Coxe Advisors Discusses Ben Ben's Big Blues, Recommends Further Shift Away From Stocks
Coxe Advisors is out with its latest must read piece, in which Don Coxe tells readers it is time to once again reduce stock exposure, explains why gold will continue to outperform, and thus why it is a better investment than a 10 Year in the mid-2%'s, why fiscal stimulus is now too small to be effective which leaves Bernanke as the only saviour of the economy, and asks what experiments the Chairman has in store next: "Already, economists are discussing which Fed innovations lie ahead if the economy etiolates further. Among the suggestions for neat new ways to debase the Monetary Base: buying up large parcels of credit card and automobile debt. (Who knows? Maybe the Fed will become the nation’s biggest used car dealer. “Buy from Big Ben, Who’s Got the Biggest Deals!”)." All presented in Don Coxe's usual inimitable style.
While the full presentation is below, here are Coxe's key views on gold:
Explanations for Gold’s Recent Rise
1. Gold and the Dow
Pierre Lassonde, formerly of Newmont and now Chairman of Franco Nevada, is one of those who believes there are long-wave cycles between the Dow-Jones Industrials and gold. Historically, at some point gold and the Dow trade at the same price. The last time that happened was in 1980, just as Paul Volcker was starting to twist the monetary vise that would crush inflation, sending the US back into recession. Lassonde and his intellectual brethren believe that the two asset classes will meet again within a few years: they just don’t know whether that will be at $6,000, $8,000, or $10,000.
What kind of world would give us the Dow and gold at $6,000? The only thing one could say for certain that it would not re-elect a sitting President… or Prime Minister.
2. Deflation and the Decline and Fall of Banks and Sovereign Debts
Gold has been trading inversely to stocks in general and bank stocks in particular. On days stocks climb, gold usually falls; conversely on days the stock market is taking gas, gold climbs. It was, for example, a winner when Greece made it to the front page for the first time since the Olympics (and one of the few times the world had any good reason to take note of it since Alexander the Great). Because Greek banks and a surprisingly large number of other European banks had invested heavily in Greek government bonds after the nation managed to lie its way into the Eurozone, the potential default of the government threatened the recovery of the entire Eurozone economy. Germany was dragged along in the bailout, while appalled Germans watched TV coverage of overpaid Greek civil servants rioting. (The vigorous activity displayed was uncharacteristic of modern Greek civil servants, where a Lotuseater lassitude tends to be the lifestyle.)
Sovereign credits got a free pass in the Basel I rules (the virtuous, Volcker values, not the racy rules of Basel II for banks that wrote their own risk formulas and hid their most malodorous “investments” off balance sheet). Doubtless, Volcker felt he had to accommodate European sensibilities and didn’t want to be seen as the American imperialist in assigning different risk valuations to individual EU members. So the sudden threat of a Greek debt default sent Poseidon-scale shock waves through the Mediterranean, as other undercapitalized banks began to reflect on their coming descent into Hades if Italy, Spain and Portugal were to catch the Greek Reek.
The European Central Bank responded to the new global concerns by setting up stress tests for Eurozone banks. Nearly all the banks passed, which suggested to some skeptics that the Mediterranean had become Lake Wobegon on majestic scale. (Recent examinations of some eurobanks’ balance sheets by some smart analysts confi rm that cynicism.)
Through all this shock, hand-wringing, political battling, and fear of future shock, gold’s price continued to rise.
The European Central Bank-IMF rescue package was supposed to postpone Greek Tragedy and financial Medideaths for at least two years. However, Credit Default Spreads on government and bank debts in the region are once again climbing, and that has triggered a new all-time high for gold.
