Daily Updates

This past weekend Eric Sprott, CEO of Sprott Asset Management gave a presentation at the Prospectors and Developers Conference in Toronto. Sprott’s Hedge LP has had a 23% annualized return over the last ten years while S &P has declined 5.4% in Canadian dollars.

Sprott thinks that it is possible that silver could triple over the next few years. Since the start of 2011, silver prices have gone parabolic surging almost 20%. Earlier in 2010, Sprott predicted that silver could hit $50 in 2011.

Sprott’s thesis is based on investment demand and current silver shortages. On the demand side of the equation Sprott thinks that Asian investment demand will drive silver prices higher. China imported 112 million ounces in 2010 yet in 2005 China was a net exporter of 100 million ounces.

On the supply side, Sprott has observed signals that the physical silver market has no inventory. COMEX holds only 106mm ounces of silver which would cover 21,000 contracts yet there are more than 137,000 silver contracts outstanding. If 15% of silver long holders decide to take delivery of physical silver, a massive short squeeze would result.

The final part of Sprott’s thesis is that the gold t silver ratio is at historic lows despite the fact that silver has rocketed higher in recent months. “Historically silver has traded in a ratio to gold of 16:1. That ratio has not been effective in the last 20-30 years.

The ratio today is 40:1 and I think it is going to 16:1 and in the next 3-5 years I could see silver going to $100/oz.” Sprott’s presentation at PDAC was similar to the presentation video below.

I get a lot of client letters from various managers and funds, as you might imagine. I read more than I should. But one that shows up every quarter or so makes me stop what I am doing and sit down and read. It is the quarterly letter from Hayman Advisors, based here in Dallas. They are macro guys (which I guess is part of the magnetic attraction for me), and they really put some thought into their craft and have some of the best sources anywhere. So today we take a look at their latest letter, where they cover a wide variety of topics, with cutting-edge analysis and sharp insight. I really like these guys, and suggest you take the time to read the entire letter.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

– Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Our leaders in Washington are so detached from reality, I am thoroughly convinced they are smoking some strange stuff. And if they’re not, then they’re pathological liars, full of nothing but hot air and B.S.

Mind you, I’m not even talking about their inability to cut reckless spending, or the patently unpayable debts and promises they’ve made, not only to the American people, but also to our foreign creditors.

Nor am I even talking about the intentional neglect of the dollar, which continues to sink in value, eroding your wealth like never before.

Consider the following B.S. Washington has been feeding you:

From the end of 2000 through the end of 2010, the ridiculous Consumer Price Index shows prices have risen 29.9% for an average annual increase of about 2.99%.

The fact is inflation is not running at 3%. Nor is it even 5%.

Just take a look at this table, courtesy of the theburningplatform.com:

Jim Rogers was on Bloomberg, talking about his most recent views about the global economy and financial markets. Insider Monkey published the excerpts of the Rogers’ interview. He is insanely bullish about commodities. Here is what he said about each commodity, followed by how we can invest in accordance with his views:

Why You Should Buy a House

Posted by Eric Fry: The Daily Reckoning

on Monday, 7 March 2011 15:35

Chairman Ben Bernanke promises to “promote inflation.” We take him at his word…and so do the commodity markets. The Reuters/Jefferies CRB Index of commodity prices has soared 80% from its lows of early 2009 – touching a fresh two-and-a-half-year high yesterday.

But even if commodity prices weren’t soaring (yet), we would take the Chairman at his word. After all, trusting a central banker to promote inflation is like trusting water to flow downhill.

Inflation is not good for very many things, but neither is it all bad. For example, inflation is great for debtors who are trying to cheat their creditors. Inflation is also great for the folks who happen to own the stuff that’s inflating.

The traditional winners during inflationary cycles are hard assets like gold and real estate. The traditional losers are long-dated bonds and, of course, the currency in your wallet. Every cycle is different, but we have no reason to doubt that the upcoming inflationary cycle will produce the typical distribution of winners and losers. Hard assets will win; the currency in your wallets and purses will lose.

If, therefore, inflation is taking root in American soil once again, how should the forward-looking investor prepare?

“Buy gold,” is the time-honored answer…and we would not quarrel with it. But an alternative answer, especially this time around, might be: “Buy a house.”

Consider the table below, which tracks the price history of specific houses in the United States that were standing in 1913 – the year the Federal Reserve came into existence – and are still standing today. While this sample of homes is not scientific, it does illustrate housing’s value as an inflation hedge. On average, this collection of American homes produced the identical annualized return as gold.

house prices since 1913

Obviously, the actual returns on housing would be lower than that of gold, since housing is subject to taxes, maintenance, etc. On the other hand, have you ever tried to raise a family inside a gold bar?

