Live From Nebraska: 5 Can’t-Miss Warren Buffett Insights

Davis Ruzicka

This post Live From Nebraska: 5 Can’t-Miss Warren Buffett Insights appeared first on Daily Reckoning.

This weekend I traveled to Omaha, Nebraska for Berkshire Hathaway’s annual shareholder meeting.

The event, known as the “Woodstock of Capitalism,” hosted an estimated 40,000 investors from all over the world who traveled to hear Warren Buffett and Charlie Munger speak on not only the current state of Berkshire Hathaway, but also on topics such as the broader stock market, the economy, politics and life.

And as a Daily Edge subscriber, you have the inside scoop on my most important takeaways.

No Word On A Successor

Although he is surely still mentally sharp now, Mr. Buffett turns 88 years old in August, which makes him the oldest CEO in the United States.

Naturally, this has made the question of who will succeed Warren Buffett as CEO a hot topic among investors and analysts.

However, this week those questions were not put to rest. Warren and Charlie deflected the question multiple times in favor of a more PC approach — reminding investors that Berkshire’s reputation speaks for itself, and that Berkshire will still be the first call for companies looking to make a deal, whether Warren and Charlie are at the helm or not.

As of now, the two likely candidates are Greg Abel and Ajit Jain — two recently promoted to vice chairmen that now oversee about half of Berkshire’s operating companies.

Warren Buffett Hates Gold

Did you know that $10,000 invested in the S&P 500 in 1942 would be worth approximately $51 million today?

While over the same time period, $10,000 worth of gold — which would have equaled roughly 300 ounces in 1942 — would be worth just $400,000.

This was the scenario Warren used to argue in favor of holding stocks — rather than gold — over the long-term.

“While the businesses were reinvesting in more plants and new inventions came along, you would look into your safety deposit box, and you’d have your 300 ounces of gold. And you would look at it, and you could fondle it, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything,” Buffett said.

In contrast, “a bet on stocks is basically a bet on America,” he added. “All you had to do was figure that America was going to do well over time.”

Warren Buffett On The Importance Of Patience

Mr. Buffett began the event on Saturday with a personal account of his first investment. The year was 1942 and he spent $120 — his entire savings at the time — to buy 3 shares of Cities Services preferred stock.

After stomaching the losses when shares initially plunged below $30, the stock made a comeback and young Warren was able to sell his entire stake for a $15 gain.

However, this was just the start of a long upswing for the stock, which eventually got called for over $200 per share. This taught Warren the valuable lesson of patience earlier in his investing career…

Wells Fargo Will Come Out Better

Wells Fargo was a popular topic after regulators and whistle-blowers revealed employees were creating fake accounts with real customer data, charging excess mortgage fees and forcing customers to buy unnecessary insurance.

This has led to the resignation of CEO John Stumpf and penalties by the Fed barring Wells Fargo from future growth.

However, Warren Buffett was adamant that companies emerge from situations like this stronger than they went in.

“All the big banks have had troubles of one sort or another and I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes,” Buffett said.

Wells Fargo (WFC) stock still sits near its 2 year low.

Thoughts On A Trade War

“It’s just too big and too obvious, the benefits are huge and the world’s dependent on it in a major way for its progress that two intelligent countries will do something extremely foolish,” Buffett said on Saturday.

“There will be some jocking back and forth and there will be some things that will make some unhappy,” but in the end Warren was adamant that this will not escalate into an all-out trade war.

And that’s coming from a man whose company owns dozens of businesses that rely on China for materials…

In addition, if you’re looking to put some money to work, Charlie Munger says to look no further than our adversary in the trade war.

“Americans are missing China because they think it’s too hard and too far,” Charlie said on Saturday. These comments were followed up on CNBC earlier this morning where he said, “The best companies in China are cheaper than the best companies in the United States,” and that his family is already “substantially” invested in China.

These are strong words from a value investor like Munger. For more on China, stick with The Daily Edge as we dig deeper into Charlie’s advice.

Now let’s get to the 5 Must Knows for May 7th as we start a new week…

5 Must Knows For Monday, May 7th

Historic Employment — On Friday, May 4th, the U.S. Labor Department released its monthly unemployment figures which showed the unemployment rate fell to 3.9%. That’s the lowest level since December of 2000. However, the good news could lead to faster rate hikes if inflation continues to tick higher. This will be evident on Thursday when the Labor Department releases its Consumer Price Index (CPI).

New NAFTA? — Today, negotiators from the U.S., Mexico and Canada are scheduled to meet in Washington to begin what is hopefully the last bit of NAFTA negotiations. Although no new details have emerged, the midterm elections are seen as a critical deadline for the Republican-controlled Congress to pass the deal.

Earnings On Deck — Earnings season rolls on with Disney, Hortonworks and Electronic Arts reporting on Tuesday, Anheuser-Busch Inbev, Albemarle and Fox 21st Century reporting on Wednesday, Wheaton Precious Metals, Nvidia and Randgold reporting Thursday, and Thomson Reuters and ArcelorMittal reporting Friday.

Putin Sworn In …read more

From:: Daily Reckoning

Financial Collusion: A Decade After the Crisis, We’ve a Lot Yet to Learn

Nomi Prins

This post Financial Collusion: A Decade After the Crisis, We’ve a Lot Yet to Learn appeared first on Daily Reckoning.

I’m Nomi Prins, a friend and colleague of Nilus here to fill in for the weekend.

