A Tale of Two Metals

For Platinum, this is the worst of times.  For Gold, things aren't so bad.  Below are graphs of the spot rates of gold and platinum over the course of 2008.  Platinum has declined by an astounding 63% from its highs earlier this year, while Gold is only off roughly 15%, and is trending higher.  For the last few weeks, many people have asked me why commodities haven't rallied in the face of blatantly inflationary fiscal and monetary policy from Congress and the Fed.  I have previously explained the process of de-leveraging on this blog, and I continue to believe that process will be with us for another 6-9 months.  While this unfolds, commodities generally will be depressed, as will foreign currencies vis-a-vis the dollar.  There will be ups and downs in these markets, but the overall trend will be clouded by de-leveraging and unwinding for some time to come. 

What is particularly interesting about Gold, however, is that it has not been as affected by de-leveraging as other commodities.  The explanation for this is hidden in a few obscure facts.  First, the retail price for gold bullion, that is, physical gold, not gold futures, has been between 9%-15% above the spot price of gold on the London market.  This indicates that individuals have substantially increased their demand for real gold.  

Peculiarly, platinum's supply and demand functions are closely related.  According to Monex, a metals trading company, if the world stopped extracting platinum from the ground today, there would be only one year's worth of platinum before the consumers of it would run out.  In contrast to gold, where there is an estimated 25 year supply of gold already extracted from the ground before demand would catch up with supply.  This indicates the imputed value of gold as a store of value and hedge against inflation.

Gold's historic price stability further confirms its status as the default currency of choice in uncertain economic times. 

Keep watching, but it appears that Gold will outpace Platinum when the overall inflationary effects of current policy begin to take effect.

 

International Assets as a Hedge Against the Dollar's Coming Decline

The dollar currently enjoys a temporary boost in its value vis-a-vis other major international currencies. We have discussed some of the reasons for this previously.  Recently, the Blue Star analysis was confirmed by Euro Pacific Capital, which is headed by Peter Schiff, one of the few major market analysts to predict the current financial crisis.  Read their similar assessment here.  

Individuals who want to hedge their own portfolios should get in touch with Euro Pacific.  They specialize in foreign brokerage and investing.  Companies and businesses who are looking for ways to earn a return on their capital as well as hedge against the coming decline of the dollar should contact us at Blue Star.

Traditional currency hedges are simply not going to be enough, and they are merely a speculative financial tool, not an investment.  Let us not forget Benjamin Graham's consistent distinction between speculation and investment.  

Investing into foreign operational businesses, whether as minority shareholders or as the sole owner, offers American companies the ability to hold assets in foreign currencies that are not likely to depreciate as quickly as the dollar if the U.S. government continues its irresponsible monetary and fiscal spending spree, while simultaneously growing the real value of their assets under well managed companies with real customers, real products, and real profits.  It is a currency hedge and an asset investment all wrapped up into one.  

If you are a business owner with capital that needs to be reinvested, or you are looking to divest of some of your domestic assets in favor of something that offers long-term safety, contact us at Blue Star and we can assist you in finding and acquiring the kinds of assets that will protect you in these uncertain times.

Beware of the Sucker's Rally

If you care about your stock portfolio and the future of your business (if you own one), then you should stop watching CNBC, or at least stop taking it seriously.  If you sold all of your stocks in 2007 (or better yet, 2006), then you have probably already taken this advice.  I turned CNBC off permanently in 2007 when half of the pundits predicted that the inverted yield curve did not portend a recession.  I should have switched it off much earlier, right after I watched the now-infamous Art Laffer vs. Peter Schiff debate.  If you haven't seen it, you should:

http://www.youtube.com/watch?v=LfascZSTU4o

Even with the cautious tone of policy-makers in Washington, there are plenty of pundits and stock brokers out there telling people that there are bargains on in the U.S. Stock Market.  This is part of the sucker's rally that is taking place as an emotional endorsement of the continued federal bailouts that seem to be a now daily occurrence.  Before you buy one of these "bargains," take a hard look at their balance sheet.  Make sure it has enough cash.  If it doesn't, don't buy.  

If you are a manager or business owner, you should be careful not to buy into the Wall Street emotion, either.  You're still going to have to cut costs, probably significantly, without sacrificing income if you want your business to see 2010.  Make those cuts sooner, rather than later, and keep a large cash reserve if you can.  Cut out any unneeded expenses, especially travel.  Most business can be conducted by conference call.  

The sucker's rally can take people in, from all walks of life.  But I'll leave you with lasting proof that anybody can be fooled (I borrow from the commentary from Benjamin Graham's timeless investment guide The Intelligent Investor):

"Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England.  Sensing that the market was getting out of hand, the great physicist muttered that he 'could calculate the motions of the heavenly bodies, but not the madness of the people.' Newton dumped his South Sea shares, pocketing a 100% profit totaling GBP 7,000.  But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price and lost GBP 20,000 (more than $3 Million in today's money).  For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence."

Nothing is a great value if it doesn't have the balance sheet to back it up.  So be cautious--there might be some good bargains available, but there is probably a lot of Fool's Gold, as well. 

Eliminating Middle Management with Technology

The modern manager has at his disposal tools and technology that enable a flattening of companies' organizational charts.  This flattening process not only leads to lower administrative overhead, but also brings a company's top management closer to the people who are the lifeblood of an enterprise as well as to the customer or client who is purchasing the goods or services produced.  This closer relationship between upper management and what would have traditionally been considered the "lower levels" of a company hierarchy gives managers unfiltered insight into the company's operations.  

