Adapt or Die

Posted On Jul 26, 2012 By Dave Gonigam

Dave Gonigam – July 26, 2012

  • You can’t change the wind, but you can adjust the sails: The key to “adaptability” in your portfolio
  • Faber, Denning, Michael Covel and Sprott’s David Franklin on zero interest rate policies… and how to adapt
  • Byron King with little-known lessons from World War II relevant to today (plus a new wrinkle to the you-didn’t-build-that discussion)
  • The event that’s bound to happen, but not right away… a strategy immune to the machinations of the Fed and the White House… moving from the S-word to the F-word (not what you think) to describe the president… and more!

   “My favorite government agency is one that’s defunct, and my favorite politician is one that’s dead.”

And so Chris Mayer kicked off this year’s edition of the no-holds-barred, politically incorrect affair we call the Whiskey bar. Our Wednesday night panel discussion at the Agora Financial Investment Symposium, fueled with quality alcohol, brought forth the usual one-liners and applause lines… plus a discussion of the U.S. housing market every bit as lively as this editor hoped for.

A handful of highlights…

  • Barry Ritholtz, suggesting that the major banks should have been put through bankruptcy court in 2008: “I know this idea’s way out there”
  • Dan Denning, on the zero interest rate policies of central banks: “It looks like the bond vigilantes have been taken out back and shot”
  • Doug Casey on whether a second passport or a foreign residence is more important: “Get both. Get multiples of both”
  • Denning again, on when it will be illegal to surrender your citizenship: “Never. They’ll just tax it prohibitively”
  • Ritholtz to Michael Covel, with the biggest non sequitur of the night: “Do you think T-rex actually tasted like chicken?”

Seriously, you had to be there. Or failing that, you can get the recordings of every session in the main hall this week… in high-definition video.

Meanwhile, an intriguing subtheme has emerged at this week’s Symposium. While this year’s confab is dubbed “Innovate or Die: Empire at a Turning Point,” the word that’s turned up most often is not “innovate,” but “adapt.”

Addison foreshadowed this adaptability idea in his welcome letter to attendees. “If enterprises and empires must adapt to changing circumstances, so must your investment strategy.” Dan Denning said on Tuesday investors must be like the platypus: Duck billed, beaver tailed, web footed, it has fully adapted to the harsh environment of eastern Australia.

The adaptability theme emerged during several of yesterday’s talks…

   “We’ve reached a stage,” says Dr. Marc Faber, “where people say, ‘I’d rather know I’m losing 4% a year holding cash than handing it to a money manager and possibly losing 30%’.”

Faber sees no end in sight to the Fed’s zero interest rate policies… not as long as the Treasury has massive deficits to finance. “Fiscal deficits of less than $1 trillion are out of the question for the next 10 years.”

A “fiscal cliff” at year-end? Dr. Faber says “a fiscal Grand Canyon” is far more likely: Politicians will be too scared to let the automatic spending cuts go into effect.

So… How to invest? You essentially have two choices: Either you have to be an impeccable market timer — in which case you’re reading the wrong e-letter — or you go Dr. Faber’s route. “I prefer to have diversification of different asset classes.” In his case, those classes are equities, cash and bonds, real estate and gold.

Within the stock market, he figures blue-chip dividend payers will deliver better yields than Treasuries over a 10-year span, and he named a few. (Check out an interesting chart to that effect later in this episode of The 5.) “I’ve also started to buy some stocks in Portugal, Italy and France. The markets there are essentially at or below the March 2009 lows. If the S&P were to fall to the March 2009 low, it would be cut in half from present levels.” That’s a fairly low-risk proposition.

   Stocks are roaring this morning; all 30 Dow components are up. The index has poked above 12,900 for the third time this month.

European Central Bank chief Mario Draghi pledged to do “whatever it takes” to save the euro. How he would do so, he did not specify. No matter, it’s another risk-on day, fueled by the bloviations of central bankers…

   “Investors are overlooking the fact that Apple’s products are ‘wants, not needs,’” says Frank Holmes.

“Millions of consumers want an iPad and many want a computer, yet every single person in the world needs global resources. We need companies to grow our food; we need oil, natural gas and coal to fuel our cities. We need to drive to work and school each day, and we need to keep our house warm in the winter and cool in the summer. And so do the other 7 billion people on the planet.”