Maybe compromise is the best course of action: Buy a house and then put some gold bricks inside. That’s right, we said, “Buy a house.”

As faithful readers would be well aware, we have not always been so sanguine about the US housing market. From early 2005 through early 2007, your California editor published numerous columns predicting the demise of the housing bubble.

May, 2005: Affluenza

May, 2005: Houses and Spouses

June, 2005: The After-Life

October, 2005: No Way Out

May, 2006: Homeless

August, 2006: The Housing Bust Begins

October, 2006: A Housing Bubble White Paper

January, 2007: When Realtors Become Waiters

Your editor also took to the airwaves to offer his gloomy observations and grim expectations for the housing market.

In May of 2005, he showed up at CNBC studios to take part in a segment about the housing market entitled “Bubble: Fact or Fiction?” Your editor argued the “fact” side of the debate, while Jerry Howard, the CEO of the National Association of Home Builders (NAHB), argued the “fiction” side.

Unfortunately, as we noted in our essay “Outside Day Reversals and the Return of the Housing Market” in Wednesday’s edition of The Daily Reckoning, Mr. Howard’s forecast did not pan out. The residential housing market began to implode almost as soon as the two of us unhooked our microphones and stepped away from the CNBC cameras…and that’s no fiction.

Four months after this CNBC interview, your editor put his home in Pound Ridge, New York, up for sale…and waited. The wait seemed like an eternity. Seven months later, the wait ended…favorably. A few days after escrow closed, in May of 2006, your editor published the following remarks:

Ben Bernanke and Alan Greenspan both agree that the housing boom is over and that it will begin an “orderly” decline. We agree that the housing boom is over and that home prices will begin to decline, but we aren’t so sure about the “orderly” part.

Throughout the seven months that prospective buyers streamed through your editor’s home, it became increasingly clear that the prospective buyers were becoming increasingly price-sensitive…and picky…and arrogant. Before our very eyes, literally, we watched the balance of power in the housing market shift from seller to buyer…

A home is a wonderful thing to own; but it is also a wonderful thing to sell…especially when prices are slumping and buyers are disappearing…

In October 2006, when we published a white paper, entitled simply, “Housing Bubble,” we observed:

By now, everyone knows the housing boom has busted. Even the National Association of Realtors admits as much… The only issues worth pondering, therefore, are how low prices might fall and/or how long the bust might last. Without trying to be too specific, we’d guess that prices will fall a lot and/or that the bust will last a long time…

Without easy credit, and lots of it, real estate could never have achieved its epic valuations. Credit not only enabled first-time buyers to “stretch” a bit, it also enabled and emboldened speculative buyers, speculative builders, second-home buyers, second-home builders and every other variant of housing market participant/speculator.

But because financing became so exotic, and speculative participation in the market became so great, the simultaneous unwinding of both will be as pleasant as hanging out with your in-laws during a root canal…

We all know what happens NEXT. But we just don’t know how bad it will be.

Please allow your editor to offer a prediction:

  • Home sales continue plummeting
  • Prices begin to plummet
  • Exotic loans begin to squeeze over-leveraged homeowners
  • Prices plummet some more
  • A bull market in housing begins in 2020…or maybe a little sooner.

As a post-mortem to the Housing Bust White Paper, we published a column in January, 2007, entitled, “When Realtors Become Waiters.” To lead off this column, we remarked, “Out here in the Golden State, jokes like the one below are becoming all too common:

Question: What’s another name for a California real estate agent?

Answer: A waiter.

Home sales volumes in California are sliding sharply…

Why should we care what happens in California? We should care because California epitomized the excesses of the late great housing bubble. It was here in California where quirky, high-risk mortgages flourished; it was here where the median home became unaffordable to 84% of the average residents; and it was here where actors became waiters, then became real estate agents…only to become waiters again.

What happens in the California real estate market, therefore, might anticipate what will happen in the rest of the country…and that’s probably not good news… The increasingly dire conditions of the mortgage industry suggest that a genuine recovery remains a delusional hope. The willingness to lend and the willingness to borrow are both in retreat. This is how cascades start…

Over the near-term, therefore, do not be surprised to hear an occasional California diner call out, “Hey waiter! Could we please see a menu…and a copy of your newest listings?”

Four years have elapsed since your editor published the column above. During that timeframe, home prices have dropped substantially…and they continue to drop. But now that the bubble has burst, and the housing market is devoid of hope, your editor has become slightly more hopeful.

Undoubtedly, the housing market will continue to produce ample pain and suffering in the months ahead…along with ample anxiety in the years ahead. But it is possible, if not likely, that the pain and suffering will yield a highly satisfactory reward.

Read on…

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant’s Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant’s International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling.

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron’s, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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