If You Own These Stocks, Your Dividend Is in Danger

By Justin Spittler

Mining companies are having another horrible week. As Dispatch readers know, commodities are in a deep bear market. Over the past year, the Bloomberg Commodity Index, which tracks 22 different commodities, has fallen to its lowest level since May 1999. Many individual commodities have lost 30% or more in the last year. Since December 2014, coffee has dropped 30%, palladium has dropped 34%, and platinum has dropped 31%. Crashing commodity prices have forced many mining companies to drastically cut spending.

Yesterday, mining giant Freeport-McMoRan (FCX) suspended its dividend. Freeport is the seventh largest mining company and the second largest copper miner in the world. The suspension of Freeport’s dividend is a major event. Until recently, Freeport was one of the industry’s most generous dividend payers. It paid $4.7 billion in dividends between 2012 and 2014. Its stock yielded about 3.8% in 2014.

Click here to get a free trend analysis for Freeport-McMoran

Management hopes to save $240 million a year by not paying a dividend. Freeport will also reduce its copper production by 29%, and cut capital spending by $1 billion over the next two years.
Freeport’s stock jumped 3.7% yesterday. It’s still down 71% this year.

The price of copper, Freeport’s main source of revenue, has plunged.…
Copper has dropped 27% this year to a six year low. Crashing energy prices have also slammed Freeport. In 2013, Freeport loaded up on debt to acquire two oil and gas companies. Its timing was awful. At the time, the North American energy industry was booming. But since last June, the energy sector has entered one of its worst bear markets on record. The price of oil has plunged 66% to its lowest level since 2009. The price of natural gas has dropped 55%. Freeport’s sales have now declined five quarters in a row. The company lost $3.8 billion last quarter, after making a $552 million profit a year ago.

Investors hate dividend cuts.…
A dividend cut often signals that a company is in big trouble. Typically, a company will only cut its dividend when it runs out of other options. Companies will often shelve new projects, lay off workers, and slash executive compensation before touching their dividends.

Freeport is only one of several major commodity giants to cut its dividend this year...
Anglo American (AAL.L), the world’s fifth largest mining company, suspended its dividend on Tuesday. The company will not pay a dividend again until at least 2017.

Kinder Morgan (KMI), North America’s largest energy pipeline company, also cut its dividend on Tuesday. The company’s fourth quarter dividend will be 75% less than it planned.
The list goes on….Vale (VALE), the world’s largest miner.…Glencore (GLEN.L), the world’s third largest miner….and....

Peabody Energy (BTU), the world’s largest publicly traded coal company, all cut their dividends this year.
Widespread dividend cuts suggest that major miners are in “survival mode.” To us, this is a key sign that commodities may be near a bottom. While prices of certain commodities could easily go lower or stay low, commodities as a group may be in a bottoming process.

Oil dropped to a new six year low yesterday.…
As we mentioned, the price of oil has now dropped 66% since June 2014. This is oil’s second-worst drop since 1985. The only bigger drop happened during the financial crisis when oil plummeted 77%.
Low oil prices are crushing the “supermajors,” four of the world’s biggest oil companies. Third quarter sales for BP (BP) fell 41%, year over year. Sales for Exxon Mobil (XOM) and Chevron (CVX) both fell 37%. And sales for Royal Dutch Shell (RDS.A) fell 36%.

All four companies have announced drastic spending cuts to cope with falling revenues. BP cut spending on capital projects by about $6 billion this year. Exxon cut spending on capital projects by 22% in the third quarter. Chevron announced 7,000 layoffs after reporting poor third quarter results. And Shell abandoned a $7 billion oil project in the Arctic. Together, these companies have cut spending by more than $30 billion in just the last few months.

Even with huge spending cuts, the supermajors are still bleeding cash….
In October, The Wall Street Journal reported:

Spending on new projects, share buybacks and dividends at four of the biggest oil companies known as the supermajors – Royal Dutch Shell PLC, BP PLC, Exxon Mobil Corp. and Chevron Corp. – outstripped cash flow by more than a combined $20 billion in the first half of 2015, according to a Wall Street Journal analysis.

However, the supermajors have NOT cut dividends yet.…
For years, supermajor dividends have been one of the safest income streams on the planet. Shell hasn’t cut its dividend since the end of World War II. Exxon has increased or maintained its dividend for 33 consecutive quarters. Chevron has done the same for 27 consecutive quarters. Many investors consider these dividends untouchable. They’re often a foundational part of their holdings, like grandma’s ring or the family farm. However, if oil keeps plummeting, these companies might have to cut their dividends.

Dividend yields for the supermajors are soaring.…
Since January, Shell’s dividend yield has jumped from 5.1% to 8.1%. It’s nearing a historic high. BP’s dividend yield has jumped from 6.5% to 8.4% over the same period. Exxon’s has jumped from 3.0% to 3.9%. And Chevron’s has jumped from 3.8% to 5.0%. These yields are not going up because the companies are increasing payouts. They’re going up because these companies’ stock prices are falling.

The world’s biggest oil companies were not prepared for oil to drop below $40.…
Financial Times reported on Tuesday: Just weeks ago, BP and France’s Total each pledged to balance their books at $60 a barrel oil, saying they aimed to cover their dividends from “organic” cash flow by 2017.
Total (TOT) is another giant oil company that’s struggling. Total’s quarterly sales have dropped four quarters in a row. If oil continues to trade below $40, these companies might have no choice but to cut their dividends. In fact, their dividends might be at risk even if oil does rebound soon.

Even at $60, the three biggest European majors will need to take further cost cutting action to cover investor payouts…Total’s $6.8bn dividend would exceed its projected organic free cash flow by $800m two years from now. For BP, the cash shortfall is put at $500m. If these giant oil companies do cut their dividends, it could trigger huge selloffs. Many investors hold these companies specifically for their reliable dividends.

The article If You Own These Stocks, Your Dividend Is in Danger was originally published at caseyresearch.com.

Chart of the Day

The bear market in oil may be far from over. Today’s chart compares the Bloomberg Commodity Index, or BCOM, to the price of oil. As we mentioned earlier, BCOM tracks 22 different commodities. Commodities and oil both peaked in 2011. BCOM entered a bear market almost immediately after. Oil, however, didn’t have a big drop until mid-2014.

In other words, commodities have been in a bear market for four years…but oil has been in a bear market for less than two years. That’s one reason why major commodity companies have cut dividends but the oil supermajors haven’t…yet. Until major oil companies begin to cut dividends, we wouldn’t bet on a bottom in oil.

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The World's First Cashless Society Is Here - A Totalitarian's Dream Come True

By Nick Giambruno

Central planners around the world are waging a War on Cash. In just the last few years:

• Italy made cash transactions over €1,000 illegal;
• Switzerland proposed banning cash payments in excess of 100,000 francs;
• Russia banned cash transactions over $10,000;
• Spain banned cash transactions over €2,500;
• Mexico made cash payments of more than 200,000 pesos illegal;
• Uruguay banned cash transactions over $5,000; and
• France made cash transactions over €1,000 illegal, down from the previous limit of €3,000.

The War on Cash is a favorite pet project of the economic central planners. They want to eliminate hand-to-hand currency so that governments can document, control, and tax everything. This is why they’re lowering the threshold for mandatory reporting of cash transactions and, in some instances, simply making it illegal to pay cash.

In the U.S., central planners ratchet up the War on Cash every time the government declares a made-up war on something else…a war on crime, a war on drugs, a war on poverty, a war on terror…..

They all end with more government intrusion into your financial affairs. Thanks to these made-up wars, the U.S. government is imposing an increasing number of regulations on cash transactions. Try withdrawing more than $10,000 in cash from your bank. They’ll treat you like a criminal or terrorist. The Federal Reserve is at the center of the War on Cash. Its weapons are inflation and control over the currency denominations.

