2012 Outlook
By John | January 2, 2012
First, I would like to evaluate my 2011 outlook, which I posted on January 1, 2011.
I think my “Most Likely Scenario” was very close to what actually occurred during 2011 in the U.S. economy. My forecast for GDP growth, inflation, unemployment and interest rates were close. However, my expectation that interest rates would be trending up by year end were not met.
My expectations that the dollar would remain fairly constant relative to other currencies, with the exception of those currencies that were experiencing their own problems, was close, although the dollar did fluctuate more than I had anticipated.
My forecast for precious metal pricing was close with regard to gold, but too high with regard to silver, at least with respect to valuation at year end. I did not anticipate the volatility of both gold and silver during the year.
My expectation with respect to both Federal Reserve actions and Federal Government fiscal policies were accurate.
My “Less Likely Scenario” did not materialize – fortunately.
Now, how about 2012?
Nothing that occurred during 2011 solved any of the underlying problems of the U.S. or world economy. That just means we moved a little closer to the cliff during 2011, leaving us a little more vulnerable to catastrophe.
However, I continue to believe that catastrophe will be averted in the U.S. in 2012, though the risk is probably a little higher than it was during 2011.
My specific forecast:
GDP: 3% to 3 1/2% growth rate for the year, as reported by the government. Starting the year lower, but accelerating toward the third and fourth quarters.
Inflation: declining during the first half of the year, but then picking up during the second half, as the Federal Reserve becomes more accommodating about mid-year. Reported CPI for the year a little above 3%, but the public will experience much more, and Shadow Stats will report 7% plus for the year.
Unemployment. Slowly trending downward during the year, ending the year at 7.6%, per government statistics.
Interest rates: Kept artificially low by the Federal Reserve throughout the year, with the Federal Funds target rate kept unchanged at 0% to 1/4%.
The dollar: More volatility relative to other currencies. As problems in Europe and Asia surface, flight to the dollar will continue, making the dollar surprisingly strong at times.
Precious metals: Both gold and silver to exhibit less volatility during 2012 than during 2011. The attractiveness of both as hedges against inflation will decline during the year. Gold will end the year at about $1,600 per ounce. Silver will end the year at about $19 per ounce.
Federal Reserve: Quietly printing, especially during the second half of the year. No announcement of QE, but helping to paper over debt problems throughout the globe, as discretely as possible.
Federal Government. There will be no change in the intended role of the U.S. Government in economic affairs as long as this administration remains in power. Both out-of-control spending and extensive intervention in the private sector will persist. This will continue to stifle economic growth and crowd out private lending.
The election: The 2012 election will result in Republican control of both the house and senate. The presidency remains in Democratic control.
How confident am I of the above? Not very. We are in very uncertain times. An unforeseen event could cause civilization to unravel. However, I do believe those in political power throughout the world are very creative and capable of protecting their own interests and remaining in power. That is why I expect catastrophe can be averted for another year.
Topics: Commentary | No Comments »
I Give Up
By John | November 9, 2011
OK, I give up.
If you have followed my posts for a while you know I have been very critical of government policies that support consumption at the expense of production – that I have been very critical of stimulus policies – that I have been very critical of government spending, borrowing, taxing, regulating…..
Well, I have been giving this a lot of thought. The Obama administration is being advised by Nobel laureate economists. Surely, they know better than I what makes sense in the real world. So I have decided to throw in the towel. From now on, I am on their side. Rather than continue my obstructionist ways, I will now attempt to support the administration and their economic policies.
In fact, in keeping with my new attitude, I have a couple of ideas to help stimulate the economy.
Last weekend, we went off daylight savings time and back to regular time. It got me to thinking – why do we have daylight savings time? Isn’t it to regulate behavior, so people have more free time to spend in the daylight, so they can spend more money and stimulate the economy? So, why not have daylight savings time adjusted two hours instead of one. That way, people will sleep less, be awake more, and spend more. After all, you can’t spend money while you sleep.
Another idea: Have you noticed how many people attend college football games in the fall? College towns are crowded with people attending home games and spending money. On days when the team is out of town, the town is dead, and businesses receive a lot less income. Why not pass a law requiring all college football games to be home games? Just think of the extra economic stimulus!
Well, as you can see, this is the new me. I hope this encourages others as well, to cease your obstructionist behavior. Let’s be supportive of this administration. Let’s help them demonstrate that their economic policies really work.