The great American novelist F. Scott Fitzgerald gets credit for my new book, Collusion: How Central Bankers Rigged the World. A decade after I left my final Wall Street post — as a managing director at Goldman Sachs — it was The Great Gatsby that carried me back in time and forward in geography.

Let me tell you how it went down.

You see, after I’d written the book It Takes a Pillage about the 2008 financial crisis, I was exhausted. Not from writing, but from the sheer ignorance that the global elite had paid (and are still paying) to the banking, economic and financial conditions that led to disaster. In 2004, my book Other People’s Money warned exactly how the 2008 financial crisis would unfold. Sadly, I was right. In the wake of the chaos, I needed a break.

Attempting to unplug, I wandered into my local library to spend an afternoon perusing. Right there in the front, I saw something that caught my eye. A poster for “Great Gatsby month” activities around the neighborhood, including 1920s music, readings, specialty drinks in local bars and a discussion of the book at a senior citizens’ community club.

By returning to the glitz and drama of the 1920s, it hit me.

The same banks that had perpetuated the crash of 1929 had perpetuated the crash of 2008!

The same families and their confidantes over decades had consistently set the stage for expansion and crisis — always to their benefit.

By researching the Big Six banks and their leaders who protected their interests at the expense of the rest of the population, I constructed the foundation of my next nonfiction book, All the Presidents’ Bankers.

I traveled the U.S. from New York to California, from Kansas to Texas, digging into the presidential libraries for documents relegated to the coffins of history until I uncovered them.

They revealed key findings — that for the past century of American history, the same banks and their bankers exuded influence over presidents from both parties.

Then came a life-changing moment. A year after the book came out, I got an email. It was from the Federal Reserve. Every year, the Federal Reserve, the IMF and the World Bank have an annual internal conference. It’s where the most elite central bankers from around the globe gather. The Fed invited me to talk at the opening session. The session would take place in the very room in which the Fed convenes to set interest rates.

I was in shock. To say the least, I hadn’t written very nice things about the Fed’s policies since the financial crisis. In very public channels, I had criticized their cheap-money and quantitative easing policies as subsidies to the private banks that had crashed the system. I had labeled their policies as rigging the markets and unhelpful to ordinary citizens and the Main Street economy.

I thought the invitation might be a mistake, but they assured me that they knew exactly who I was. In fact, they wanted me to address the topic of why Wall Street banks weren’t helping Main Street, and they looked forward to hearing my views.

A few months later, I was sitting in the front of a room with central bankers from around the world, listening to Fed Chair Janet Yellen proclaim that the worst of the crisis and its causes were behind us.

The gloves were off. The first thing I asked the distinguished crowd was, “Do you want to know why big Wall Street banks aren’t helping Main Street as much as they could?” The room was silent. I paused before answering for everyone. “Because you never required them to.”

When a bank is offered a pile of cheap money in bailouts and loans for dangerous behavior with no major consequences and no stipulation that they engage the real economy, why should they? What would you expect? The presentation was clear, and you can see the notes I revealed to them here.

Something more interesting happened after my talk. Some of the people at the Fed — not at the top, but in the ranks — told me it made sense. Many thanked me. Leadership of central banks from Lebanon to Thailand thanked me for making it clear that the entire monetary system was controlled more than ever by the major central banks, with the Fed leading the way.

I realized right then and there that the zero interest rate policies prevailing in the U.S., Europe and Japan were part of a coordinated effort. They were trying to render the cost of money cheap everywhere so that banks and other financial players could thrive. The move could also harm smaller, emerging-market countries. The side effects would lead to asset bubbles that could pop and cause an even greater crisis the next time around.

I had to get back on the road. This time, it wasn’t to traverse the U.S.; it was a global affair. My next expedition took me from Mexico to Brazil, China to Japan, Europe and the United Kingdom and back across the United States.

I spoke with central bankers who gave me intel about how this collusion happened in practice and behind the scenes. That information was verified multiple times over.

What might surprise you is that after confirming these findings with both off-the-record and public sources — from different languages to local sources — is that very few had put it all together.

No matter what happens from a geopolitical perspective, monetary policy strategy is often more collusive than government leaders might present on the surface.

When I met with a key central banker in Brazil, he left me shocked after revealing his analytic findings. He presented me with reams of information about just how far the collusion went. The central banker’s analysis showed the high correlation between the level of markets …read more

From:: Daily Reckoning

The Coming Massive Commodity Rally

Commodities Rally?

This post The Coming Massive Commodity Rally appeared first on Daily Reckoning.

Earlier this year Goldman Sachs had sent a report out to its high-net-worth clients indicating that it was the best time to own commodities in at least 15 years, if not decades.

This view from Goldman was based on three forces coming together at the same time:

  1. Economies around the world are growing in unison (good for commodity demand).
  1. The world is borrowing more money, which means more to spend (again, good for commodity demand).
  1. Inflation is on the rise (again, good for commodity demand).

You may not love Goldman Sachs, but their research is definitely worth paying attention to.

Then just a short time later, the notoriously secretive hedge fund legend Paul Tudor Jones had suddenly become rather chatty. His main message detailed a very bullish view on commodity prices.

Jones’ view is based on a belief that the recent big tax cut is a mistake. His issue with the tax cut is timing, it coming nine years into an economic expansion. Jones believes the tax cut is going to be the spark that finally sets off the inflation fire.

I see his point — there are a lot of inflationary forces at work here. This tax cut, on top of a decade of ultra-low interest rates, on top of years quantitative easing, on top of a spending bill.

The bottom line for Jones is that nothing performs better in an inflationary environment than commodities.