Take the $100 note, for example. It’s the largest bill in circulation today. This was not always the case. At one point, the U.S. had $500, $1,000, $5,000, and even $10,000 notes. But the government eliminated these large notes in 1969 under the pretext of fighting the War on Some Drugs. Since then, the $100 note has been the largest. But it has far less purchasing power than it did in 1969. Decades of rampant money printing have inflated the dollar. Today, a $100 note buys less than a $20 note did in 1969.

Even though the Federal Reserve has devalued the dollar over 80% since 1969, it still refuses to issue notes larger than $100. This makes it inconvenient to use cash for large transactions, which forces people to use electronic payment methods. This, of course, is what the U.S. government wants. It’s exactly like Ron Paul said: “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

Policymakers or Central Planners?

On stories related to the War on Cash, you may have noticed that the mainstream media often uses the word “policymakers,” as in “policymakers have decided to keep interest rates at record low levels.” When the media uses “policymakers,” they are often referring to central bank officials. It’s a curious word choice. As far as I can tell, there is no difference between a policymaker and central planner. Most people who want to live in a free society agree that central planning is not a good idea. So the media uses a different word to put a more neutral spin on things.

To help you think more clearly, I suggest substituting “central planners” every time you see “policymakers.”

The World’s First Cashless Society

In 1661, Sweden became the first country in Europe to issue paper money. Now it’s probably going to be the first in the world to eliminate it. Sweden has already phased out most cash transactions. According to Credit Suisse, 80% of all purchases in Sweden are electronic and don’t involve cash. And that figure is rising. If the trend continues - and there is nothing to suggest it won’t - Sweden could soon be the world’s first cashless society.

Sweden’s supply of physical currency has dropped over 50% in the last six years. A couple of major Swedish banks no longer carry cash. Virtually all Swedes pay for candy bars and coffee electronically. Even homeless street vendors use mobile card readers. Plus, an increasing number of government restrictions are encouraging Swedes to dump cash. The pretexts are familiar…fighting terrorism, money laundering, etc. In effect, these restrictions make it inconvenient to use cash, so people don’t.

So far, Swedes have passively accepted the government and banks’ drive to eliminate cash. The push to destroy their financial privacy doesn’t seem to bother them. This is likely because the average Swede places an unreasonable amount of trust in government and financial institutions. Their trust is certainly misplaced. On top of the obvious privacy concerns, eliminating cash enables the central planners’ latest gimmick to goose the economy: Negative interest rates.

Making The Negative Interest Rate Scam Possible

Sweden, Denmark, and Switzerland all have negative interest rates. Negative interest rates mean the lender literally pays the borrower for the privilege of lending him money. It’s a bizarre, upside down concept. But negative rates are not some European anomaly. The Federal Reserve discussed the possibility of using negative interest rates in the U.S. at its last meeting. Negative rates could not exist in a free market. They destroy the impetus to save and build capital, which is the basis of prosperity.

When you deposit money in a bank, you are lending money to the bank. However, with negative rates you don’t earn interest. Instead, you pay the bank. If you don’t like that plan, you can certainly stash your cash under the mattress. As a practical matter, this limits how far governments and central banks can go with negative interest rates. The more it costs to store money at the bank, the less inclined people are to do it.

Of course, central planners don’t want you to withdraw money from the bank. This is a big reason why they want to eliminate cash…so you can’t. As long as your money stays in the bank, it’s vulnerable to the sting of negative interest rates and also helps to prop up the unsound fractional reserve banking system. If you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates...or you can spend your money.

Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy. If you ask me, these radical and insane measures are a sign of desperation. The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

Most people have no idea what really happens when a currency collapses, let alone how to prepare. How will you protect your savings in the event of a currency crisis? This just-released video will show you exactly how. Click here to watch it now.

The article was originally published at internationalman.com.

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Why Stocks Could Fall 50% if the Fed Makes the Wrong Move

By Justin Spittler

One of the most brilliant investors in the world just made a stunning call…..


Ray Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund. Dalio manages nearly $170 billion in assets. He has one of the best investing track records in the business. When he speaks, we listen. Dalio has been saying for a long time that governments and businesses around the world have borrowed far too much money. He thinks their high levels of debt have created an extremely fragile and dangerous situation.

The stats back up Dalio’s view. In the United States, government debt as a percentage of gross domestic product (GDP) is 102%...its highest level since World War II.

Countries around the world are in a similar position. Japan’s debt-to-GDP ratio is at 226% and climbing. In Italy, government debt/GDP jumped from 100% in 2007 to 132% in 2014. Dalio explained how these extreme debt levels are one reason for the recent market volatility we’ve been telling you about…

These long term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars.

•  In an article published yesterday, Dalio said the Fed should start another round of quantitative easing...…

Quantitative easing (QE) is when a central bank buys bonds or other assets to lower interest rates and boost asset prices. It’s mostly just another name for money printing. The Fed started QE in a desperate attempt to stave off disaster during the 2007-2008 financial crisis. It launched the first round in November 2008…a second round in November 2010…and a third round in September 2012. It stopped its last round of QE last October.

The first three rounds of QE fueled a big bull market in US stocks. The S&P 500 has gained 113% since the Fed started QE in 2008. Dalio thinks the Fed should bring QE back. It’s a bold call, and one that most economists disagree with. Most economists expect the Fed to raise rates soon. Raising rates would tighten monetary conditions…essentially the opposite of QE.

•  Dalio is worried the Fed won’t get it right..…

Dalio thinks the Fed will raise rates, even if it’s just to “save face.” He pointed out that the Fed has threatened to raise rates so many times that not raising rates would hurt its credibility. Dalio’s big concern is that the world is too indebted to handle a rate hike. He thinks it could cause a financial disaster like a stock market crash, or worse.

In a letter to clients earlier this year, Dalio made a comparison to 1937, when the world was in a similar situation of having way too much debt. He explained that the Fed made a huge mistake by raising rates, and it caused the stock market to plummet 50%.

The danger is that something similar could happen if the Fed raises rates today.

•  We asked Dan Steinhart, executive editor of Casey Research, for his take..…

Here’s his response…...

I don’t know what the Fed’s going to do. That’s a guessing game. What’s important is Dalio’s point that we’re in an extremely fragile situation. The world has too much debt, and the Fed’s margin for error is tiny. If it takes a wrong step and stocks plummet 50%, it could cause a bigger financial crisis than in 2008.

So the real question is, do you trust the US government and the Fed to manage this dangerous situation?

I don’t. This is the same Fed that blew two huge bubbles in the last twenty years. First the 1999 tech bubble…then the even bigger housing bubble, which almost took down the whole financial system when it popped in 2007.

And keep in mind – this is all a gigantic experiment. The Fed is using tools, like QE, that it had never used before the financial crisis. No one in the Fed, the US government, or anywhere else knows how this is going to work out.

Who knows…maybe the Fed will surprise us and successfully guide the economy through this dangerous period. But that’s not an outcome I’d bet my savings on. Dan went on to explain two things you can do to prepare for another financial crisis. One, own physical gold. Unlike stocks, bonds, or cash, it’s the only financial asset that has value no matter what happens to the financial system.

Two, put some of your wealth outside the “blast radius” of a financial crisis. We wrote a new book with all of our best advice on how to do this. And we’ll send it to you today for practically nothing…we just ask you to pay $4.95 to cover our processing costs. Click here to claim your copy.

The article Why Stocks Could Fall 50% if the Fed Makes the Wrong Move was originally published at caseyresearch.com.

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The Next Silver Bull May Have Already Started

By Laurynas Vegys

Silver is down 7.1% this year. Will this weakness persist? To find out, let’s look at the key factors in the silver market this year.