Topics: Commentary | No Comments »
Flight to Quality
By John | November 6, 2011
During periods of financial uncertainty, such as we are experiencing today, investors seek to minimize risk by shifting their investments to low-risk securities. In recent decades, that means U.S. Government debt instruments. As market turmoil increases, the dollar rises relative to other currencies and U.S. Treasury yields decrease, as the prices of debt instruments increase.
Does this make sense?
Some day, historians will look back at this period in history and describe at as the era of debt – a time when debt was accepted as a conservative investment – a time when all types of entities, from individuals to governments utilized debt as a way of spending more than their revenues would support – a time when debt, itself, became accepted as “money.”
Those same historians will characterize debt as a massive bubble. They will wonder how it came about that billions of people simultaneously believed that debt instruments totaling many times the value of all of the assets on the planet could be accepted at face value. They will wonder how people came to believe that the debt obligations of bankrupt entities could be accepted as “safe” investments.
Now, it may very well be that U.S. Government debt will retain its value for some time. However, it can never be paid back, and at some point that will become recognized. At that point, everyone will try to exit Treasuries at once, and the value will sink to zero.
As you seek safety in your investments, don’t abandon common sense. Don’t, in effect, lend money to the insolvent. If you own bonds, income mutual funds, or even money market funds, you are at risk.
A flight to quality should involve investments in precious metals, real estate, or other assets with real value and no counter-party risk.
Topics: Commentary | 1 Comment »
Measuring Investment Success
By John | November 5, 2011
How do you measure your investment performance? If you invested $10,000 and received back $20,000, was that a good performance? Possibly not.
Why? Because the standard of measurement you are using, when you measure performance in dollar terms, is flawed. The IRS would like you to measure performance that way, because they do just fine. But you might not be doing so well.
“Money” performs three basic functions. It is a medium of exchange, a standard of value, and a store of value. As a medium of exchange, the U.S. dollar has done well for many years (up to now). However, as a measurement of value, and as a store of value, it is failing badly. Because of that, I suggest that you shouldn’t use the U.S. dollar as your “money.” It distorts your investment performance.
In the above example, if you invested $10,000 and received $20,000, the IRS will tax you on $10,000 of income. That is OK, if both transactions occurred on the same day. However, if it occurred as little as one year apart, you did not receive a $10,000 gain. If, as some will point out, the U.S. dollar is losing purchasing power at a rate in excess of 10% per year, that $20,000 you received back at the end of one year is now only worth 90% of $20,000 (or $18,000) in terms of comparable purchasing power to what dollars were worth at the time the original $10,000 was invested. In other words, you are paying income tax on a $10,000 “profit,” when you only profited in the amount of $8,000.
What if you had held this investment for several years? At 10% annual inflation, you would only be breaking even if you received $20,000 back on a $10,000 investment in about 6 ½ years. In this case, you paid income tax on a $10,000 “profit,” but had no profit at all!
When you invest in stocks, bonds, bank CDs, real estate, precious metals, etc., and measure your performance against dollars you may be receiving fictitious profits. So, how do you measure your performance? Against real money – against gold and silver.
Everyone complains about the cost of gasoline today. Do you realize that gasoline, as measured against silver, is cheaper today than it was 50 years ago? I remember when it cost about three silver dimes to buy a gallon of gasoline. Those three silver dimes today will buy a lot more than a gallon of gas.
Several states are contemplating making gold and silver legal tender, and disallowing the taxation of gains on “investments” in gold and silver coins, as those gains are not profits, but merely the depreciation of the value of the dollars against which those coins are measured.
We are experiencing persistent deflation in the U.S. today. That means that the true value of many things is going down, as the massive debt expansion of recent decades is unwound. Some of that deflation, such as in the value of single family homes, is being recognized. However, as more and more dollars are created, backed by nothing other than empty promises of the issuer, the true decline in value of many asset classes is being camouflaged.
At the same time we are experiencing asset deflation, we are experiencing currency inflation. That is how the deflation is being masked. Everyone measures the value of his assets in dollar terms. As those dollars become more plentiful, and worth less and less, their purchasing power declines and distorts investment performance.
So, how should you measure your investment performance? How do you value your assets? I suggest you use traditional money – gold and/or silver. How many ounces of gold or silver did it take to acquire this asset in the past? How many today? Continue to use that criteria in the future, as you monitor your investment progress.
However, you may want to use this measuring device with one caveat. As the public continues to recognize that fiat currencies are becoming worthless, there will be a flight out of currencies and into precious metals. As this occurs at an accelerating pace, you might expect the demand for, and relative “price” of gold and silver coins to accelerate.