And in April another very smart investor reported that he thinks commodities are going to perform exceptionally well. At some point we may need to conclude that these proven investors are onto something.

This time around the investor is DoubleLine Capital’s Jeffrey Gundlach.

Gundlach doesn’t just think commodities are going to do pretty well from here; he thinks commodity prices are on the verge of exploding higher. Gundlach isn’t looking for a 30% rise; he expects commodities as a group to go up 100%, 200% or even 400%!

That is a bold call.

As to why (always the important part) Gundlach is so bullish on commodities, the investing heavyweight hits on a few factors that are similar to what we heard previously from Goldman and Jones.

Those factors include:

  • Continuing growth in global economic activity
  • The Trump tax cut, which will boost economic growth
  • The incredibly easy money policies from the European Central Bank
  • A continued weakening of the U.S. dollar.

In addition to putting together the fundamental case behind rising commodity prices, Gundlach points to something else. That something else is history.

He captures his point in the chart below. As of today the S&P GSCI commodity index is sitting at its lowest point relative to the S&P 500 since the dot-com bubble:

What that means is that today commodity prices are historically cheap relative to large-cap stocks.

Since 1970, commodities have only been this inexpensive relative to large-cap stocks twice before. After each of the prior instances, commodity prices staged furious rallies, outperforming the S&P 500 by more than 800%.

History doesn’t necessarily have to repeat, but when you put the fundamental case alongside what has happened historically it is hard not to think commodities are poised to do well.

That is good news for subscribers to Contract Income Alert because the portfolio holds bonds of several commodity producers with exposure to oil, natural gas and copper, primarily. We don’t need a big commodity rally for these bonds to do well, but it certainly isn’t going to hurt!

Now the Bad News — After These Commodity Rallies…

I can’t believe it is true, but the financial crisis is now 10 years in the rearview mirror. It feels like last year.

I remember exactly where I was when I heard that Bear Stearns was being bought out, when Lehman Bros. collapsed and when George Bush so eloquently stated, “If money isn’t loosened up, this sucker could go down”!

Since those scary days we have had nearly a decade of uninterrupted economic growth and smooth sailing in the stock market. My point is that we need to be aware that sooner or later there will be a bump in the road.

Jeff Gundlach’s historical chart provides a pretty compelling argument that a major commodity rally is close at hand. Unfortunately, if you look at what has happened historically after those commodity rallies, you will find dates that coincide with recessions.

It happened in 1973, 1990 and of course 2008.

The good news is that these past commodity rallies lasted anywhere from four–eight years. If this commodity rally is just starting, the next recession still could be a ways off yet.

Between now and then rising commodity prices are going to fatten up the cash flows and improve the balance sheets of many of the companies whose bonds Contract Income Alert subscribers own.

By the time the next recession rolls around, armed with a few more years of steady interest payments, we are going to be ready, willing and eager to take advantage of the discounted bond opportunities it produces.

Of all the major commodities, the biggest story now is oil.

2017 saw a significant decline in oil inventory levels, especially in the fourth quarter. The chart below will show you that this trend has continued into the first quarter of 2018 and taken us to a place we haven’t been in a long while:

Oil Storage

I believe that this chart is very important. It details the number of days of oil demand that the U.S. has in storage relative to the five-year average. In other words, this tells us how long it will take us to consume all of the oil we currently have in storage.

The blue line with the white circles represents 2018. You will notice that we are now right at the very bottom of the five-year average in terms of days of oil demand in storage.

I can tell you that we haven’t been at the bottom of this range in a long time.

If you look back to the line that depicts 2017, you will notice that as recently as September 2017 we were right at the …read more

From:: Daily Reckoning

These 7 Car Myths Are Costing You Money

Nilus Mattive

This post These 7 Car Myths Are Costing You Money appeared first on Daily Reckoning.

There was a point in my life when I wanted to own a red car.

All my friends told me I shouldn’t. After all, red cars get more speeding tickets and cost more to insure.

These two truths stopped me from buying myself a red car for years. Until one day, I did a little research.

That’s when I found out these “truths” were bullshit. Nowhere could I find any evidence to suggest that red cars received more speeding tickets than blue, black, or any color for that matter.

And, after a quick call to my insurance, I realized that insurers don’t give a damn about what color car you drive.

So, it got me thinking about what’s fact and what’s fiction when it comes to cars?

Here’s my list of 7 car myths that are costing you money if you believe them.

Myth #1:
You Can Wax Your Car by Going Through a Car Wash

The car shine business is like the anti-aging skin care section at your local drug store.

There’s a lot of hype and marketing with very little substance to back it up. So do I think it’s worth paying the additional $3 to $5 for “protectant” when you’re at the automatic car wash?

I say, no.

Don’t get me wrong, automatic car washes are great. But I wouldn’t get your hopes up about a product that is sprayed onto your car for 30 seconds and then rinsed off.

It’s better to save that $5 at the car wash and buy and apply a cheap paint sealant yourself, like NuPolish or Mothers California Gold Synthetic Wax. These can last up to a year and should take you less than 30 minutes to apply.

Myth #2:
You Should Change Your Oil Every 3,000 Miles

Do you remember the old Jiffy Lube jingle? “Every 3,000 miles, just bring it into Jiffy Lube.”

That jingle alone has been costing people money for what seems like a lifetime. Even now that Jiffy Lube has dropped the jingle it still sticks in our minds.

Here’s the deal about oil changes: you change your oil and filter when the owner’s manual recommends it. For many new cars, the recommendation is to change the oil only once every 5,000 miles — or even less frequently.

But don’t take my word. Go by the book.

