Ounces of Truth, Shares of Illusion

Tue, Jul 21, 2015 - 9:49am

Don’t worry, disheartened Goldbugs- if you can pull yourself away from your shiny rocks for a few minutes, I have a killer stock play that will help ease your considerable pain. A truly great growth company that has averaged 12% gains over the last six years AND pays a meaty 2.7% dividend. It is highly rated by analysts, earning a Schwab A rating (top 5% in its sector) to go with a Strong Buy rating from analyst at Citi, Bank of America, RBC Capital Markets and UBS Warburg. Goldman Sachs analysts love this one, from fabled stock guru Abbey Joseph Cohen who has recommended this stock repeatedly, to Goldman’s David Fleischer who recently called it the “Michael Jordon” of its sector. And if you are worried about its debt or capital structure, please note that Fitch, Moody’s, and Standard & Poor all give its bonds their highest rating, Investment Quality. Despite the increase in the price of this company, earnings have been rising even faster, increasing from .20 cents a share to 1.01 over the last nine years! As if that isn’t enough, the big boy managed money professionals like Janus, Alliance, and AIM all hold large (nine figures) positions in this one.

Best of all, while 1,000$ invested in gold over the last six years is worth a meager 1,027$, that same 1,000$ invested in this company six years ago would be worth 2,057$. Now I hate to rub salt in your wounds, but surely even you hard money troglodytes can see that you could have nailed an easy double if you simply had the good sense to listen to the experts and had gone with the crowd on this one. The stock, of course, is…

Enron, in November of 2000. It would soon go from a high near 90$ to around .50 cents per share, at which point two of the 15 analysts who followed the stock still had it rated a “strong buy” when it vaporized entirely.

. . .

I admit to having several motivations in using this example, not the least of which is to illustrate the degree to which mainstream analysts, mutual funds, and credit ratings agencies – the supposed big boy market professionals – can be profoundly and catastrophically wrong. I also wanted to illustrate the dangers of beating yourself up by playing the “if only I had bought X” game, when we are in fact only at halftime of a contest that is still very much afoot.

But beyond these, I wanted to illustrate something that is for me (and I suspect many of you as well) a crucial reason we invest in gold and silver: they are real and tangible, with no counterparty risk. They do not rely on continued financing, favorable interest rates, or daisy-chains of CDS paper. Precious metals are value that is real, tangible, and genuine, in an era of where Enron economics has come to encompass the very foundations of the economy.

Does that sound like an exaggeration? A false equivalency? Well, consider a few examples and judge for yourself what is real and what is illusion. We are told that the economy has been recovering for five years now, and that stock prices have merely risen to reflect this reality. But if this is so, why do we not see any evidence of this recovery in our towns, our cities, our counties? Why are measures like ZIRP, treasury purchases by the Fed, and QE that were introduced as temporary and extraordinary measures all still in place after six years of “recovery”? Why does even a hint of withdrawing these so-called temporary measures, so aggressive that they were literally unprecedented, cause spasms across markets? If all is humming along, why is the Labor Force Participation rate at a 40 year low with 99 million working age Americans not in the workforce? Why do market commentators crowing about the performance of the stock market never mention that they have been driven primarily, for more than a year now, by all-time high stock buybacks financed on cheap credit with artificially low interest rates? Isn’t this a classic Enron-style accounting trick? Can’t people see where it leads?

The previously rock-solid benchmark US treasury bond has to be artificially propped up by the Fed, pushing interest rates to the floor. Is 2.7% a reasonable rate of return in the real world? Remember, this rate of return is supposed to compensate the buyer for the opportunity cost of having his money tied up for 10 years, provide a reasonable rate of return above the real cost of inflation, and compensate for risk of default by the issuer or a degeneration of the unit of account, i.e.- the underlying currency. Honestly, I would consider investing in some US Treasuries… at 12.7%, not 2.7%.

But the reality is that today the bond "market" is artificially created from start to finish through a fictional process of financial alchemy. This is how it works: The Federal Reserve creates previously non-existent dollars out of thin air on a computer screen, and uses them to purchase US Treasury bonds. These bonds are a fictional promise from a completely bankrupt country to pay the holder of the bond in fake dollars (again created out of thin air) at some point in the future. These instruments are sold at pretend "auctions" where in reality, 50-80% of the "buyers" are actually the Federal Reserve itself.

Fantasy dollars created out of thin air and used to purchase fictional promises to pay from a bankrupt and spendthrift issuer and sold at pretend auctions. Did you get all that? Do you understand what a complete and utter sham every part of it is? Good. Now ponder this: The continuance of that ridiculous charade is what gives your paycheck its value- without it, your paycheck would be either worth less or possibly worthless. That elaborate sham is the only thing that gives value to the dollars shown in your checking account. It "values" the stock market.

So what are treasuries really worth? What is a fair market value interest rate for US or corporate bonds? What are stocks actually worth? You and I really have no idea, and that is the problem. Each of these is openly and brazenly manipulated or falsified to the degree that the only thing we can know with certainty today is that they can quite reasonably be called illusionary valuations. I have no idea what the difference between the illusion “valuation” and what the actual, real world valuation would be, and anyone who says they do is fooling themselves.

Those who are cackling about gold and silver investor’s poor performance over the last three years apparently believe that these illusions and manipulations can continue forever and ever without interruption, or at least believe they are so smart they will be able to get out before the reckoning. Well maybe they can and maybe they can’t, but with my ounces of stored value in my possession, I don’t have to worry about that. I own something real and valuable, and if the paper price doesn’t reflect that today, well I am more than capable of waiting.

In a world of fake interest rates, artificial stock values, and Enron economics, I am truly thrilled to own a genuine store of value even if I purchased it at a higher price than it fetches today. I may not have had perfect market timing, but that's OK because I own the perfect investment vehicles. And I am quite certain that ounces (of true value) will win out over shares (of illusion).

About the Author

Subscribe or login to read all comments.

Become member and subscribe to Turd's Vault


Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 5/10

5/11 10:00 ET JOLTS job openings
5/11 12:00 ET Goon Brainard
5/12 8:30 ET Consumer Price Index
5/12 9:00 ET Goon Chlamydia
5/12 2:00 ET Federal Budget
5/13 8:30 ET Producer Price Index
5/14 8:30 ET Retail Sales
5/14 8:30 ET Import Price Index
5/14 9:15 ET Cap Ute & Ind Prod
5/14 10:00 ET Consumer Sentiment

Recent Comments