In other words, currencies are currently overvalued. Gold and silver are undervalued.
So, what should you be holding in your investment portfolio?
Topics: Uncategorized | 1 Comment »
The Teacher
By John | July 24, 2011
Many years ago a contingent of her former pupils visited a retired teacher. Then in her late eighties, the teacher had spent over 40 years teaching in one-room rural schoolhouses in Northern Michigan during the early part of the twentieth century. As the only teacher – in fact the only adult – in the building, it had been her responsibility to prepare her students to succeed in life, whether that life was to be spent on the neighboring farm or pursuing a professional career in some distant city.
A member of that visiting contingent of former pupils asked the teacher, “In all of your years as a teacher, who was your best student?”
Without hesitation, the teacher named the student she considered to be the best – the one who had stood out from the rest in her long experience of teaching multiple generations of students.
Taken aback by her quick and decisive response, the visitors endeavored to determine exactly what it was that differentiated this student from all the rest. Had it been a photographic memory? An ability to excel at tests? Oratorical skills? A speed reader? A mathematical whiz? An ability to quickly grasp and retain information?
No, none of those, the teacher replied. This student stood out because of the thought-provoking questions – questions the teacher could not always answer – questions the teacher had not always thought of herself. This student stood out because of a desire to know why, the desire to understand in depth, beyond the facts, beyond the information presented. This student stood out because of a desire to know more.
This teacher understood that though the skills and information she was disseminating to her students would prove valuable in their lives, success would be determined by a continued habit of delving deeper to learn more, of becoming a lifetime student.
Most investors today seek “the answer.” Whether investing in the stock market, bond market, futures market, mutual funds, real estate, precious metals, etc., everyone seeks some simplified formula or “system” to tell them the path to riches. Well, there ain’t none!
Investment success is totally dependent upon you, the investor. As an investor, you must have that desire to know more – to get beyond the superficial, to ask those thought-provoking questions, to understand.
Topics: Uncategorized | 4 Comments »
Timber
By John | July 14, 2011
Vacant land is never vacant. The “vacant” term is used to indicate there are no buildings on it, or, in some cases, to indicate there are no man-made improvements. However, nature has a way of providing its own improvements.
In much of the U.S. and Canada, where I invest in vacant land, the natural state of this land is usually wooded, unless it is too wet or too rocky to support trees. Too often, the value of those trees is overlooked.
If you are, or intend to be, an investor in wooded land, I suggest you establish a relationship with a forester. The demand for, and consequent value of, different species of trees varies considerably over time. You will need the advice of someone who keeps current on timber values in your area. Then, when you are contemplating making an offer for a tract of wooded land, ask the forester to give you an estimate of value. If you want a timber cruise (a detailed estimate of value), you will probably be charged for it. However, if you are working with a forester on a regular basis, he or she should be willing to give you a rough estimate of value for no charge.
You may have heard of people buying a tract of timbered land, selling off the timber, and owning the land free and clear. That is possible, and has happened. However, it is rare today. What is not so rare is buying a tract of land, selling off timber, and owning that land with a very low cost basis. You might then sell that land at a nice profit.
When valuing timber, most people think of saw logs – the trees that can be cut down and converted to lumber. That is where the most value is. However, don’t overlook the value of pulpwood.
Pulpwood can come from any size tree. The tree is chipped up into small pieces and blown into the back of an enclosed semi-trailer and hauled to a pulp mill (which might convert it to paper), co-generation plant (which might burn it to generate heat and/or electricity) or an ethanol plant (which uses wood chips instead of corn to create a fuel additive).
Because pulpwood has lower value than saw logs, it typically is difficult to justify the economics of transporting it great distances, so most pulpwood markets are localized.
Let me give you an example from my experience of the value of foresters. We purchased a tract of forested land we intended to develop. We hired a forester to mark and measure selected trees that we intended to sell. The forester put the trees out for bid as standing timber. (That means the buyer has the responsibility to cut and remove the trees.) We received about a half dozen bids. They varied from about $45,000 to $128,000. Guess which bid we accepted? See how much less we could have received had we sold to the first guy who came along and offered to buy our trees? Foresters charge a modest percentage of the sale price for their services. Foresters know trees, wood, markets and buyers and keep themselves abreast of industry trends and developments. They are well worth what they charge. And, they can advise you on how to manage woodlands over time to produce the best return and/or achieve other objectives you might have for your land.
Another comment on timbering land: Yes, a mature woods is attractive and has aesthetic value. But in many cases, economics dictate that you should timber your property. And, no, you are not destroying the environment – you are harvesting a crop. Deciduous trees will quickly grow back without additional seeding. In a few years, you will have a forest again, even if you clear-cut.
Just make sure you carefully remove the tree hugger before cutting down the tree.
Topics: Rural Land Investment | 2 Comments »
Precious Metals vs. Land
By John | June 19, 2011
If you believe, as I do, that world fiat currencies are in danger of collapse, the next question becomes, what do I invest in?
I have mentioned previously that I recommend precious metals – gold and silver – or land. I came across some anecdotal information that might help clarify which you should be investing in.
In 1864, the Robinson Family purchased a 103,000 acre island in Hawaii for $10,000 in gold. At that time, an ounce of gold was equivalent to $20.67, so $10,000 in gold represented about 484 ounces of gold. Now suppose, instead of buying the island, the Robinson Family had just kept the 484 ounces of gold. How would those two respective investments look today?
The 484 ounces of gold are the equivalent of about $726,000 today. $726,000/103,000 acres, means you would have to be able to purchase that 103,000 acre island for about $7 per acre today for the two investments to be equivalent. I suspect that island is worth several thousand dollars per acre today.
What conclusion can we draw from this? If you are expecting to need to spend your investment in the near future, you need to be investing in something that is liquid, that can be converted to cash and spent. In that case, I recommend gold or silver coins. However, if you are looking for an investment that is long term, an investment you can pass on to your heirs, I recommend land.
Topics: Rural Land Investment | No Comments »
Debt
By John | June 16, 2011
Greeks are rioting. Banks, nations, governments at all levels are in trouble. Debt is stifling economic growth and threatening to plunge the world economy into chaos.
In my book, I advocate the judicial use of debt. If debt can be used safely to leverage reliable returns, debt can be beneficial to the investor. But that means that the debt incurred must be used to generate returns greater than the cost of the capital employed. Debt to support consumption is discouraged, as that debt does not generate a return, and only increases the cost of whatever is being consumed.
Now this may seem obvious. I know it seems obvious to me. However, it apparently is not obvious to government officials who advocate that government debt be used to support government expenditures (i.e., consumption) that cannot, or will not, be supported by government revenues.
Governments do not create wealth. They do not generate a return on invested capital. Therefore, in my opinion, governments should never borrow money.
Greece, Portugal, Spain, Ireland, California, Illinois, New York, the U.S. Government, etc. have incurred debt beyond what any reasonable person would expect to be repaid. Rather than recognize reality, all governments who find themselves in this position try to postpone the inevitable by borrowing even more to pay back old debts.
These governments are bankrupt, and the sooner that is officially recognized, the sooner we can return to a rational economy.
Greeks are rioting against austerity. To the extent that Greeks are objecting to the reduction in their “entitlements” (i.e., the money they did not earn), their objections are not legitimate. In a free market economy – one that respects private property rights – no one has the right to claim the fruits of another’s labor.
However, to the extent that Greeks are objecting to the failure to recognize that the Greek Government is bankrupt and needs to repudiate its debt, they are correct. Is it reasonable that the Greek population should experience a drastic reduction in standards of living in order to support debt owed to foreign banks? Isn’t that a form of involuntary servitude?
Greece will not recover until it is reorganized economically. That means defaulting on Greek Government debt. That means recognizing that Greek citizens must support themselves, and not rely on government handouts.
I know what you’re thinking. How is that going to happen? Probably not voluntarily. Probably not without a lot of further social unrest and economic upheaval.
Unfortunately, this outcome will not be confined to Greece, as most of the governments of the world are in the same situation. They have incurred debt inappropriately – debt they cannot possibly pay off. Their citizens, having become reliant upon government handouts, will resist the termination of their “entitlements.”
As we take this “big picture” look at the world, let’s not forget what those pieces of paper we carry around with us in our wallets truly represent. The entire world uses fiat currencies. Those currencies represent the debt of the issuing governments. This debt, too, will be defaulted upon.
What to do? Put your savings in true stores of value. Don’t trust governments to honor debts. They can’t, even if they wanted to.
I advocate gold, silver and land. As stores of value, these are not investments. They do not yield a return, in a true economic sense. So, do not borrow to purchase them. Own them free and clear of any encumbrances. If you will owe property taxes on land, make sure it is minimal, and make sure you have the funds to pay them.
Government defaults are coming. I just don’t know how long they can keep postponing the inevitable. I know that the longer the postponement, the more serious the outcome.