Myth #3:
Servicing Your Car at Independent Shops Will Void Your Warranty

If you have your services done regularly with quality parts — and keep your paperwork — you should have no problem not voiding your warranty. Dealers are typically the more expensive choice when it comes to repairs, so avoid them if you can.

However, one advantage of going to your dealer is to check if there’s a “Technical Service Bulletin” out on your car. Different from a recall, the manufacturer sometimes warns of a non-safety-related item — like, premature corrosion in a certain area. Trying to find these advisories yourself isn’t easy, but the dealer always gets them directly and will sometimes fix whatever is wrong for free.

Myth #4:
Premium Gas Is Better for Your Car

“Premium,” “Ultra,” and “Supreme” are all just marketing.

The only reason to buy premium is if your vehicle can benefit from the higher octane levels it has. Octane is a measure of gasoline’s resistance to pre-ignition. Some car manufacturers recommend premium so they can tune their engines for higher performance, but you can use regular safely. Only a small percentage of cars are premium-required.

Myth #5:
You Can Check Your Tire Tread with a Penny

Stick a penny in a groove head-down, and part of Abe’s head should always be covered.

This isn’t 100% wrong.

The problem is, if you can see the top of Abe’s head, that means the tire has less than 2/32″ of tread, the legal minimum in most states.

I recommend you use a quarter. If George’s head has some coverage, that means you have at least 4/32″, a safer margin. If you’re getting close, this buys you some time to hunt for a good deal on tires.

Myth #6:
If Your Tire Pressure Light Is Off, You Have Enough Air

All cars sold since 2007 have what’s called Tire Pressure Monitoring Systems (TPMS).

These monitor that your tires have air in them and warn you if they don’t.

However, the light only comes on when a tire is 25% lower than the recommended pressure. If you wait for that, you’re potentially endangering yourself and wasting money.

Underinflated tires reduce gas mileage by roughly 0.5% per pound that they’re low.

It might not seem like much but imagine this: if your recommended inflation pressure is 40 psi, and you’re 25% low on air, that’s a 2% hit to your gas mileage. Plus, underinflated tires wear more quickly and unevenly, reducing your tire life.

Myth #7:
Warm Up Your Engine Before You Drive

Whenever you start your engine, at least on cold days, you have to let it warm up to its normal temperature before driving, otherwise you’ll ruin the engine parts.

This myth has gone on for too long. Unless you’re flooring it out of the driveway every day, you can get going as soon as you turn the key.

It used to be that some engine parts and oil did need some time to warm up before you could operate your vehicle at full capacity. But an idling engine takes much longer to warm up, so it ends up experiencing far more cold-start wear and tear than if you just hopped in and drove it.

Think about that: when your engine is idling, it’s still producing power, so what difference does it make if that power is being used to move the car or sit in one place?

Additionally, there are other parts of your car that also need warming up, like your transmission and wheel bearings, and those don’t start to warm up until you get your car moving.

I hope that debunking some of these car myths saves you money as well as time.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

The post These 7 Car Myths Are Costing You Money …read more

From:: Daily Reckoning

Four market terms you need to know

Nilus Mattive

This post Four market terms you need to know appeared first on Daily Reckoning.

One of my big goals with the Rich Life Roadmap is helping you become a more knowledgeable investor.

So today I’d like to tell you about four stock market terms that are often cited, but rarely explained properly, even by investment experts and the financial press…

Misunderstood Term #1: “Market Breadth”

Market breadth is a measure of how many companies in a particular index have gone up vs. how many have gone down.

Take the S&P 500, which contains 500 different constituents. If 300 of those stocks closed in negative territory on a given day, the stock market had negative breadth.

Conversely, if 400 of the stocks went up, market breadth would be considered very positive.

Since market breadth provides a quick way of knowing how widespread buying or selling was, it’s considered a good gauge of investor sentiment.

Misunderstood Term #2: “Limit Order”

There are many different ways to place a stock order, and the suggested approach depends on the particular security you’re going to purchase along with what the market is doing.

Perhaps the most popular way of placing an order is “at the market,” which is the same thing as telling your broker “buy me this investment no matter what the cost and do it as soon as possible.”

Market orders have the distinct advantage of getting your order filled quickly. They also tend to be the cheapest type of order you can place since your broker is not being asked to do very much on your behalf.

The downside of market orders is that you have no way of knowing exactly what price you’re going to pay.

This is generally not a problem when a stock trades millions of shares a day and when its price is expected to remain relatively stable. However, it can be a dangerous method when a stock is thinly traded or moving very rapidly.

Limit orders, on the other hand, give your broker very clear instructions — to buy the specified number of shares at a predetermined price… or better.

The “better” means that the broker can buy the stock at a price that is lower than your specified price or sell it at a price that is higher. Limit orders can be a great way to keep everyone involved in the process honest.

One other thing I’d like to note on placing limit orders with your broker…

You will usually have the option to specify a “day order” or a “good till cancelled” (GTC) order.

As the name implies, a day order will expire at the end of that trading day if it is not filled. A GTC order will remain open until either it is filled or you inform your broker that you no longer wish to place that trade.

Misunderstood Term #3: “Same-Store Sales”

We often hear retailers citing same-store sales. And the entire stock market can move when a bellwether like Wal-Mart releases this monthly number.

Here’s the important thing to understand about same-store sales: they measure results from stores that have been open for a year or more.

The idea here is that you want to know how much more product a company is selling from its existing locations, not from new stores that it might have recently added.