Nothing wrong with Apple in Frank’s estimation. You’re just better off buying the stuff Apple uses to build its products.

Frank’s presentations are always chockablock with eye-opening graphs and tables. This one stood out to your editor: Look at what a zero-interest rate policy has begat…

Mr. Holmes packs a lot of information into his talks: Sometimes he’ll breeze through his PowerPoint so quickly you can’t pick up all the subtleties in real-time. Which, in a sense, gives you a leg up on the people who are here in person: With our new video recordings of the Symposium talks, you can linger over any chart for as long as it takes to sink in. And you can rewind to pick up a point you missed the first time.

We have folks in attendance this week who’ve signed up for the recordings for just that reason. You can do the same.

   “What appears to be evident may not be imminent,” cautions EverBank World Markets president Chuck Butler.

That is, just because something is bound to happen doesn’t mean it’ll happen right away. Mr. Butler noticed the U.S. government racking up debt at a precipitous rate starting in 2001. But it didn’t show up in the form of a falling dollar index until the following year.

Now? The debts have become far larger, and even more unsustainable. But with fear abounding over Europe, it’s not showing up in a weakening dollar. Not now. But it will.

That gives you time to carry out the most important diversification Chuck believes you need in your portfolio — currency diversification. Make sure you’re exposed to currencies other than the U.S. dollar, while there’s still time. EverBank offers a host of innovative products to that end.

[Ed. Note: We’re in EverBank’s debt for sponsoring the outstanding welcome reception here Tuesday night. They put on quite the shindig!]

   “We can no longer run the American empire on cheap energy and unsound money,” declared Byron King. It is time, once again, he said, to adapt.

Byron was in a reflective mood, drawing on a vast store of knowledge acquired at the Naval War College. His concern: How the nation might adapt to the realities of expensive energy and crushing debt.

The lessons he drew came in part from ancient Rome, from the British loss at Saratoga during the American Revolution (really, you have to see the talk for yourself)… but mostly from the American experience during World War II.

For all his faults, President Franklin Roosevelt adapted: “During the 1930s and the New Deal,” said Byron of FDR’s attitude, “industrialists were ‘malefactors of great wealth.’ But by 1940 as war loomed, FDR needed productive skills of the business people.”

In that vein, Mr. King had a fine addition to the you-didn’t-build-that discussion: One of the government accomplishments the current president crowed about, Hoover Dam, couldn’t have happened without steel from Henry Kaiser’s mills. And as war loomed, William Boeing designed the B-17 independent of any government agency; it wound up shooting down more enemy aircraft than any other model.

“The arsenal of democracy,” says Byron, “was created with urgency by U.S. private industry.” We live with their legacy today. Navy ships — mostly designed by the Gibbs & Cox naval architecture firm — mapped the bottom of the ocean, making possible the underwater energy discoveries that help fuel cars and ships and planes today.

Byron saved his favorite names in the energy space for his afternoon workshop. But fear not: As part of the audio/video package we offer, you also get a concise write-up of the “breakout sessions” — complete with names and ticker symbols. Access here.

   If we’re stuck “managing wealth in uncertain times” — the title of David Franklin’s talk — then the best way to adapt is to identify the few things that are certain and work with those.

Mr. Franklin — the head of Sprott Private Wealth — identified close to a dozen certainties. Among them…

  • “Quantitative easing” measures are having less and less impact
  • U.S. dollar devaluation is a certainty: The Federal Reserve has an inflation target of 2% a year — guaranteeing a 33% loss in purchasing power over a 20-year span
  • A bubble in fear: Spanish and Italian bond yields are blowing out, while Germany and Switzerland have negative interest rates; people are literally willing to lose money for the assurance they’ll get the bulk of it back.

The most powerful certainty Mr. Franklin pointed to is the same one he identified last year: Gold’s outperformance in an environment of “negative real interest rates.” Look at what gold does when the after-inflation return on a 10-year Treasury note falls below 2%…

The biggest takeaway: “If you don’t have exposure to gold stocks at the moment and you believe in gold, now is the time to get in,” says Mr. Franklin. Yes, the sector’s beaten down right now. That’s the point. The average pullback in the HUI index in the last decade was 38%. It’s been followed by an average 120% increase. Little wonder Franklin is nibbling away on behalf of his high-net-worth clients, adding gradually to their gold stock positions every month.

