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Put Up or Shut Up

Submitted by Expected Returns on 02/01/2011 15:16 -0400

More than any time in the last century, I feel the next 5 years will be a time to put up or shut up. If you really think gold is a bubble, go short. If you think U.S. Treasuries are a viable investment because Helicopter Ben says there is no inflation, then go ahead and risk your retirement on bonds. If you don't think there will eventually be protests and riots in the U.S., go ahead and put your head back in the sand. These are the current risks until proven otherwise. Seeing these trends is not so much a matter of intelligence- it is a matter of discernment. Without discernment, you have knowledge; with discernment, you have wisdom.

One of the things that no doubt frustrates those who wish to paint me as a permabear is how I was bullish for 95% of this monster rally in stocks. While I can't predict every twist and turn of the market, I can see the major trends. This is a dual inflation and liquidity-driven rally that is going to go on much longer than people expect. The deflationists have gone conspicuously silent as food prices globally are at record highs and gasoline prices are closing in on $4. The worst is ostensibly over, yet gold stubbornly trades at $1340 as I speak. Believe me, by the end of this crisis, you will understand that most financial professionals have no idea what they are talking about.

Stocks Overvalued?

At the present time, people generally think stocks are overvalued on a P/E basis. However, I don't like using static measures like P/Es to judge valuations. P/Es may give you a basic road-map, but there are other things to consider, such as mean-reverting profit margins and interest rates, to judge value. People in the "stocks are overvalued" camp seem to forget that the 10-year is yielding only 3.4%. Stocks can be valued richly on a historical basis because of the precipitous drop in the "risk-free" rate. Relative to bonds, one should own stocks. Generally speaking, if you buy and hold stocks in the direction of the secular trend, you are compounding your gains annually, while in bonds you are greeted by Uncle Sam every single year. Bonds need to show a very clear relative advantage over stocks in order to be invested in them.

Will Boomers Wake Up?

I have some very valid concerns about our near-term future from obvious hard trends. I truly feel sorry for Baby Boomers even though I personally don't know too many besides my parents. The Boomers I do know are scared out of their mind, and with good reason. Financial advisers who can't even beat the stock market are spewing the same old conventional wisdom that retirees should be invested in bonds. This, my friends, is financial suicide. Anyone with an operating BS filter knows that U.S. government bonds are a huge bubble looking for a pin. I highly doubt anyone but the most open-minded of Baby Boomers will go against the grain and hold more in stocks and gold than they do in bonds.

So much conventional wisdom is just plain wrong. There is this strange love affair in America with the concept of home ownership. Boomers celebrate owning their own home, which took their entire professional life to pay off. Now what? Boomers are paying onerous property taxes that are ironically bolstered by the capital appreciation they were once so happy about. The longer Boomers hold on to their homes, the greater a liability it becomes. On the revenue side, pensions, whether public or private, are going bust. Meanwhile, the economy is clearly becoming more dynamic and people need to continually evolve their skills. Working for GM for 30 years and retiring on a pension is a thing of the past. This is the kind of dislocation in the work force we saw during the Great Depression when people moved from agriculture to manufacturing. Our education system needs to change or we will fall behind, but that's another story.

This is personally an exciting time for me because I have felt like the one-eyed king in the land of the blind for a long time. People still just don't get it, and this is allowing me to quietly build a position and profit from things that "no one saw coming." The probability of bond yields spiking in the next couple of years is very high. The probability of gold spiking on civil unrest, fear, and inflation is even higher. It is truly time to put up or shut up.

Expected Returns is a blog focused on gold investing.

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Tue, 02/01/2011 - 17:38 | 925218 tonyw

Dig a bit deeper and you will see that December figures are much lower than November (2.5 million oz), my guess is that some of December's sales have been pushed into January. So add 2.5m back to December to make 4+ million then January also becomes about 4 million.

Tue, 02/01/2011 - 16:05 | 924826 spinone