Reason being, sales growth from new stores is good, but rising sales at the same location generally show increasing demand for a company’s goods or services…

And that indicates the kind of larger, deeper trend that investors really care about.

Misunderstood Term #4: Fiscal Year

If only every company would just use a regular old calendar, comparing numbers would be so much easier!

Unfortunately, many companies opt to use their own business calendars — or fiscal years — to report their results. In fact, roughly one quarter of U.S. companies choose to end their years on a month other than December.

Some have good reason to do so.

For example, retailers often end their calendars in January. That allows them to record all their holiday sales into their current fiscal year. While it technically doesn’t matter what year they record the sales, I suppose they like to go out with a bang.

A lot of technology companies also have whacky fiscal years. In many cases, this is simply related to the date of their initial public offering or because their competitors also use the same fiscal year.

So why worry about fiscal calendars at all?

Because they determine when various quarterly earnings reports, dividend payment announcements, and other important developments will be hitting the news wires.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

The post Four market terms you need to know appeared first on Daily Reckoning.

…read more

“Money Is Gold — and Nothing Else”


This post “Money Is Gold — and Nothing Else” appeared first on Daily Reckoning.

Following the Panic of 1907, John Pierpont Morgan was called to testify before Congress in 1912 on the subject of Wall Street manipulations and what was then called the “money trust” or banking monopoly of J. P. Morgan & Co.

In the course of his testimony, Morgan made one of the most profound and lasting remarks in the history of finance. In reply to questions from the congressional committee staff attorney, Samuel Untermyer, the following dialogue ensued as recorded in the Congressional Record:

Untermyer: I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?

Morgan: A control of credit? No.

Untermyer: But the basis of banking is credit, is it not?

Morgan: Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.

Morgan’s observation that “Money is gold, and nothing else,” was right in two respects. The first and most obvious is that gold is a form of money. The second and more subtle point, revealed in the phrase, “and nothing else,” was that other instruments purporting to be money were really forms of credit unless they were redeemable into physical gold.

My readers know that I am a big proponent of gold. We should all be mindful of Morgan’s admonition, and not lose sight of the way in which real wealth is preserved through manias, panics and crashes.

Today I’ll provide an overview on why I recommend gold in every portfolio, and why gold may be the best performing asset class in the years ahead.

Specifically, my intermediate term forecast is that gold will reach $10,000 per ounce in the course of the current bull market that began in December 2015. I recommend that investors keep 10% of their investable assets in physical gold (with room left in the portfolio for “paper gold” in the form of ETFs and mining stocks).

Here’s the analysis:

We begin with the 10% allocation. The first step is to determine “investable assets.” This is not the same as net worth. You should exclude your home equity, business equity and any other illiquid or intangible assets that constitute your livelihood. Do not take portfolio market risk with your livelihood or the roof over your head. Once you’ve removed those assets, whatever is left are your “investable assets.” You should allocate 10% of that amount to physical gold.

Your correspondent in a vault near Zurich, Switzerland during a recent visit. The pallet in front of me has $25 million in gold bars arrayed.

This gold should not be kept in a bank safe deposit box or bank vault. There is a high correlation between the time you’ll want your gold the most and the time banks will be closed by government order. Keep your gold in safe, non-bank storage.

The next part of the analysis concerns my $10,000 per ounce forecast for the dollar price of gold. This is straightforward.

Excessive Federal Reserve money printing from 2008–2015 combined with projected U.S. government deficits over $1 trillion per year for the foreseeable future, and a U.S. debt-to-deficit ratio of 105% rising to over 110% in a few years, leave the U.S. dollar extremely vulnerable to a collapse of confidence on the part of foreign investors and U.S. citizens alike.

That collapse of confidence will not happen in a vacuum. It will coincide with a more general loss of confidence in all major central banks and reserve currencies. This loss of confidence will be exacerbated by malicious efforts on the part of Russia, China, Turkey, Iran and others to abandon dollars entirely and to bypass the U.S. dollar payments system.

The evolution of oil pricing from dollars to IMFs special drawing rights, SDRs, will be the last nail in the dollar’s coffin. All of these trends are well underway now, but could climax quickly into a general loss of confidence in the dollar.

At that point, either the U.S. acting on its own or a global conference resembling a new Bretton Woods will turn to gold to restore confidence. Once that route is chosen, the critical factor is to set a non-deflationary price for gold that restores confidence, but does not lead to a new depression.

Here’s the math on how to compute a non-deflationary price of gold using the latest available data:

The U.S., China, Japan and the Eurozone (countries using the euro), have a combined M1 money supply of $24 trillion. Those same countries have approximately 33,000 tons of official gold.

Historically, a successful gold standard requires 40% gold backing to maintain confidence. That was the experience of the United States from 1913 to 1965 when the 40% backing was removed.

Taking 40% of $24 trillion means that $9.6 trillion of gold is required.

Taking the available 33,000 tons of gold and dividing that into $9.6 trillion gives an implied gold price of just over $9,000 per ounce. Considering that global M1 money supply continues to grow faster than the quantity of official gold, this implied price will rise over time, so $10,000 per ounce seems like a reasonable estimate.

I believe this kind of monetary reset is just a matter of time. It could happen through a planned process such as a new Bretton Woods, or a chaotic process in response to lost confidence, heightened money velocity, and runaway inflation.

The portfolio recommendation is to put 10% of investable assets into physical gold as a diversifying asset allocation and as portfolio insurance. The following example demonstrates that insurance aspect.

For purposes of simplification, we’ll assume the overall portfolio contains 10% gold, 30% cash, and 60% equities. Obviously those percentages can vary and the equity portion can include private equity and other alternative investments.

