There They Go Again

Picking up where they left off in 2008, the media is in the midst of a campaign to ignore and undermine the presidential candidacy of Ron Paul (they gave me even rougher treatment during my 2010 Senate run).  Political pundits just do not know what to do with a candidate who fails to fit into the blue and red boxes that form the simple narrative of American politics. They are perturbed by the grass roots nature of the campaign, by the strange honesty and earnestness of the candidate and his supporters, and the odd mixture of conservative values and liberty-minded policies. And like most adolescents, they reject what they don’t understand.

The media’s revulsion reached a fever pitch in the wake of the August 12 Iowa Straw Poll, the first test of the strength of Republican Presidential candidates. Objectively the results were a dead heat between Michelle Bachman and Ron Paul, who captured 28% and 27% of the votes respectively. But you would never have known that based on the subsequent media coverage.

The story that almost all news outlets ran with was that the poll produced a “top-tier” of candidates that included Bachman, Mitt Romney, and Rick Perry (both Romney and Perry received less than 5% of the Iowa vote). There was almost no mention of Congressman Paul’s strong performance. The media also ignored how Perry’s entrance into the race will draw votes away from Bachman, thereby benefiting Paul. The media silence even prompted comedian Jon Stewart to issue a hilarious and scathing indictment.

Now the media is even impugning what should be seen as the Congressman’s most successful accomplishment: the performance of his investment portfolio.

In an August 20 article entitled “Candidate of Doom and Gloom,” Barron’s Magazine goes out of its way to characterize Ron Paul’s gold mining-heavy portfolio allocation as simplistic, robotic, and unpatriotic. And while the reporter, Barron’s Washington bureau chief Jim McTague, grudgingly recognized how these “stopped clock” investments had made strong gains over the last few years, he glaringly under-reported the long term success and wisdom of the Congressman’s strategy.

By any objective standard the portfolio would make any financial superstar green with jealousy. Fueled by his understanding of the inflationary policies unrelentingly pushed by his colleagues in Washington, Ron wisely loaded up on gold and gold mining stocks in the mid to late 1990s when those assets were regarded as the poor stepchildren of Wall Street. Although these assets have significantly beaten the broad markets over the one and three year time frames used in the article, most of their phenomenal gains occurred earlier in the last decade. McTague, however, completely neglects to mention this despite his noting that Ron Paul favored a “buy and hold” strategy that surely gave him exposure to those fat years.

Amazingly, the average 10 year return of the 8 stocks listed in his top 10 holdings (that have 10 year track records – the two other positions have not been around that long) came in at more than 600%! During that time frame the S&P 500 was down 3%. Is there any stock mutual fund that can even touch that performance over a decade? Not likely.

If Barron’s chooses to label this strategy as “stopped clock” investing, so be it. But a more honest assessment would simply call it “successful” investing.

But ignoring his returns is just a minor offense in the article. Its main attack is far more subtle. Using evangelical language, McTague stresses that the Congressman’s investment decisions were informed by a lack of faith in the United States. His portfolio is described as a “super bearish bet against the United States,” implying that the Congressman is unpatriotic. Would it have been more patriotic to foolishly bet on the U.S. economy and to have gone broke like the majority of American investors?

More pernicious still are implications that the Congressman opposed the recent debt ceiling increase because he was looking to goose his investment returns. The article argues that an engineered default (by failing to raise the ceiling) would have caused economic crisis in the U.S., thereby pushing up the price of gold and gold-related investments. Not only is this a low blow but the logic is faulty at its core.

It is much more likely that a failure to raise the debt ceiling would have signaled an end to reckless spending and currency debasement, which would have restored confidence in the U.S. dollar and taken the shine off of gold and gold-related investments. In fact, all of Paul’s efforts in Congress over the decades to champion more responsible monetary and fiscal policy can be seen as detrimental to his own investment portfolio. If anything, his actions have been selfless rather than selfish.

Like most investment professionals, Ron Paul’s opponents likely failed to comprehend the damage the overly expansive monetary and fiscal policy would do to our economy and, as a result, adopted mainstream investment strategies. While Barron’s could try to characterize such approaches as being more patriotic, it certainly cannot describe them as being more successful. Isn’t it about time we elected a president with some substance rather than someone who pantomimes in the preferred manner? Who do we want working in the Oval Office anyway: one of the few who understood how government policy would undermine our economy, and arranged his finances to profit from it, or one of many who had no clue?

The fact that Ron Paul chose to invest as he has is a testament to his intellect and his pragmatism. The fact that he voted the way he did, and tried relentlessly to persuade his colleagues to do likewise, in direct opposition to his personal investment strategy, is a testament to his patriotism. He knew that his appeals would fall on deaf ears and that Washington would destroy the dollar in its quest to “save” the economy. So while he tried to stop the train from running off a cliff, he took the sensible step of buying a parachute. Sounds like a guy I would like to see in the White House.

Too bad no one in the media seems to share these views.

Overview

Two things seem to be coming together. The popular notion that the world will repudiate the dollar has been in the market for a long time. For some the S&P downgrade of US Treasuries is a step in this direction.

Market forces have been downgrading the dollar since the Fed started imposing crackpot interventionist theories. Bondholders suffered the worst bear market in history from 1946 to 1981. That was in nominal price and dollar depreciation made it worse.

This sordid condition does not represent America as a country traditionally dedicated to individual freedom. For reasons too lengthy to list now, an experiment in authoritarian government began in the early 1900s. Initially stealthy, in a hundred years it has become an insatiable beast.

Any experiment in unlimited government requires unlimited funding and as noted a few weeks ago, market forces are beginning to say “no” to reckless theories and practices.

Rating agencies are beginning to say “no” as well.

And on the battle over the debt ceiling the electorate also said “no”.

We have long thought that the dollar and Treasuries would not suffer repudiation, but that market and political forces would repudiate experimental policy making.

Timing

In January, our proprietary Momentum Peak Forecaster indicated that the speculative surge would complete around April. The S&P and CRB set important highs on the first trading day of May.

When the big action has included commodities the consequences have been serious. In 1973 the Forecaster registered in November and eventually the recession was determined to have started in that fateful November.

The next signal occurred in November 1979. The mania in gold and silver blew out in January 1980. Six months later the NBER determined that the recession started in that fateful January.

Our conclusion in April was that the recession would likely have started around May with the peak in commodities.

Events since seem to be confirming rather than denying this probability.

Stock Markets

Volatility rules!

Lowry’s has been running its research for many decades and the set of 90% upside and downside days in one week has never happened in 78 years of data.

Today extends the violence.

What does it mean?

Ostensibly each rally and slump has been driven by “news”. Good one day, bad the next.

The establishment is desperate to drive prices up. Following an outstanding speculative surge the natural direction is down.

Quite likely the volatility is indicative of diminishing liquidity.

This is supported by the increase in volatility in the gold/silver ratio.

The ChartWorks has been expecting an important high for gold this week. A reversal in precious metals could prompt a stock-market rally into early September.

On the decline, the S&P took out the lows back to March. This is a huge set back and one wonders if it pre-empted seasonal weakness in September.

Are conditions bad enough this week to form an intermediate low?

The August 14th ChartWorks was looking for a low around this week followed by a bounce to Labour Day.

Furthermore, the first business expansion out of the post-bubble crash is ending and this longer-term prospect will over ride nearer-term swings in the S&P.

In the meantime, the rally into September could be modest and taking out the recent low of 1100 would formally set the bear market.

Credit Spreads

Corporate spreads were likely to narrow (with the party) into May. Junk came into 619 bps, over treasuries, in April. Then have widened from 721 bps in early July to 1015 bps this week. Similarly the High-Yield widened from 326 bps to 603 bps.

A trend to severe widening in the fall has been possible. The action has set a tested trend and is quite severe already.

It is another example of diminishing liquidity.

Currencies

This month’s decline in the DX seems like a test of the July low at 73.5.

Today’s rise is suggesting that the test is completed and we have been looking for an intermediate rally.

There is money to be made by shorting the Euro, but there could be more profitable trades based upon the firming dollar. Most of the party animals, including silver stocks, will come under pressure.

However, a token short in the European Currency as the union fails could be considered as position providing great historical satisfaction. Being short an artificial country as it breaks up is a unique opportunity.

Signs Of The Times

“‘No risk” the US will lose its top credit rating, says Treasury’s Geithner.”

–The Hill, April 19, 2011.

“Stock Market Outlook Bullish argues Jeremy Siegal”

–CNBC, July 9, 2011

“I believe this is, without question, the Tea Pary downgrade.”

— John Kerry, The Washington Times, August 7, 2011.

“Economy will avoid its second recession in three years..”

” The U.S. Merits a quadruple A rating.”

–Warren Buffett, Bloomberg, August 8, 2011.

Perhaps Mr. Buffett has been drinking to much Democratic Kool Aid?

Yesterday, Peter Foster’s column in the Financial Post on Mr. Buffett was headlined:

“The Stooge of Omaha”

Enough said.

INSTITUTIONAL ADVISORS

WEDNESDAY, AUGUST 24, 2011

BOB HOYE

PUBLISHED BY INSTITUTIONAL ADVISORS

The Above is part of Pivotal Events that was

published for our subscribers August 18, 2011.

 

Link to August 19 ‘Bob and Phil Show’ on Howestreet.com:

http://talkdigitalnetwork.com/2011/08/liquidity-liquidation/

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bobhoye@institutionaladvisors.com

WEBSITE: www.institutionaladvisors.com

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