   Gold is adding to yesterday’s gains. At last check, the bid was $1,617. Silver’s up to $27.70.

   “We are all here,” Michael Covel told the assembled throng in Vancouver, “because we know zero interest rate policies have taken all cash in this room and made it worthless unless you invest it in risky assets.

“That’s the hand we’ve been dealt. What do we do with that hand?” Mr. Covel’s adaptation method might strike you as unorthodox: He is an evangelist for “trend trading.”

Don’t be misled by the name: “Trend” does not entail chasing after the latest fad. And “trading” doesn’t entail trying to pick a top or bottom to the market. Rather, it means watching closely for when an asset — any asset — has already started a move up and bailing after it’s started a move down.

Trend trading works, says Mr. Covel, no matter what Ben Bernanke says about monetary policy and no matter what Congress does — or doesn’t do — about the $15.8 trillion national debt. He recalls the words of the legendary trader and hedge fund manager Paul Tudor Jones: “The illusion has been created that there is an explanation for everything, with the primary task to find that explanation.”

Trend trading foregoes the need for explanations — which sounds like a much simpler way to make money than to fuss over what politicians and central bankers are going to do next.

[Ed. Note: Watching Mr. Covel’s presentation in person, it becomes quite apparent — the advantages to our new video offerings of this year’s recordings of the Symposium. Frankly, the audio alone won’t make much sense. But seeing the kind of chart action he talks about, it’s crystal clear.

We’ve had a tremendous response to our addition of video this year. And it’s not some jerky, pixelated thing, either: This is high-definition video, worthy of the biggest TV in your house. It’s the overwhelming choice of folks who are signing up for the recordings of this year’s conference. Check it out.]

   “One of your readers called Obama a socialist,” writes a reader who caught our newest controversy, launched in yesterday’s episode.

“If he researches history a bit more, I believe he will realize Obama is actually a fascist, in that he wants you to own the business under HIS rules of operation.”

   “I appreciate that you pointed out to the reader who wrote the following that President Obama is not a socialist, but I’m disappointed that you failed to ask the name of the planet on which that reader lives.”

“It’s sad that anyone who would write such trash might be eligible to vote; sadder still that he’s no doubt one of many who will vote based on the crap he’s swallowed and now regurgitates.”

   “I’m not into name-calling either, per your answer in not calling our president a socialist…or anything else for that matter.

“But do you really not consider what he did with GM, which included taking away the rights of the bondholders, through an appointment of an unelected car czar, a nationalization of that company of sorts? Does he really need to do that to an entire industry (think health care insurance laws) for you to acknowledge that some of his decisions are socialism, despite the fact that other crony capitalists like Goldman still contribute to him and other like-minded politicians?”

“Let’s just let the facts fit the description of what our president is or isn’t, without labels… but I think you are incorrect when you say his alleged ‘socialism’ to date is sheer hyperbole.”

The 5: A reasoned point. One of the speakers here in Vancouver this week harkened back to George W. Bush’s infamous words in the teeth of the 2008 crisis: “I’ve abandoned free-market principles to save the free-market system.”

Going back to the first reader’s point, the only thing that would have made it better is if he’d paraphrased Nixon and added, “We’re all fascists now.”

Regards from Vancouver,

Dave Gonigam
The 5 Min. Forecast

P.S. “This market’s so much bigger than the stock market,” said Doug Casey at last night’s Whiskey Bar. “It’s set for a catastrophic collapse.”

“I look at it the way I looked at the Nasdaq in 1996,” added Barry Ritholtz. “You know it’s going to go higher, you know it’s going to end badly, but you don’t know when.”

In a new and rare video release, Bill Bonner describes “the fattest, juiciest financial bubble that’s ever existed.” He describes what it is, and what you can do about it — while there’s still time — at this link.

P.P.S. “Even the bad food here is good,” writes roving reporter Jim Amrhein, reviewing the gustatory delights of Vancouver. For his latest dispatch — always colorful, and frequently covering ground we don’t have room for in our humble 5 Mins. — click here.

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