Here’s how the 10% allocation to gold works to preserve wealth:

If gold declines 20%, unlikely in my view, the impact on your overall portfolio is a 2% decline (20% x 10%). …read more

From:: Daily Reckoning

The Dreaded “S-word” Threatens a Return


This post The Dreaded “S-word” Threatens a Return appeared first on Daily Reckoning.

A fearsome bogeyman may be stalking the American economy…

Dormant for decades, many considered it permanently licked.

But some have picked up its grisly scent… and discovered its approaching footprints.

What is this fee-fi-fo-fum?

And why its possible return?

Today we investigate the reports… weigh the evidence… and hazard a judgment.

We first note that first-quarter GDP fell 0.6% from the previous quarter.

And the New York Fed’s six-month business activity outlook plunged from 44.1 last month… to a dismal 18.8.

According to Danielle DiMartino Booth, former adviser to the president of the Dallas Fed:

The 26-point move lower is worse than anything seen during the 2008–09 financial crisis and on par only with the one that followed Sept. 11.

We further note that consumer spending slowed to its weakest pace in nearly five years last quarter.

Of course, one swallow does not a summer make… nor does one snowball a winter make.

But the overall trend does not… encourage.

And at 107 months, the current recovery vastly exceeds the 58-month post-WWII average.

How much longer can it last?

But to the second part of our tale…

Inflation begins to stir.

Consumer prices — excluding food and energy — rose at a 2% annual rate the first three months of 2018.

And oil prices have soared nearly 50% since last August alone.

The cost of fueling an average tractor-trailer has risen nearly $100 over the past year.

Your grocer, of course, hands you a part of that bill at the check-out.

“More and more we are going to see small businesses having to pass along those higher costs,” affirms Scott Anderson, chief economist at the Bank of the West.

Meantime, the folks at Phoenix Capital say the bond market is predicting a “massive inflationary development.”

As they explain:

Perhaps the single best metric for measuring inflation versus deflation for the bond market is the Treasury inflation-protected securities (TIPs) versus Long U.S. Treasury ratio.

In its simplest rendering when this ratio rises, it means inflation is on the rise. When it falls it means deflation is dominating the bond markets.

As you can see in the chart below, this ratio has just broken out of a 10-year deflationary downtrend. This is the FIRST confirmed breakout since the 2008 crisis. And it signals a tectonic shift toward inflation is underway in the bond markets.

A “tectonic shift toward inflation is underway,” they say.

Above we draw a portrait of weakening growth… and approaching inflation.

Which inevitably brings us to the topic of today’s discussion…


The word is as ugly as it sounds — a ghastly portmanteau of stagnation and inflation.

It conjures the darkest days of the 1970s…

Stalling economic growth, soaring prices, gas lines… bell-bottomed trousers.

We do not suggest stagflation has arrived — unlike the 1970s, for example, official unemployment is low.

And gas lines can nowhere be found.

But with slackening growth and percolating inflation… are we receiving a foretaste of coming events?

“Investors better wake up to the growing risk of stagflation,” thunders the aforesaid Danielle DiMartino Booth.

“By all metrics, inflation is heating up,” she continues, “but it’s not clear the same can said for underlying economic activity.”

No, alas, it is not clear.

Ms. DiMartino Booth is not alone.

Jim Paulsen, chief investment strategist at the Leuthold Group:

This idea of facing higher rates and higher inflation with decelerating economic momentum — that’s stagflation and that’s very frightening for both stock and bond investors.

Our how about the maestro himself?

What does old Alan Greenspan say?

Stagflation is about to emerge. We are moving into a different phase of the economy, to a stagflation not seen since the 1970s.

Given Mr. Greenspan’s “imperfect” forecasting record… you may salt his comments according to your taste.

But finally we come to our own Jim Rickards:

Now we’re returning to that unpleasant combination of low growth and high inflation… Stagflation may be in the cards. If so, it will be a return to the late 1970s when the “misery index” was created to describe the stagflation combination of high interest rates and high unemployment at the same time.

History rarely, if ever, repeats itself, as Mark Twain said — but it does “rhyme.”

Could we be heading for a 21st-century stagflation… absent the trappings of the disco era?

We have no answer, of course.

But two things we do know…

1: We need no reminders of the 1970s — thank you just the same.


2: Gold skyrocketed 2,300% during the stagflation of the 1970s.


Brian Maher
Managing editor, The Daily Reckoning

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From:: Daily Reckoning

Size Matters

Jody Chudley

This post Size Matters appeared first on Daily Reckoning.

Let me shed some light on where the greatest stock market returns are generated.

Over the last 90 years, the market’s smallest stocks with market caps averaging just $114 million have been the best performers with an incredible 17.45% annualized rate of return.

Compare this to the market’s largest stocks, with an average market cap of $88 billion, that have returned just 9.21% annually.

The reason for this outperformance is simple…

Institutional investors cannot fish in this pond. The companies are too small for them to invest any meaningful amount of cash and therefore bargain opportunities are able to exist.

This is where the market is inefficient.

The data is screaming to us that small-cap companies are an ideal place to find great equity investments. So let’s do exactly that.

Growth At A Bargain Price — Ashford Inc. (AINC)

Ashford Inc. (AINC) provides asset management services to two NYSE listed real estate investment trusts, Ashford Hospitality Trust (AHT) and Ashford Hospitality Prime (AHP).

With a market capitalization that has been hovering around $200 million, this is just the kind of under-the-radar business that outperforms over the long-term.