As we have watched the financial crisis unfold, and now as we read about the would-be collapse of the world's largest financial institution, Citigroup, we find that it was management's disconnect from what was happening in the day-to-day operations of the company that permitted billions of dollars of Citigroup's portfolio to be invested in toxic subprime mortgages & derivatives and then highly leveraged to purchase other derivative assets that ultimately failed.  If you don't believe that this was the problem, read the following article from the International Herald Tribune:

http://www.iht.com/articles/2008/11/23/business/23citi.php

Technology can "shrink" the size of enterprises large and small by allowing employees usually termed "lower level" to directly access information, and to publish information that is then accessible to people in top management.  By creating an organizational culture that rewards people who point out problems (rather than punish them, as is frequently the case), Enterprise 2.0 information technology can not only eliminate the need for significant numbers of middle managers, but simultaneously eliminate some of the very disincentives to organizational transparency that exist in business today.

Imagine if an associate level securities analyst at Citigroup had realized the massive quantities of potentially endangered securities the company was acquiring, and wrote an internal blog about it, and that blog was brought to the attention of the CEO. The CEO could then commission further investigation into the claims, and might steer the company on a different course thereafter.  However, because middle managers care most about job security, they are quick to dismiss claims of fundamental misdirection, and are also quick to punish people who point them out.  This creates a negative organizational culture that ultimately causes collective mismanagement, since most mismanagement is based on bad or insufficient information and not on mere bad judgment.  

If you are growing your business, consider saving long-term costs, not only in personnel, but also in the cost of mistakes, and employ technology early in your growth cycle.  From integrated project management tools to empowering individuals to contribute information to a widespread data repository, endless options exist for making your business more efficient and contributing at the same time to a better organizational culture that rewards transparency and expects the highest quality results out of every member.

Government Fears Inflation, Not Deflation

Management planning for a  deflationary recession are going to be caught by surprise.  In spite of the significant press attention to lower consumer prices, the Federal Government is taking actions that indicate a fear of a different kind.  The U.S. is seeking $300 Billion in hard cash from the Gulf States' sovereign funds, indicating that there is a distinct lack of belief in the power of domestic fiscal stimulus and monetary policy to solve the present crisis.  There is, instead, a fear that such attempts will lead to inflation, or else they would not bother seeking the funds and sacrificing the political capital elsewhere.

The strategies for dealing with an inflationary recession and a deflationary one are very different, and enterprising managers need to be prepared.

The Flat World and Good Management

Managers everywhere are going to be faced with tighter credit markets, lower consumer spending, and scarce equity in the coming years, highlighting the need for hyper-efficient management practices that focus on reducing costs without cutting operations.  The flattening world makes this easier for managers, as outsourcing is no longer the province of people with computer programming needs.  From business plan development to executive assistants to server management and accounting, competent, professional, and well-educated outsourcing service providers are available to meet the needs of enterprises of any scale and significantly reduce personnel costs in a time when businesses need to remain at full operational capacity but simultaneously lower their operating expenditure.  

Whether you are looking for long-term work (like a virtual assistant) or project-by-project work, there are firms in India, Pakistan, the Philippines, and China that are available.  To explore this growing trend, visit one of the premier service providers in India, Brickwork:

http://www.b2kcorp.com/

Or to peruse the multitude of different providers, go to:

http://www.elance.com

In this tight economy, unrelenting efficiency will keep you in business.

Commodities, the Dollar, and the Collapse of Lehman Brothers

The financial press, we think, has been overlooking an important possible explanation for the significant decline in commodities prices and appreciation of the dollar over world currencies.  The missing explanation is vital to understanding the macroeconomic circumstances that underly today's business climate and without which will lead managers to make unwise decisions about the future of their companies and apply strategies that will not work in the present context.  It is also leading the nation's policy-makers to pursue potentially disastrous inflationary monetary and fiscal policy.  

The headlines across the financial media have declared the decline of crude oil, other commodity goods, and gold (to a much lesser extent, which in and of itself indicates widespread market fears of coming inflation) are the result of the recession.  Simultaneously, they report, the dollar has appreciated against the Euro and other global currencies because the international markets still view the dollar as a safe haven.  These explanations are inadequate at best, and possibly extremely misleading.

What is overlooked is the impact of the collapse of Lehman Brothers (and other highly leveraged trading firms) on the speculation taking place in the commodities and currency markets.  Lehman Brothers filed for Bankruptcy protection on September 15, 2008, roughly coinciding with what was that time the lowest point of the Euro against the Dollar in a year.  Since the decoupling of Lehman, the Euro has plummeted.  The ensuing credit crisis has made the type of leverage previously employed by Lehman and other securities firms virtually impossible to accomplish.  

The failure to examine the effects of the untangling of massively leveraged positions means that the deflationary myth will lead many people to plan for dropping prices in the long-run, in spite of the significant increase in M1 and the continued promise from the Federal Reserve to lower rates further in necessary, combined with a Congress that is dedicated to spending massive quantities of borrowed money to try to bailout failing industry, expand US infrastructure, and pay for expensive new health care policies.  

Politics aside, business managers need to understand the macroeconomic realities of the current crisis if they are to keep their firms solvent during the next several years.  The end of highly leveraged speculation is an important piece of that puzzle.