• Like gold, silver fell as the US dollar rose on the back of expectations that the Fed will hike rates.
• World demand for physical silver fell 4% in 2014, largely due to a record 19.5% drop in investment demand.
• Silver exchange traded funds (ETFs) did not see big liquidations in 2014. ETF holdings grew by 1.4 million ounces and recorded their highest year end level at 636 million ounces.

The first two factors helped push silver 19.9% lower last year. That’s more than gold or any other precious metal fell. Despite this, silver production rose 5% in 2014. That added to the pressure on prices.

Why did miners produce more silver when prices were falling? Because of:

• By-product metal. Around 75% of the silver mined is a by-product at gold or base metal mines. These producers will keep mining silver, almost regardless of price.
• Reduced cash costs. The primary silver producers have cut costs since they peaked in 2012. The main way miners do that is by boosting production to achieve economies of scale.
• Bull market hangover. Precious metals were in a major bull market from 2001 to 2011. Producers built a lot of mines in response. Nobody wants to pull the plug on a new mine that’s losing money if they think prices will go higher.

That’s the backdrop. Now let’s look at this year’s fundamentals.

Supply

Silver mine output has risen for 12 consecutive years (silver mine supply is a little different, due to hedging, but also trending upward). This year could break this trend. Industry experts at GFMS forecast up to a 4% decline in silver output in 2015. Why? It’s not rocket science. There are now fewer major new mines under construction due to lower metals prices. That leaves scrap supply. But scrap comes from jewelry, and sellers are price sensitive. People like to sell granny’s silver tea set when prices are up. We expect subdued scrap supply until silver heads much higher.

Demand

Investment demand - that’s us - is a big chunk of total silver demand: 18.4% as of the latest figures.
There was a big drop in investment demand last year: 19.5%. This tells us that most short-term investors and sellers have left the market. We don’t know any “silver bugs” who were selling. That means that today’s bullion is in stronger hands. And that means that any new buying will have a strong impact on prices.
But will there be buyers?

The Silver Institute expects more silver demand from investors this year. They say that the first half of 2015 sales of silver bars were the fifth highest on record.

Photovoltaics (PV) is another source of silver demand that many analysts expect to rise in 2015 and beyond. Global PV demand is set to increase by 30% in 2015, according to IHS analysts. China alone has plans to install 17 gigawatts of solar capacity by the end of the year.

The solar industry consumes a small amount of silver compared to jewelry and other electronics. Yet, if PV demand delivers in 2015, it will become the third-largest source of fabrication demand for silver.

Wildcard: Tesla plans to put batteries big enough to power a house in every home. What happens if that takes root is anyone’s guess… but it will be big. Really big. And the impact on demand for silver would be just as huge.

The Deficit

Silver supply went into deficit during much of the big run up from 2001 to 2011. That may happen again. Silver Institute expects the silver supply deficit to grow to 57.7 million ounces in 2015. (Note that even if physical mine supply is up, net supply can be down if a lot of the mine supply was forward sold as hedges.) If the institute is right, it’ll be bullish for silver prices.

The Dollar and the Fed

We believe the dollar is grossly overvalued, and we are not alone. HSBC thinks the greenback’s rise since 2014 could be in its final stage. For the three months between April and June, the US dollar fell against every developed-market currency (save for the yen and the New Zealand dollar).

Many investors seem convinced that the Fed will raise interest as soon as September. We view this as unlikely at this stage. Yes, tightening US monetary policy would propel the dollar to new highs. But an even stronger dollar would mean slicing billions off the US GDP; not exactly a desirable situation from the standpoint of the Fed given the sluggish growth of the economy.  We think the Fed could delay raising rates until 2016. It might even stop talking about rate hikes indefinitely. Each delay, the dollar will get whacked, and that’s good for precious metals.

On the other hand, if the Fed does nudge rates higher this year, it would likely dampen the stock market. That would increase demand for silver and gold. This could push silver prices much higher, given the small size of the market.

The Gold-Silver Ratio

The gold-silver ratio (GSR) tells you how many ounces of silver you need to buy one ounce of gold. The record shows that the GSR often surges during a recession. (See the shaded areas on the chart below.)

Silver is about 17 times more abundant than gold in the earth’s crust. Silver and gold prices were close to this ratio for most of history. These facts make many investors think that the GSR should be 17-to-1 and that eventually it will be.

They may be right, but we’ve never found the GSR to be a strong predictor of gold or silver prices. To us, the GSR “suggests a lot but proves nothing.”

Conclusion

The fundamentals are positive for silver in 2015: less mine supply, and the healthy demand we already see is bullish. The greater demand that’s possible could create a real supply crunch. As a result, we expect silver to hold on throughout 2015 and perhaps even increase faster than gold, if the whole precious metals sector turns positive this year.

As for guessing the future, we have no crystal ball. We can say that Louis’ case for 2015 as a win-win year for silver is backed by the numbers.

P.S. If silver moves off its current level of $15 and into the $20 or $30 areas, silver investors could make large gains. But owners of a unique silver-related security could make gains that are five... 10... even 100 times greater. And right now is a once-in-a-decade chance to buy them very, very cheap.

Our friends at Casey Research are the world’s leading experts in this sector. And they’re EXTREMELY bullish on this rare opportunity. Read on here for details.

The article The Next Silver Bull May Have Already Started was originally published at caseyresearch.com.

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Shoot the Dog and Sell the Farm

By John Mauldin 

“If this were a marriage, the lawyers would be circling.”

The Economist, My Big Fat Greek Divorce, 6/20/2015

Greece is again all the buzz in the media and on the commentary circuit. If you’re like me, you are suffering terminal Greece fatigue. You just want Greece and its creditors to “do something already” rather than continually coming to the end of every week with no resolution, amid finger pointing and dire warnings from all sides about the End of All Things Europe – maybe even the world.

That frustration is a common human emotion. Perhaps the best and funniest illustration (trust me, it is worth a few minutes’ digression) is the story about one of my first investment mentors, Gary North, who was working in his early days for Howard Ruff in Howard’s phone call center before Gary began writing his newsletters and books. (Yes, I know I am dating myself, as this was the late ’70s and early ’80s, just as I was getting introduced to the investment publishing business. And for the record, I knew almost everyone in the publishing business in the ’80s. It was a very small group, and we got together regularly.)

Howard set up a phone bank where his subscribers could call in and ask questions about their investments and personal lives. One little lady had the misfortune to get Dr. Gary North on the line. (Gary was the economist for Congressman Ron Paul and went on to write it some 61-odd books, 13,000 articles, and more – all typed with one finger. He is a human word processing machine.)

This sweet lady lived way out in the country and was getting older. She asked Gary if he thought it would be a wise idea for her to move into the city (I believe it was San Francisco) to live with her daughter. Not knowing the answer, Gary helped her work out the pros and cons over the phone, and she decided to move. A few days later she called back and said that she couldn’t bring her dog with her because of the rules at her daughter’s apartment. It turns out she couldn’t live without her dog, so Gary helped her come to the conclusion that she could stay in the country.

A few days later she called him back asking whether she should change her mind, and Gary once again help her to come to a conclusion. This went on for several weeks, back and forth, move or not move, dog or no dog. Finally she called one last time. Gary, in utter exasperation and not being infinitely tolerant of indecisive people, said, “Look lady, just shoot the dog and sell the farm.” (For the record, I hope she didn't really shoot the dog. I like dogs.)

That is where most of us are with the Europeans and Greeks. I have devoted a great deal of space in this letter to Greece over the past five years and have visited the country and corresponded with many analysts and citizens about the situation. And while I want to briefly outline the Greek situation again today, as there are some subtle nuances to consider, I think this juncture is a teaching moment about the larger picture in Europe. In fact, watching this process, I have come to change my mind about the timing of what I see is the endgame for Europe and European sovereign debt. I think exploring that issue will make for an interesting letter.

Economic crises go through cycles. Here’s a chart from the clever folks at Valuewalk.com (via my friend Jonathan Tepper on Twitter).



https://twitter.com/valuewalk/status/612948290267688960

The Greek situation is presently caught in those two bubbles on the bottom. European leaders held summit meetings this week to consider new breakthrough concessions offered by Greek Prime Minister Alexis Tsipras. Let the champagne flow. Except those concessions were rejected, and the Greeks rejected the counteroffer as of this afternoon. But it’s not quite midnight yet.

Unfortunately, the wheel of debt never stops turning. If this solution is like countless others floated in the last five years, we will soon learn that it has no substance or simply won’t work. We will then reenter the crisis phase.

Every cycle breaks eventually. If you forget everything that’s happened to this point and re-imagine the crisis as an economic standoff between Greece and Germany, you have to say Germany will win. It outweighs tiny Greece in every possible category. The real question is why Germany let the fight go on this long. We will deal with that in a minute.

Note that this observation isn’t about which country should win; it is about who will win. Greece has some legitimate grievances. Unfortunately, these grievances aren’t going to matter in the end.

Poster Children for European Profligacy

My friend David Zervos of Jefferies & Co. has no doubt who will win. He sent me this note on June 17.

The bell is tolling for Alexis [Tsipras]. European leaders from all sides have abandoned him as he burns through every last bridge that was once in place. His only meeting of importance during this crucial week of negotiation is with Putin – which clearly does not inspire any confidence for a near term resolution. 

It is actually amazing that we have not seen any of the left-leaning party leaders from the rest of Europe running to Tsipras’ side as he truculently engages his paymasters. Where are all these European anti-austarians? Of course they are hiding from the Germans, hoping not to receive the same fate as Alexis. So there he sits, alone and under his last Soviet held bridge, just like Hemingway's Robert Jordan. He is waiting to cause just a little more damage before his time is up. 

In the end, there is no question that the Germans have executed a near flawless plan to humiliate and vilify Greece. The Greeks now stand as poster children for European profligacy. And they are being paraded through every town square in the EU, in shackles, as the bell tolls near the gallows for their leader. And to be sure, making an example of Greece is a probably the greatest achievement for the fiscal disciplinarians of Europe. Maastricht never had any teeth. But this exercise is impressive. It shows that fiscal excess will be squashed in Europe. The Portuguese, Spanish, and Italians are surely taking notice. And in the days that lead up to a Greek default on 30 June, and then more importantly on 20 July, these disciplinarians will surely display their power for all to see.

Oddly enough, I actually think this has been the German plan all along. With no real way to ensure fiscal discipline through the treaty, they resorted to killing one of their own in order to keep the masses in line. It explains why Merkel took out Samaras when she knew a more hostile government would surely emerge in Greece. This was masterful political manipulation.

The 1992 Maastrict Treaty created the European Union and led a few years later to the euro currency. Which I said at the time would be a disaster. And it has been. Leaders have been wrestling with its fundamental flaw almost from the beginning. The EU has no way to enforce fiscal standards on its member nations. The member nations likewise have no way to devalue the currency in their own favor. This can’t go on forever – and it won’t.

Germany, by virtue of its sheer size and its favored position in the bureaucratic scheme of things, grew wealthy partly by exporting to the European periphery: Greece, Italy, Spain, Portugal, and Ireland. (The rest of their 40–50% of exports of GDP come from exporting to the rest of Europe and the world. They have benefited massively from a currency that has been and continues to be weaker than it would be if it were just a German currency.)

The peripheral countries essentially exported all their cash to Germany (and to some extent northern Europe) in exchange for German goods. When they ran out of cash, not just because of their purchase of export goods but because of the uncompetitive nature of their bureaucratic and labor systems and the rather large unfunded government expenditures, they wanted yet more cash to continue to spend on government services.

Germany and the rest of Europe offered vendor financing. German and the rest of European banks loaned money to Greeks so the Greeks could buy German goods and perpetuate their government spending habits. In the early part of the last decade, tt was a deal that was seemingly made in heaven as Greece got to borrow money at German rates and Germany got to sell products in a currency driven by the valuation of the peripheral countries.

This arrangement left Greece and the other PIIGS deep in debt. Much like the American homeowners who lived beyond their means, Greece found itself overleveraged and undercapitalized. And here we are.
To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Shoot the Dog and Sell the Farm was originally published at mauldineconomics.com.

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Prove You’re Not a Terrorist

By Jeff Thomas

Recently, France decided to crack down on those people who make cash payments and withdrawals and who hold small bank accounts. The reason given was, not surprisingly, to “fight terrorism,” the handy catchall justification for any new restriction governments wish to impose on their citizens. French Finance Minister Michel Sapin stated at the time, “terrorism feeds on fraud, money laundering, and petty trafficking.”

And so, in future, people in France will not be allowed to make cash payments exceeding €1,000 (down from €3,000). Additionally, cash deposits and withdrawals totaling more than €10,000 per month will be reported to Tracfin—an anti-fraud and money laundering agency. Currency exchange will also be further restricted. Anyone changing over €1,000 to another currency (down from €8,000) will be required to show an identity card.

Do you need to make a deposit on a car? That might be suspect. Did you just deposit a dividend you received? It might be a payment from a terrorist organisation. Planning a holiday and need some cash? You might need to be investigated for terrorism. And France is not alone. In the US, federal law requires banks to file a “suspicious activity report” (SAR) on their customers whenever a customer requests a suspicious transaction. (In 2013, 1.6 million SAR’s were submitted.)

As to what may be deemed “suspicious,” it may be any transaction of $5,000 or more, but it may also mean a series of transactions that, together, exceed $5,000. The reader may be saying to himself, “But that’s just normal, everyday banking business—that means anybody, any time, could be reported.” If so, he would be correct. Essentially, any banking activity the reader conducts could be regarded as suspect.

In Italy, in 2011, Prime Minister Mario Monti began working to end the right of landlords, tradesmen, and small businesses to perform large transactions in cash, which critics say help them evade taxation. In December of that year, his government reduced the maximum allowed cash payment from €2,500 euros to €1,000.

Spain has outlawed cash transactions over €2,500. The justification? “To crack down on the black market and tax evaders.”

In Sweden, the country where the first banknote was created in 1661, the use of cash is being steadily eliminated. Increasingly, expenses are paid and purchases made by cellphone text message, and many banks have stopped handling cash altogether.

Denmark’s central bank, Nationalbanken, has another justification for ending its use of banknotes—producing paper money and coinage is not cost effective.

Israel also seeks to end the use of cash. Prime Minister Benjamin Netanyahu’s chief of staff has announced a three phase plan to “all but do away with cash transactions in Israel.”

Individuals and businesses would initially continue to be allowed to make small cash transactions, but eventually, all transactions would be converted to electronic forms of payment. The justification being used in Israel is that “cash is bad,” because it encourages an underground economy and enables tax evasion.

Across the Atlantic, banks and governments are on a similar campaign. A 2012 law in Mexico bans large cash transactions, with a maximum penalty of five years in prison.

In August 2014, Uruguay passed the Financial Inclusion Law, which limits cash transactions to US$5,000. In future, all transactions over that amount will be required to be performed electronically. The crying need for such a law? The stated reason was to improve the country’s credit ratings.

The Elimination of Paper Currency

In recent years, in commenting on the inevitability of currency collapse in those countries that are indebted beyond the possibility of repayment, I’ve made the prediction that governments and banks would jointly resort to the elimination of paper currency and replace it with an electronic one.

Some readers have understandably regarded the prediction as “alarmist.” After all, the idea is so farfetched—paper currency may be conceptually flawed, but it’s been around for a long time. But banks and governments seek total control of money, and this can only be achieved if they possess a monopoly on the flow of money.