The first REIT, Ashford Hospitality Trust, invests in full-service and upper-upscale hotels in diversified markets. In total it has 120 hotels and 25,000 plus rooms. The second REIT, Ashford Hospitality Prime, focuses on luxury hotels and resorts covering 12 hotels and 3,600 rooms.

Combined, these two REITs operate 132 hotels and have $7.5 billion on total gross assets that Ashford Inc. is in charge of managing.

As the asset manager, Ashford Inc. gets paid a management fee from the two REITs. That fee is based on the $7.5 billion in gross assets that these REITs have. As the REITs grow their assets, so too grows the management fee that Ashford Inc. collects.

Historically that growth has been excellent.

I’m talking about a compounded annual growth rate of over 25% since 2003. Yes, that rate includes the financial crisis and is something that I expect to continue.

But there is more to the story…

As the manager of all of these hotels, Ashford Inc. effectively controls how those hotels spend billions of dollars every year.

Not surprisingly then, Ashford Inc. has invested in a few businesses that provide services to hotels. For example, Ashford Inc. purchased J&S Audio Visual which is a company that provides audio visual services for hotel conventions, conferences and business meetings.

I know of at least 132 hotels that are going to be customers of J&S Audio…

Similarly, Ashford Inc. made an investment in a company called Pure Rooms, which is in the business of making hotel rooms hypoallergenic for $30 per night.

You can bet there will be additional opportunities to capitalize on servicing hotels down the road. This will add more growth to the management fee growth that has been compounding at more than 25 percent per year for 15 years.

Great Balance Sheet + Incentivized Insiders At An Attractive Valuation

In addition to having a rapidly growing asset management business and opportunities to cross-sell services, Ashford has three other very attractive features.

The first is the balance sheet. As of the end of December 2017, Ashford was in a strong financial position with the company sitting on $40 million of cash while having zero debt.

The second is that insiders are highly incentivized to build shareholder wealth.

I’m a huge believer in the power of proper incentivization and Ashford’s insiders own three times more shares than the average of its peer group.

The third is an attractive valuation. Ashford Inc. trades for 8 times EBITDA (earnings before interest taxes depreciation and amortization). Meanwhile, the most comparable publicly traded competitor, RMR Group (RMR), trades at 15 times EBITDA — almost twice the valuation!

Not surprisingly, RMR’s market capitalization is almost ten times that of Ashford and institutional investors have been attracted to the RMR story. As Ashford continues to grow, I expect that institutional investors will move in here as well and Ashford’s valuation multiple will increase.

For now this is a high quality small company available at a discounted price.

Here’s to looking through the windshield,

Jody Chudley
Financial Analyst, The Daily Edge

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Beneficiaries: Careful what you decide

Nilus Mattive

This post Beneficiaries: Careful what you decide appeared first on Daily Reckoning.

I’ve written about the importance of having a will before. But not everything you own is controlled by a will when you die.

Some of your most valuable assets, for example, life insurance benefits, employer-sponsored retirement plans, IRAs, and annuities allow you to name a beneficiary. And that designation overrides what you have in your will.

Naming a beneficiary on your retirement plan documents or life insurance application is a snap. Fill in the form, and 30 seconds later you’re done.

And when the day comes for your beneficiaries to collect, all they have to do is complete and sign a form, and then send it to the financial institution along with your death certificate.

Since probate is not required, the process is generally fast and doesn’t cost a cent.

You can name individuals, charities, trusts, organizations, or your estate (where it would be distributed according to your will). You could even name a group of individuals, like “all my grandchildren who survive me.”

That stroke of a pen on a simple form focuses on who will receive your assets.

Yet it might not correlate with your overall estate plan, which can lead to mistakes made and problems down the road.

For instance, when…

Naming minors as beneficiaries

If minors receive an inheritance, the court will appoint someone to manage the funds. When the child reaches the age of majority – 18 to 21 depending on the state – they’ll get the money.

Imagine, though, someone at that age coming into a large lump sum, say from a life insurance policy.

I started investing when I was in grade school, so I probably would have bought dividend-paying stocks or tucked the money into some other safe place for future use.

But I know what many of my friends would have done: New cars, expensive clothes, or a trip to Europe!

So if you want minors to receive assets that have a beneficiary form, you might consider drafting a trust first and naming the trust as beneficiary.

The trust could, for example, specify that the children receive payouts at age 25 when there’s a better chance they’ll handle the money wisely.

Worried that an inheritance would make your kid lazy?

As I explained in a separate article, an incentive trust holds the inherited assets on behalf of your beneficiaries. You (the grantor) spell out conditions they must achieve before receiving distributions.

However, it’s important to know there are also…

Risks when naming a trust as beneficiary

Trusts are valuable estate planning tools. Drafting a trust that will be the beneficiary for your assets allows you to select a trustee to distribute those assets to the ultimate beneficiaries (your grandchildren, for instance) per your instructions within the trust.

Plus it could protect the inheritance from creditors.

But in certain circumstances, a trust could also penalize a surviving spouse…

If a surviving spouse is named beneficiary on her deceased husband’s IRA, she can retitle the account as an inherited IRA and remain the beneficiary. Or she can treat it as her own.

In either case, she can defer RMDs until age 70½ when the distributions are taxed at her ordinary income tax bracket.

Such deferral is not always possible if a trust for the benefit of the surviving spouse is named as beneficiary. And the trust may be required to make the payout within as little as five years.

Other potential minefields…

Beware of beneficiary forms that don’t allow your assets to pass “per stirpes,” or equally among the branches of a family.