The Spring crisis opened a long-covered lesion deep within the German psyche. For the first time since the Weimar Republic, individual Germans, in an outburst of atavism, rushed to banks to exchange euros for gold. Angela Merkel’s party suffered its worst-ever defeat in the North Rhine-Westphalia election because of rage that Germany was participating in the Greek bailout. To punish her center-right party, they voted Socialist and even Communist. (Solidarity for never?) The voters had been forced to surrender their precious Deutschemarks for euros which, they were told, were even better. Once they figured out that the euro was a pudding that could contain poisoned raisins, they rushed to protect themselves. A currency that is not specifically and irrevocably backed by any government, any tax system, or any army and navy depends entirely on citizens’ faith. Many Germans who, despite the winds of modernism, kept their faith in God, also kept their faith in the Deutschemark. Now, a large proportion of the population apparently believes deeply in neither. (The US manages these possibly overlapping or interconnected belief systems with panache: greenbacks include the motto “In God We Trust,” which may be construed as a form of assurance if foreign exchange markets or infl ation raise Doubt among dollar-holders.) This Deutsche-angst, in which long-buried fears suddenly erupted across a broad swath of the population, was, we believe, an historic moment for gold. It could no longer be dismissed by sophisticated economists as merely the antiquated pre-Keynesian fixation of foreign exchange funds, or the delight of jewelers and people who might feel the need to leave their homeland under cover of night. It was suddenly the last remaining protection against cynical deals made by politicians and bureaucrats with each other in defiance of the wills of voters.
As we have noted previously, when the member nations agreed on the creation of the euro, they set up a committee to approve the faces that would appear on the new currency. This was going to be the triumph of the European dream—currency celebrating the people that had made the West the world leader in arts and science and philosophy. After years of increasingly frustrated meetings, they abandoned the project: they couldn’t agree on even one great European whose visage wouldn’t be offensive to some group of Europeans. Consider: If the new united Europe can’t agree on even one of such eminences as Leonardo, Michelangelo, Verdi, Mozart, Bach, Beethoven, Titian, Cezanne, Montesquieu, Descartes, Erasmus, Rembrandt, Dante, Goethe, Curie, Pasteur, or Liebig, why should anyone trust its paper money depicting buildings and bridges?
The euro’s loss is gold’s gain.
3. Inflation and Troubles for the Dollar and the Pound
From the time paper money came into broad circulation in the 18th Century, only two currencies have possessed global status—the pound and the dollar. (The euro was on its way to achieving that status until it slipped on Greece.) Both those currencies offered convertibility into specie—the pound into gold (until World War I) and the dollar into silver (until 1964). During each currency’s global dominance, it was backed by the world’s leading navy, a general commitment to free trade—and, until recently, a willingness to pursue and hang pirates.
World War I ended the pound’s global dominance, although the dollar shared space with sterling for a few years before assuming dominance during the Depression.
It is safe to say that no monetary theorist ever thought that the dollar could maintain its acceptability through another Depression, coming at a time when government debt exceeded 100% of GDP, or visualized a world in which derivatives on that debt and economy would multiply to $70 trillion. Or, for that matter, an industrialized world in which fertility and marital rates collapsed, and projected lifespans grew to nonagenarian levels while governments were on the hook for universal pensions and health care.
Quite simply, unless America moves decisively toward budget balance, (which may require that the threat from Islamic terrorism shrinks to mere nuisance status), it is hard to see how the dollar can remain the global store of value. Gold’s core inverse factor is the dollar—although it has more recently been trading inversely to the euro.
Those who sneer that gold has not outperformed Treasurys over the very long term ignore the fact that the basic financial projections for the US have not been this weak since the outbreak of the Civil War. Moreover, new gold mines were being discovered and developed across the globe for most of the past two centuries. No longer do new discoveries more than make up for declining production rates in existing mines. Indeed, most new deposits involve grades so low they would have been unthinkable even five years ago.
As Barrick’s Aaron Regent remarks, we may not be in the era of peak oil, but we may well have entered the era of peak gold.
Gold’s rather sudden emergence as the optimal hedge against recession-driven deflation and derivatives-and-debt-driven inflation has given it new luster. It has mitigated risks and saved people’s lives from tyrants or invaders for millennia. It is now the last best hope against governments’ willingness to create debts to fight downturns—even at the cost of the money that will be printed later to service those debts.
What worked in the stagfl ationary 1970s is now working to protect the wise against new kinds of government-spawned threats against the wealth remaining after the Lost Decade.
Conclusion: There will not be enough gold to satisfy the needs of the newly needy.
Full presentation below: