then direct it where they think it's most needed (not necessarily to me or you . . . but that's another post).

Step 2: the markets ("Mr. Market") take note of all that deficit spending, and drive down the dollar while pushing up commodity prices.

Step 3: elevated commodity prices retard recovery.

To take just one example, at $80 a barrel, oil is likely twice what supply and demand would otherwise dictate at the moment. Meanwhile, "stores of value" like gold -- now around $1,100 an ounce -- drain money that would otherwise fund economic growth.

Step 4: the Federal Reserve and Treasury, noting anemic growth, serve up another helping of stimulus cum deficit spending (see Step 1).

How long can this go on?

As many commentators have now noted, eventually one of two things happen: 1) economic recovery kicks in, and the government can taper its rescue efforts; or 2) the U.S. bumps up against the natural limits of its ability to borrow (not a bright line).

The "canary in the coal mine" for this kind of kind of fiscal/monetary tightrope is Japan, which is a good 15 years ahead of the U.S. on its trajectory of boom, bust, and (non)recovery.

The lesson for policymakers would seem to be, "don't do what Japan has done."

Real Estate & Inflation -- Updated

A *Macroeconomic Overview

Back in April, I ran a post called "Real Estate & Inflation" that isolated wage growth as the key to whether any inflationary outbreak would help or hurt real estate (incidentally, that post is now ranked 18th in the world, according to Google).

Specifically, if inflation spilled over into workers' wages, it would drive up real estate; absent that, inflation would hurt real estate.

That's because static wages plus rising prices for everything else (food, gas, health care, etc.) would "crowd out" consumers' ability to spend on housing.

Six months later, how do things look?

Clearly, there is no inflationary pressure on wages. In fact, with unemployment at about 10% nationally and still rising, there is more downward pressure on wages than upward.

However . . . two other developments have come into clearer focus.

Coming Into Focus

The first is the Fed's apparently indefinite commitment to an easy (free?) money policy -- at least to banks that borrow from it.

Second, while wage inflation is nowhere to be found, asset and commodity inflation -- at least outside of housing -- appears to be rampant. (Hmmm . . . maybe the two are linked).

The Dow Jones is well over 10,000, gold smashed through 1,000 an ounce weeks ago, and oil appears to be poised for another run at $100 (and beyond). Meanwhile, the dollar is plumbing record lows against the Euro, yen, and other major currencies.

So, to return to the original question, what will an outbreak of inflation mean for real estate -- and specifically, the housing market?

Based on the foregoing, I've shifted into the camp that believes that rising inflation elsewhere in the economy will ultimately spill over into real estate, as well -- even if wage growth is flat (or negative).

If the economy can simultaneously experience recession and inflation -- a phenomenon dubbed "stagflation" in the '70's -- there's no reason why houses can't appreciate in a lousy economy, given what's happening to other asset prices.

P.S.: Peter Lynch has a famous line that if you spend 15 minutes a year trying to figure out macroeconomic factors . . . you've wasted 13 minutes.

Gold Bulls and Bears

That's the Bearish Case??

Though gold performs well as a defensive asset in times of global economic strife, its long-term record is spotty. Over $1,040 an ounce is only a record if you leave inflation out of the picture. Factor that in and gold prices haven't gotten near prices from the early 1980s.

--Melinda Peer, "Gold: High Risks And High Prices"; Forbes (10/7/09)

Let's see . . .

Today's ongoing economic crisis is supposedly the worst since The Great Depression.

At $1,040 per ounce, gold is making nominal highs, but is nowhere near it's all-time, inflation-adjusted high -- reached during the now-eclipsed, early 1980's recession.

Isn't this actually the bullish case for gold??

Factor in that gold is a smaller, thinner market than oil; and that commodity speculators now have mega-capital at their disposal (how else do you explain $160 a barrel for oil more than a year ago?) . . . and it sure seems like conditions are favorable for an epic run.

'09 Stock Market Rally

Out of Treasuries, Into Stocks?

"Obama Warns Trillion-Dollar Deficit Potential"
--The New York Times (Jan. 7, 2009)

"Suddenly, a Markets Turnaround"
--The Wall Street Journal (Jan. 7, 2009)

The stock market is famously forward-looking, so it's certainly possible that the rally the last month or so -- up 10% to 20% from its lows, depending on the index -- reflects investors' optimism that the economy is due to start improving (or, as NYT columnist Floyd Norris puts it, that "things are getting worse at a slightly slower rate").

It's also true that tax-loss selling peaks near the end of the year, and that once it subsides stocks frequently rise (called the "January effect," which often as not now occurs in December).

However, it's at least a fair guess that some of the market's rise is due to investors taking President-elect Obama at his word, and exiting suddenly not-so-safe Treasuries. Where does that money go? Stocks, bonds, gold, commodities -- you name it, all these asset categories have rallied recently.

High Risk, No Reward?

For the uninitiated, literally trillions of dollars have flooded into U.S. government debt (T-bill's and bonds) seeking refuge from the stock and credit market crack-up's the last 18 months ago. The stampede has been so great that the yield on short-term debt has effectively been driven to zero -- less when you take account of fees.

Now, with the prospect of trillion dollar U.S. deficits as far as the eye can see, would-be Treasury buyers are faced with the double whammy of minuscule yield and debased currency (in truth, the latter has been a concern for some time, but the magnitude of the risk is clearly rising along with the deficit projections).

Such a combo recalls the Cal Tech football team's slogan: 'we may be small, but we're slow.' Not surprisingly, investors are taking the hint and deploying their money elsewhere.