Suppose you name your three adult children as beneficiaries of your IRA. If one of them predeceases you, you might want that child’s share to go to his or her children.

However, many standard beneficiary forms provide that your two remaining adult children would share the pot. That’s because the insurance company or a financial institution may consider it impractical to determine the identity of such descendants.

Some forms also make it impossible or awkward to designate a trust for distribution to beneficiaries who are minors or someone who is incapacitated. That could require appointment of a guardian or conservator for any such beneficiary.

All too often completing a financial institution’s beneficiary forms is taken lightly without any professional help. The company’s representative is anxious to close the sale before you change your mind or death is something you’d just as soon not even think about.

So pause before filling in that form. How will that asset affect those you hope to pass it to? What are the tax implications?

You want to focus on not only WHO will receive your assets but also how and under what circumstances.

Also remember to review all your beneficiary and contingent designations after experiencing a life-changing event, such as marriage, divorce, or the death or birth of a loved one.

An estate planning attorney can provide the exact language to include on a beneficiary form or draft an attachment. Once you’ve completed the form, insist that the financial institution or insurance company send a confirmation that it’s been accepted.

Financial institutions merge. Records get lost. So be sure to file that confirmation with your other important papers, too.

And if a company ever refuses to accept your beneficiary instructions, I suggest taking your business elsewhere.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

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3 Stocks Fighting Back Against “Elephant” Amazon Today!

Zach Scheidt

This post 3 Stocks Fighting Back Against “Elephant” Amazon Today! appeared first on Daily Reckoning.

You would think I asked her to go to school wearing a dunce cap!

“Dad, there’s no way I can wear that sweatshirt! It’s NIKE!

Rebekah, my thirteen year old, was late for cheer practice and needed a sweatshirt. I found one next to the front door and tossed it to her.

She was mortified.

“Can’t you see I’m wearing Adidas pants? And the three stripes on my shoes? Look at this hat!”

Yep, the girl was decked out in Adidas gear. And of course you can’t mix brands and toss a Nike sweatshirt in the mix. What was I thinking??

Today, I want to show you how brand loyalty among teens (and adults), can actually put cash in your designer jeans pockets, thanks to American consumers with money to spend…

Americans Ride the Wave of Wealth

There’s a big wave of spending spreading across the U.S. right now.

It’s tied to what I’ve called the “wealth effect” which has been lining the pockets of American citizens and spurring shopping sprees as we get ready for summer.

The wealth effect started with the stock market moving steadily higher for nearly a decade.

Higher stock prices have led to big profits. And that’s true for people who have brokerage accounts, for people who simply invest in mutual funds, and even for people who don’t have anything to do with financial markets.

A higher stock market has made consumers and businesses more confident in our growing economy. And as consumers spend more, businesses are naturally selling more. This has led to one of the strongest job markets seen in modern history.

Of course, the more people that are employed, the more money people have available to spend. And that spending simply adds more fuel to the growing economy.

Toss in a housing market that features higher prices for homes, and you now have homeowners who can tap into lines of credit to free up even more spending money.

In short, this is a great environment for Americans to build wealth.

And as that wealth is being built, cash is naturally being spent.

The only question is WHERE shoppers will spend that cash…

Apparel, Brand Loyalty, and Amazon

It’s not hard to make a case for higher consumer spending. For generations, Americans have earned a reputation for spending whatever money they can get their hands on. And based on the research I’ve seen, we’re still very much a “consumer nation.”

But that doesn’t mean that all retail companies are doing well.

There’s a giant elephant in the room when it comes to retail companies and investing in retail stocks, and that elephant’s name is Amazon.

Amazon has made it very difficult for many “brick and mortar” stores to stay in business.

You’ve already heard the story of how Amazon is killing department stores, how people are looking at electronics in physical stores and then going home and buying their favorite gear on Amazon, and how this giant e-commerce company is changing everything.

Well not everything has changed.

When I was a kid, Nike Air Jordan’s were the shoes to wear. Today, I’m fond of Under Armour running gear. My kids each have their own brands that they like to wear. And in the more affluent areas of any city, you can see people walking around with their favorite brands proudly displayed as status symbols.

It doesn’t matter how strong Amazon is as a company, some people still gravitate toward their favorite apparel companies. And stocks of these popular apparel companies are moving higher, despite (and in some cases because of) Amazon’s dominance.

Get on the Brand Name Bandwagon

Popular apparel brands aren’t all being hurt by Amazon.

Some companies choose not to sell their apparel on Amazon, so the only way that you can get your hands on their styles is to buy the products direct.

Other companies partner with Amazon to sell their brands through the biggest e-commerce market in the U.S.

Regardless of where the apparel is sold, popular apparel brands grow their profits by making clothing that appeals to today’s consumers. And with plenty of consumer spending to tap into, the best apparel stocks have been moving steadily higher.

With jobs plentiful, the stock market stabilizing, and the housing market continuing to move higher, don’t look for this apparel stock trend to change anytime soon.

Some of my favorite apparel stocks include

American Eagle Outfitters (AEO) — a popular brand that my teens have been gravitating towards.

Lululemon Athletica (LULU) — yoga-inspired apparel that is priced WAY above my family’s budget (but popular with affluent consumers).

Columbia Sportswear (COLM) — outdoor gear and clothing for those who explore, and those who want to LOOK like explorers.

So this year as the weather starts getting warmer and you think about updating your wardrobe, consider funding your next shopping spree with profits from these wealth effect winners!

Here’s to growing and protecting your wealth!

Zach Scheidt
Editor, The Daily Edge

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