Be prepared. Mass amounts of wealth will be transferred as a consequence of massive debt defaults. Plan to come out of the debacle with a portfolio of solid assets. Gold and/or silver – coins or bullion – not paper backed by gold or silver. Land – a solid piece of the earth’s surface. They will still be there when the dust settles.
Topics: Commentary | No Comments »
Real Estate Bundle of Rights
By John | June 4, 2011
Real estate ownership constitutes a “bundle of rights.” Most real estate investors strive to own property in “fee simple.” That means they own all of the rights associated with that particular property. As an investor in vacant land, I typically strive to own in fee simple. However, sometimes that is not possible.
The “right” most often not available when purchasing vacant land is mineral rights – the right to extract minerals from that property. What does that mean? What it means can vary from state to state. In Michigan, where I live, it typically refers to the right to drill for hydrocarbons – oil and gas. However, it can also refer to surface minerals, such as sand and gravel. If you are acquiring land that does not include mineral rights, make sure you know what that means in your state.
There are many other separate rights associated with land ownership. I have purchased land without grazing rights – they had been sold off to another rancher. I have purchased land that had no right of ingress or egress. (In other words, you couldn’t get to the land without a helicopter.) I have purchased land in which the prior owner retained timber rights for a specified time period. I have purchased land in which the prior owner retained timber rights for a specified time period and for specified portions of the property (as shown on a timber map). I have purchased land on which neighboring owners held easements for ingress and egress, or for monitoring oil and gas wells.
The right to use property is, of course, part of that bundle of rights. However, if you are new to land investments, you might be surprised by how many limitations are placed on usage rights. Zoning laws in many areas are very restrictive. In fact, to me, land in an area with no zoning laws is more valuable than land that is zoned.
Development rights are being purchased by government agencies, preventing the land from ever being developed.
Many state and federal laws impact the right to use your land, such as wetlands laws, endangered species laws, and requirements to obtain permits for everything from building to mining to installing a water well.
Speaking of water, western states, in particular, have different laws regarding water rights. Just because you own surface rights does not mean you have the right to use either surface water or the right to extract water from underground aquifers. I backed out of the purchase of a western ranch one time after consulting with a water attorney, who discovered a recorded water usage plan associated with that land.
I am an owner of land in Utah that has a very exciting water development opportunity associated with it. This could make the land worth several times what we paid for it.
The bundle of rights issue is not all negative. You might want to specialize in investing in particular rights, such as mineral rights, timber rights, development rights, water rights, etc. This represents an opportunity to develop very specialized knowledge of these property rights and how you might capitalize on them. It might also be much more cost effective to only purchase those rights you are interested in, rather than buying a fee simple interest in land.
Investing in vacant land is much more complicated than many realize. That is why it contains investment opportunities you may not have thought of.
Topics: Rural Land Investment | No Comments »
Are You an Accidental Lender?
By John | May 13, 2011
Markets have been in turmoil recently. Turmoil creates confusion as to where one should be invested. Let’s take a step back and try to see the forest for the trees.
We know the Federal Reserve has announced they will discontinue QE2 at the end of June. Different opinions have been expressed regarding the implication for U.S. Treasuries – the primary beneficiary of the Fed’s QE2.
Some believe Treasuries could be a good investment now, even though the Fed is backing away from the market. I don’t agree.
In the short run, I don’t pretend to know what the market for U.S. Treasuries will do. What I do know is that the U.S. Government, the issuer of Treasuries, is essentially bankrupt. The U.S. cannot possibly fulfill its promises and pay back Treasuries with full purchasing power. In fact, it is not even pretending to do so, as the Federal Reserve has targeted an inflation rate of 2% per year.
Why would you want to loan money to a bankrupt entity? Just because everyone else is doing it? Does that make it a sound investment?
Even if you don’t own Treasury securities, you are still loaning money to the U.S. Government. How? Do you hold Federal Reserve Notes in your wallet or bank account? Are you aware that those are unsecured, promissory notes, backed only by the “full faith and credit” of the U.S. Government? Yes, that same U.S. Government that is bankrupt!
That is why I encourage everyone with savings – anything you don’t plan to spend anytime soon – to take those savings out of dollar denominated assets and put them into hard assets: Gold, silver, land.
You need to protect your savings from devaluation. Don’t be an accidental lender to the U.S. Government. Don’t exchange your hard-earned savings for worthless paper. Own something real.
Topics: Commentary | No Comments »
« Previous Entries