If a worldwide system can be implemented in which currency transactions can only take place electronically through banking institutions, the banks will then have total power over the ability of a people to function economically. But why would any government allow the banks such dictatorial monetary control? The answer is that governments would then realise a long held, but heretofore impossible dream: to have access to a record of every monetary transaction that takes place for every single individual.

Governments have been both more proactive and bolder than I had anticipated and are simply imposing the restrictions worldwide under the justifications previously stated. As yet, there hasn’t been any backlash, and it may be that people worldwide may simply swallow the pill, not understanding what it means to their economic liberty.

If the public are not treating the new system as serious business, governments most assuredly are. Bankers on both sides of the Atlantic have forcibly become unpaid government spies. If they don’t comply, they can be fined and/or lose their banking charter. Directors can be imprisoned.

The US Justice Department already wants to take this overreach even further. Banks are now being asked to call the authorities whenever something “suspicious” occurs, presumably so that immediate action may be taken. What we are witnessing is the creation of totalitarian control of your finances. The implication that you may have some sort of terrorist involvement is a smokescreen.

As the above information attests, if for any reason you object to any of these measures, you have already been forewarned—you may be suspected of money laundering, tax evasion, or even terrorism. If you use cash for any reason—to pay your rent, to buy a used car, or (soon) to pay for your lunch—you may trigger an investigation. (The onus of proof that you are not guilty good will be on you.)

The take away from this discussion? Totalitarian control of currency is an inevitability, and it will take place sooner rather than later. The only question is whether the reader can retain some control of his wealth. Fortunately, wealth may still be held in land and precious metals, but these are only safe if they’re held outside a country that seeks totalitarian rule over its people. The ability to retain wealth still exists and, as always, internationalisation remains a key element to its continuation.

Editor’s Note: The ultimate way to diversify your savings internationally is to transfer it out of the immediate reach of your home government. And we've put together an in depth video presentation to help you do just that. It's called, "Internationalizing Your Assets."

Our all star panel of experts, with Doug Casey and Peter Schiff, provide low cost options for international diversification that anyone can implement - including how to safely set up foreign storage for your gold and silver bullion and how to move your savings abroad without triggering invasive reporting requirements. This is a must watch video for any investor and it's completely free.

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The article was originally published at internationalman.com

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What Top Hedge Fund Managers Really Think About Gold

By Jeff Clark, Senior Precious Metals Analyst

In the January BIG GOLD, I interviewed a plethora of experts on their views about gold for this year. The issue was so popular that we decided to republish a portion of the edition here.

Given their level of success, these fund managers are worth listening to: James Rickards, Chris Martenson, Steve Henningsen, Grant Williams, and Brent Johnson. Some questions are the same, while others were tailored to their particular expertise.

I hope you find their comments as insightful and useful as I did…...

James Rickards is chief global strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He is the author of the New York Times best  seller The Death of Money and the national best seller Currency Wars.

He’s a portfolio manager, lawyer, and economist, and has held senior positions at Citibank, Long Term Capital Management (LTCM), and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. He’s an op-ed contributor to the Financial Times, Evening Standard, New York Times, and Washington Post, and has been interviewed by the BBC, CNN, NPR, C-SPAN, CNBC, Bloomberg, Fox, and the Wall Street Journal.

Jeff: Your book The Death of Money does not paint an optimistic economic picture. What will the average citizen experience if events play out as you expect?

James: The end result of current developments in the international monetary system will almost certainly be high inflation or borderline hyperinflation in US dollars, but this process will take a few years to play out, and we may experience mild deflation first. Right now, global markets want to deflate, yet central banks must achieve inflation in order to make sovereign debt loads sustainable. The result is an unstable balance between natural deflation and policy inflation. The more deflation persists in the form of lower prices for oil and other commodities, the more central banks must persist in monetary easing. Eventually inflation will prevail, but it will be through a volatile and unstable process.

Jeff: The gold price has been in a downtrend for three years. Is the case for gold over? If not, what do you think kick-starts a new bull market?

James: The case for gold is not over—in fact, things are just getting interesting. I seldom think about the “price” of gold. I think of gold as money and everything else as a price measured in gold units. When the dollar price of gold is said to be “down,” I think of gold as a constant store of value and that the dollar is simply “up” in the sense that it takes more units of gold to buy one dollar. This perspective is helpful, because gold can be “down” in dollars but “up” in yen at the same time, and often is when the yen is collapsing against the dollar.

The reason gold is thought to be “down” is because the dollar is strong. However, a strong dollar is deflationary at a time when the Fed’s declared policy is to get inflation. Therefore, I expect the Fed will not raise interest rates in 2015 due to US economic weakness and because they do not want a stronger dollar. When that realization sinks in, the dollar should move lower and gold higher when measured in dollar terms.

The looming global shortage of physical gold relative to demand also presages a short squeeze on the paper gold edifice of futures, options, unallocated forward sales, and ETFs. The new bull market will be kick started when markets realize the Fed cannot raise rates in 2015 and when the Fed finds it necessary to do more quantitative easing, probably in early 2016.

Jeff: Given what you see coming, how should the average retail investor position his or her portfolio?

James: Since risks are balanced between deflation and inflation in the short run, a sound portfolio should be prepared for both. Investors should have gold, silver, land, fine art, and other hard assets as an inflation hedge. They should have cash and US Treasury 10-year notes as a deflation hedge. They should also include some carefully selected alternatives, including global macro hedge funds and venture capital investments for alpha. Investors should avoid emerging markets, junk bonds, and tech stocks.

Steve Henningsen is chief investment strategist and partner at The Wealth Conservancy in Boulder, CO, a firm that specializes in wealth coaching, planning, and investment management for inheritors focused on preservation of capital. He is a lifetime student, traveler, fiduciary, and skeptic.

Jeff: The Fed and other central banks have kept the economy and markets propped up longer than some thought they could. How much longer do you envision them being able to do so? Or has the Fed really staved off crisis?

Steve: I do not believe we are under a new economic paradigm whereupon a nation can resolve its solvency problem via increasing debt. As to how long the central banks’ plate spinning can defer the consequences of the past 30-plus years of excess credit growth, I hesitate to answer, as I never thought they would get this far without breaking a plate. However incorrect my timing has been over the past two years, though, I am beginning to doubt that they can last another 12 months. Twice in the last few months the stock market plates began to wobble, only to have Fed performers step in to steady the display.

With the end of QE, a slowing global economy, a strengthening dollar, and the recent sharp drop in oil prices, deflationary winds are picking up going into 2015, making their balancing act yet more difficult. (Not to mention increasing tension from poking a stick at the Russian bear.)

Jeff: Gold has been in decline for over three years now. What changes that? Should we expect gold to remain weak for several more years?

Steve: I cannot remember an asset more maligned than gold is currently, as to even admit one owns it receives a reflexive look of pity. While most have left our shiny friend bloodied, lying in the ditch by the side of the road, there are signs of resurrection. While I’m doubtful gold will do much in the first half of 2015 due to deflationary winds and could even get dragged down with stocks should global liquidity once again dissipate, I am confident that our central banks would again step in (QE4?) and gold should regain its luster as investors finally realize the Fed is out of bullets.

The wildcard I’m watching is the massive accumulation of gold (and silver) bullion by Russia, China, and India, and the speculation behind it. Should gold be announced as part of a new monetary system via global currency or gold-backed sovereign bond issuance, then gold’s renaissance begins.

Jeff: Given what you see coming, how should the average investor position her or his portfolio?

Steve: Obviously I am holding on to our gold bullion positions, as painful as this has been. I would also maintain equity exposure via investment managers with the flexibility to go long and short. I believe this strategy will finally show its merits vs. long-only passive investments in the years ahead. I believe that for the next 6-12 months, long-term Treasuries will help balance out deflationary risks, but they are definitely not a long-term hold. Maintaining an above average level of cash will allow investors to take advantage of any equity downturns, and I would stay away from industrial commodities until the deflationary winds subside.
Precious metals equities could not be hated more and therefore represent the best value if an investor can stomach their volatility.

Grant Williams is the author of the financial newsletter Things That Make You Go Hmmm and cofounder of Real Vision Television. He has spent the last 30 years in financial markets in London, Tokyo, Hong Kong, New York, Sydney, and Singapore, and is the portfolio and strategy advisor to Vulpes Investment Management in Singapore.

Jeff: The Fed and other central banks have kept the economy and markets propped up longer than some thought possible. How much longer do you envision them being able to do so? Or has the Fed really staved off crisis?

Grant: I have repeatedly referred to a singular phenomenon over the past several years and it bears repeating as we head into 2015: for a long time, things can seem to matter to nobody until the one day when they suddenly matter to everybody. It feels as though we have never been closer to a series of such moments, any one of which has the potential to derail the narrative that central bankers and politicians have been working so hard to drive.

Whether it be Russia, Greece, the plummeting crude oil price, or a loss of control in Japan, there are a seemingly never-ending series of situations, any one (or more) of which could suddenly erupt and matter to a lot of people at the same time. Throw in the possibility that a Black Swan comes out of nowhere that nobody has thought about (even something as seemingly trivial as the recent hack of Sony Pictures by the North Koreans could set in motion events which can cascade very quickly in a geopolitical world which has so many fissures running through it), and you have the possibility that fear will replace greed overnight in the market’s collective psyche. When that happens, people will want gold.

The issue then becomes where they are going to get it from. Physical gold has been moving steadily from West to East despite the weak paper prices we have seen for the last couple of years, and this can continue until there is a sudden wider need for gold as insurance or as a currency. When that day comes, the price will move sharply from being set in the paper market—where there is essentially infinite supply—to being set in the physical markets where there is very inelastic supply and the existing stock has been moving into strong hands for several years. Materially higher prices will be the only way to resolve the imbalance.

Jeff: You’ve written a lot about the gold market over the past few years. In your view, what are the most important factors gold investors should keep in mind right now?

Grant: I think the key focus should be on two things: first, the difference between paper and physical gold; and second, on the continuing drive by national banks to repatriate gold supplies. The former is something many people who are keen followers of the gold markets understand, but it is the latter which could potentially spark what would, in effect, be a run on the gold “bank.” Because of the mass leasing and rehypothecation programs by central banks, there are multiple claims on thousands of bars of gold. The movement to repatriate gold supplies runs the risk of causing a panic by central banks.

We have already seen the beginnings of monetary policy divergence as each central bank begins to realize it is every man for himself, but if that sentiment spreads further into the gold markets, it could cause mayhem.
Keep a close eye on stories of further central bank repatriation—there is a tipping point somewhere that, once reached, will light a fire under the physical gold market the likes of which we haven’t seen before, and that tipping point could well come in 2015.

Jeff: Given what you see coming, how should the average investor position his or her portfolio?

Grant: Right now I think there are two essentials in any portfolio: cash and gold. The risk/reward skew of being in equity markets in most places around the world is just not attractive at these levels. With such anemic growth everywhere we turn, and while it looks for all the world that bond yields are set to continue falling, I think the chances of equities continuing their stellar run are remote enough to make me want out of equity markets altogether.

There are pockets of value, but they are in countries where the average investor is either disadvantaged due to a lack of local knowledge and a lack of liquidity, or there is a requirement for deep due diligence of the kind not always available to the average investor.

The other problem is the ETF phenomenon. The thirst for ETFs in order to simplify complex investing decisions, as well as to throw a blanket over an idea in order to be sure to get the “winner” within a specific theme or sector, is not a problem in a rising market (though it does tend to cause severe value dislocations amongst stocks that are included in ETFs versus those that are not). In a falling market, however, when liquidity is paramount, any sudden upsurge of selling in the ETF space will require the underlying equities be sold into what may very well be a very thin market.

In a rising market, there is always an offer. In a falling market, bids can be hard to come by and in many cases, nonexistent, so anybody expecting to divest themselves of ETF positions in a 2008 like market could well find themselves with their own personal Flash Crash on their hands.

Unlevered physical gold has no counterparty risk and has sustained a bid for 6,000 straight years (and counting). Though sometimes, in the wee small hours, those bids can be both a little sparse and yet strangely attractive to certain sellers of size.

Meanwhile, a healthy allocation to cash offers a supply of dry powder that can be used to gain entry points which will hugely amplify both the chances of outperformance and the level of that performance in the coming years.

Remember, you make your money when you buy an asset, not when you sell it.

Caveat emptor.

Chris Martenson, PhD (Duke), MBA (Cornell), is an economic researcher and futurist who specializes in energy and resource depletion, and is cofounder of Peak Prosperity. As one of the early econobloggers who forecasted the housing market collapse and stock market correction years in advance, Chris rose to prominence with the launch of his seminal video seminar, The Crash Course, which has also been published in book form.

Jeff: The Fed and other central banks have kept the economy and markets propped up longer than some thought possible. How much longer do you envision them being able to do so? Or has the Fed really staved off crisis?

Chris: Well, if people were being rational, all of this would have stopped a very long time ago. There’s no possibility of paying off current debts, let alone liabilities, and yet “investors” are snapping up Italian 10 year debt at 2.0%! Or Japanese government bonds at nearly 0% when the total debt load in Japan is already around $1 million per rapidly aging person and growing. I cannot say how much longer so called investors are willing to remain irrational, but if pressed I would be very surprised if we make it past 2016 without a major financial crisis happening.

Of course, this bubble is really a bubble of faith, and its main derivative is faith based currency. And it’s global. Bubbles take time to burst roughly proportional to their size, and these nested bubbles the Fed and other central banks have engineered are by far the largest ever in human history.

As always, bubbles are always in search of a pin, and we cannot know exactly when that will be or what will finally be blamed. All we can do is be prepared.

Jeff: If deflationary forces pick up, how do you expect gold to perform?

Chris: Badly at first, and then spectacularly well. It’s like why the dollar is rising right now. Not because it’s a vastly superior currency, but because it’s the mathematical outcome of trillions of dollars’ worth of US dollar carry trades being unwound. So the first act in a global deflation is for the dollar to rise. Similarly, the first act is for gold to get sold by all of the speculators that are long and need to raise cash to unwind other parts of their trade books.

But the second act is for people to realize that the institutions and even whole nation states involved in the deflationary mess are not to be trusted. With opaque accounting and massive derivative positions, nobody will really know who is solvent and who isn’t. This is when gold gets “rediscovered” by everyone as the monetary asset that is free of counterparty risk—assuming you own and possess physical bullion, of course, not paper claims that purport to be the same thing but are not.

Jeff: Given what you see coming, how should the average investor position her or his portfolio?

Chris: Away from paper and toward real things. If the outstanding claims are too large, or too pricey, or both, then history is clear; the perceived value of those paper claims will fall.

My preferences are for land, precious metals, select real estate, and solid enterprises that produce real things. Our view at Peak Prosperity is that deflation is now winning the game, despite everything the central banks have attempted, and that the very last place you want to be is simply long a bunch of paper claims.

However, before the destruction of the currency systems involved, there will be a final act of desperation by the central banks that will involve printing money that goes directly to consumers. Perhaps it will be tax breaks or even rebates for prior years, or even the direct deposit of money into bank accounts.

When this last act of desperation arrives, you’ll want to be out of anything that looks or smells like currency and into anything you can get your hot little hands on. This may include equities and other forms of paper wealth—just not the currency itself. You’ll want to run, not walk, with a well-curated list of things to buy and spend all your currency on before the next guy does.

We’re not there yet, but we’re on our way. Expect the big deflation to happen first and then be alert for the inevitable central bank print a thon response.

Because of this view, we believe that having a very well balanced portfolio is key, with the idea that now is the time to either begin navigating toward real things, or to at least have that plan in place so that after the deflationary impulse works its destructive magic, you are ready to pounce.

Brent Johnson is CEO of Santiago Capital, a gold fund for accredited investors to gain exposure to gold and silver bullion stored outside the United States and outside of the banking system, in addition to precious metals mining equities. Brent is also a managing director at Baker Avenue Asset Management, where he specializes in creating comprehensive wealth management strategies for the individual portfolios of high-net-worth clients. He’s also worked at Credit Suisse as vice president in its private client group, and at Donaldson, Lufkin & Jenrette (DLJ) in New York City.

Jeff: The Fed and other central banks have kept the economy and markets propped up longer than some thought possible. How much longer do you envision them being able to do so? Or has the Fed really staved off crisis?

Brent: As much as I dislike the central planners, from a Machiavellian perspective you really have to give them credit for extending their influence for as long as they have. I wasn’t surprised they could engineer a short-term recovery, and that’s why, even though I manage a precious metals fund, I don’t recommend clients put all their money in gold. But I must admit that I have been surprised by the duration of the bull market in equities and the bear market in gold. And while I probably shouldn’t be, I’m continually surprised by the willingness of the investing public to just accept as fact everything the central planners tell them. The recovery is by no means permanent and is ultimately going to end very, very badly.

But I don’t have a crystal ball that tells me how much longer this movie will last. My guess is that we are much closer to the end than the beginning. So while they could potentially draw this out another year, it wouldn’t surprise me at all to see it all blow up tomorrow, because this is all very much contrived. That’s why I continue to hold gold. It is the ultimate form of payment and cannot be destroyed by either inflation, deflation, central bank arrogance, or whatever other shock exerts itself into the markets.

Jeff: As a gold fund manager, you’ve watched gold decline for over three years now. What changes that? And when? Should we expect gold to remain weak for several more years?

Gold has been in one of its longest bear markets in history. Many of us in the gold world must face up to this. We have been wrong on the direction of gold for three years now. Is this due to bullion banks trying to maximize their quarterly bonuses by fleecing the retail investor? Is it due to coordination at the central bank level to prolong the life of fiat currency? Is it due to the Western world not truly understanding the power of gold and surrendering our bullion to the East? I don’t know… maybe it’s a combination of all three. Or maybe it’s something else altogether.

What I do know is that gold is still down. Now the good news is… that’s okay. It’s okay because it isn’t going to stay down. The whole point of investing is to arbitrage the difference between price and value. And right now there remains a huge arbitrage to exploit. As Jim Grant said, “Investing is about having people agree with you… later.”

Now all that said, I realize it hasn’t been a fun three years. This isn’t a game for little boys, and I’ve felt as much pain as anyone. I think the trend is likely to change when the public’s belief in the central banks starts coming into question. We are starting to see the cracks in their omnipotence. For the most part, however, investors still believe that not only will the central banks try to bail out the markets if it comes to that, but they also still believe the central banks will be successful when they try. In my opinion, they are wrong.

And there are several catalysts that could spark this change—oil, Russia, other emerging markets, or the ECB and Japan monetizing the debt. This “recovery” has gone on for a long time. But from a mathematical perspective, it simply can’t go on forever. So as I’ve said before, if you believe in math, buy gold.

Jeff: Given what you see coming, how should the average investor position her or his portfolio?

Brent: The answer to this depends on several factors. It depends on the investor’s age, asset level, income level, goals, tolerance for volatility, etc. But in general, I’m a big believer in the idea of the “permanent portfolio.” If you held equal parts fixed income, equities, real estate, and gold over the last 40 years, your return is equal to that of the S&P 500 with substantially less volatility. And this portfolio will perform through inflation, deflation, hyperinflation, collapse, etc.

So if you are someone who is looking to protect your wealth without a lot of volatility, this is a very strong solution. If you are younger, are trying to create wealth, and have some years to ride out potential volatility, I would skew this more toward a higher allocation to gold and gold shares and less on fixed income, for example.

Because while I generally view gold as insurance, this space also has the ability to generate phenomenal returns and not just protect wealth, but create it. But whatever the case, regardless of your age, level of wealth, or world view, the correct allocation to gold in your portfolio is absolutely not zero. Gold will do phenomenally well in the years ahead, and those investors who are willing to take a contrarian stance stand to benefit not only from gold’s safety, but also its ability to generate wealth.

One other thing to remember about gold is that while it may be volatile, it’s not risky. Volatility is the fluctuation in an asset’s daily/weekly price. Risk is the likelihood of a permanent loss of capital. And with gold (in bullion form), there is essentially no chance of a permanent loss of capital. It is the one asset that has held its value not just over the years, but over the centuries. I for one do not hold myself out as being smarter than thousands of years of collective global wisdom. If you do, I wish you the best of luck!

Of course, bullish signs for gold have been mounting, which begs the question: could the breakthrough for the gold market be near?

Well, no one knows for sure. But what we do know is that when the market recovers, the handful of superb mining stocks that have survived the slaughter won’t just go up—they’ll go vertical.

Which is why we're hosting a free online event called, GOING VERTICAL, headlined by a panel of eight top players in the precious metals sector, names you'll no doubt recognize. Each of our guests give their assessment on where the gold market is right now, how long it will take to recovery, and what practical steps you need to take to prepare including - which stocks you should own now.

This free video event will air March 10th, 2pm Eastern time. To make sure you don't miss it, click here to register now.

The article What Top Hedge Fund Managers Really Think About Gold was originally published at caseyresearch.com.

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Using Stock Buybacks to Mask Deep Business Problems

By Tony Sagami

Stock buybacks are always a good thing… right? That’s what the mass media has trained investors to believe, but there are times when stock buybacks are a horrible strategy.

Let’s take a look at Herbalife, which has had very visible news items as billionaires like Carl Icahn, George Soros, Daniel Loeb, and Bill Ackman publicly debate the future of the company.



Herbalife shares have lost more than half their value in 2014 because of a Federal Trade Commission investigation and a big drop in profits. 50% is a huge haircut, but I believe Herbalife is poised for even more pain.

Rapidly Disappearing Profits

Herbalife recently reported its third-quarter results and they were just awful. Herbalife earned $0.13 per share in Q3, but that was a whopping 92% decline from the $1.32 it earned last year.

That’s awful, but Herbalife says business will be even worse going forward. The Wall Street crowd expected Herbalife to grow revenues by 7% in 2015, but the company said that its revenues will fall by -1% to -2% instead.

Part of that lower guidance is from the impact of the strong US dollar. Guidance for Q4 includes an unfavorable impact of $0.31 from currency conversions. If you remember, I previously wrote that the strong dollar was going to kill the 2015 profits of companies that do lots of business overseas.

I have to admit, I am skeptical of all the multilevel marketing businesses, but Herbalife is reinforcing that preconceived notion.

FTC and FBI Investigation

The Federal Trade Commission is investigating Herbalife for what could ultimately result in charges that Herbalife is operating an illegal pyramid scheme.

In March, the FTC sent Herbalife a civil investigative demand (CID), which is a subpoena on steroids because all the evidence produced by a CID can be used by other agencies in other investigations, such as the FBI, which is also investigating Herbalife.

The FTC outcome is unknown. Heck, Herbalife could eventually be declared innocent and pure… but I wouldn’t bet on it.

Board Members Gone Bad!

When your company is in the middle of FTC and FBI investigations, the last thing you want is for your company officers to get in trouble with the law. A current Herbalife board member, Pedro Cardoso, has been charged with illegal money laundering by Brazilian prosecutors. Time will tell if the charges are true… but it looks very bad.



That’s not the only problem with the Herbalife board of directors. Longtime Herbalife Board Member Leroy Barnes announced that he is leaving. Board members leave for legitimate reasons all the time, but Barnes is the fourth Herbalife board member to leave in 2014. Talk about rats jumping the ship!

The Smoke and Mirrors of Stock Buybacks

The above issues are all serious and enough to stay away from Herbalife, but the biggest red flag I see is the abusive financial engineering that Herbalife is using to prop up its stock.

Example: In Q2, Herbalife spent over $500 million to buy back its own stock for the purpose of propping up its earnings-per-share ratio. Fewer shares translates into higher earnings per share.



The root of the problem is that Herbalife is using up all its cash AND borrowing money like mad to finance the stock buyback.



In the last year, Herbalife’s debt has exploded by over $1 billion. Herbalife is using every penny of operating cash flow and taking on new debt just to buy back its stock.



Moreover, since Herbalife’s stock has plunged by 50% this year, Herbalife wasted hundreds of millions of dollar of shareholder money by buying stock at much higher prices.

And now that revenue, profits, and free cash flow generated by operations are shrinking, Herbalife is on a collision course with insolvency.



Carl Icahn, who is certainly a much better investor than I will ever be, is a big Herbalife fan and even went as far as to call the shares undervalued. “I would tell you I do believe Herbalife is quite undervalued and it is still a good business model.”

Ahhhh… Carl… sorry, but I think you couldn’t be more wrong.

George Soros, by the way, appears to agree with me because he reduced his Herbalife holdings by 60% after the company reported those disastrous third quarter results a few weeks ago. I’m not suggesting that you rush out and buy put options on Herbalife tomorrow morning. As always, timing is everything, but I have very little doubt that Herbalife’s stock will be significantly lower a year from now.

Moreover, the real point isn’t whether Herbalife is headed higher or lower, but that good, old fashioned fundamental research can help you make money in any type of market environment.

Even during bear markets.

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Stock Manipulation 101: Using Stock Buybacks to Mask Deep Business Problems was originally published at mauldin economics

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Everything You Need to Know About the SP 500 Until Christmas

By Andrey Dashkov

When I need to clear my mind, I put on my beat up Saucony sneakers and drive to nearby Deer Lake Park in Burnaby, British Columbia. After a couple of miles, though, as my body gets into a rhythm, my mind wanders back to the thought that occupy it for hours each day: where will this market go next?

And I’ve thought a lot about what went on this summer. Since June 1st:

•  S&P 500 is up 2.7%, having set a new record high in September;

•  MSCI World index is down 0.5%;

•  10 year Treasury yield is down from 2.54% to 2.50%;

•  Brent Crude 0il is down 12.8%; and

•  Gold is down 2.2%.

The Bureau of Economic Analysis reported that the U.S. economy expanded by 4.6% year on year in the second quarter, up sharply from the first quarter’s disappointing 2.1% annual decline. Consensus estimates for annual GDP growth in the third and fourth quarters of this year are about 3%.

The stage seems to be set for the fifth straight year of positive economic growth in the US; however, we’re always cautious about government supplied information, especially during an election cycle.

At the moment, macro developments seem closely intertwined with stock market performance. Instead of slumping, the market was rather vibrant this summer. The S&P 500 showed resilience, reaching higher highs after a dip in late July and early August that coincided with increased uncertainty surrounding the Ukrainian crisis.

Geopolitics aside, the market was supported by GDP growth, which in turn was underpinned by strong corporate profits and margins. In fact, in the second quarter, the S&P 500 set a new record for profit margins: 9.1%. So much for “sell in May and go away.”

Expanding earnings and margins are great news on the fundamental front. Of the trends we observed this summer, at least two will benefit S&P 500 companies’ profitability. Cheaper oil may keep energy costs down, while consumers are more than willing to swipe their debit and credit cards. In August, consumer confidence jumped to its highest level since October 2007, having increased for four months in a row.

Loose Money Helping Stocks in the Short Term

The Fed has done its part, too. Long-term effects of its prolonged loose monetary policy aside, it’s hard to argue that it hasn’t helped stocks in the short term. With Treasury rates still low, debt options abound, and companies can obtain cheap funding for things like capital expenditures and buying back shares.

In the first quarter, 290 companies from the S&P 500 bought back shares at a cost of $159.3 billion, 59% more than a year ago. Dividends are up as well: in the first quarter, S&P 500 companies spent a record $241.2 billion on dividends and repurchases together, according to Standard & Poor’s.

Second quarter share repurchases were estimated at $106 billion, according to Financial Post. That’s much lower than first-quarter repurchases (though the official numbers aren’t out yet) and down 10% year on year.

Buyback Frenzy Is a Net Positive for Share Prices

However, the most important takeaway is that the cumulative effect of the recent buyback frenzy was positive for share prices and dividends. With fewer shares, it’s easier for companies to maintain dividend payments. Higher share prices may drive down dividend yields, but companies tend to increase dividends over time, which makes up for that in part. And despite the S&P 500’s significant growth over the past five years, dividend yields have not decreased as much as one would expect.

The chart below tracks the S&P 500’s median dividend yield since the first quarter of 2009.

The median dividend yield decreased just slightly over this period: from 1.9% in 1Q09 to 1.7% in 2Q14, and it’s held relatively steady over the past three years.

The good news is that S&P companies aren’t stretching their balance sheets too thin to cover these dividend payments—these payments are backed by earnings. The median dividend payout ratio (the ratio of dividends paid to net income), although up from five years ago, still looks solid.

S&P companies can successfully cover their dividends with earnings, so there’s no reason to fear that they’ll have to borrow to keep paying them. However, a lot of investors worry about leverage. On one hand, financial leverage boosts return on equity (ROE), and prudent borrowing can be a positive for investors. On the other hand, large amounts of leverage leads to volatility in earnings, a less stable balance sheet, and risk that affects valuations.

Debt and Cash Both Up

These are legitimate concerns, but our next chart shows that in the past five years, S&P companies have increased debt while also accumulating a lot of cash on their balance sheets.

Debt and cash grew at about the same pace during the last couple of years. There were many reasons for this trend, but two interrelated ones stand out: the abundance of cheap debt that S&P companies took advantage of (why spend your own cash when you can finance on such great terms and pay it back over a long period?); and the desire to keep interest on that debt as low as possible by making credit rating agencies happy and holding a lot of cash in the bank.

If a correction is in the cards for the near term, this cash, increased earnings, and the support coming from share buybacks will provide some cushion for these companies’ valuations.

Why We’re Not “Permabears”

So what’s ahead? I wish I knew. There are a lot of market bears out there who say this rally will come to a halt sooner rather than later, and the S&P will fall off a cliff. I stay away from calling tops and bottoms and wonder how many pundits actually have any skin in the game. Going short the market requires timing; so any “permabear” who puts money where his mouth is may lose a lot if his timing is wrong.
I’m not saying the rising market is somehow “wrong.” There are solid company level fundamentals and positive macro-level data points here and there that support a significant part of its growth.

Your Plan to Profit

We’re pragmatists at Miller’s Money. Quantitative easing and basement-level interest rates have flooded the market with dollars and eroded yields, but you should use these circumstances to capture some of the benefits they’ve created. No, you can’t earn much on CDs. No, dividend yields might not beat inflation (at least not all of them, and certainly not every estimate of inflation). And yes, the current rally will eventually end, one way or another. We just don’t know when or how. No one does.

What matters is that even in this situation you can protect your financial well being by sticking to our core strategy: diversify geographically and across sectors; and invest in assets that provide robust yield relative to risk and have the potential to rise in price. You can learn more about the Miller’s Money Forever core strategy here—a time-tested plan designed for seniors, savers and like-minded conservative investors.

The article Everything You Need to Know About the S&P Until Christmas was originally published at millers money.

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