Swizzled Posted January 27, 2011 Posted January 27, 2011 Wondering if anyone had any intelligent comments that could enlighten my thinking. I just read this from Sprott http://www.gurufocus.com/news.php?id=120425 I take anything from him and Embry with a grain of salt because they are after all selling their product. I can't ignore the fact that they were into this gold idea almost a decade ago. I don't know if they were lucky or smart. What I can't get my head around is why not oil instead of gold or silver to protect against all of this loose monetary policy. Oil is essential, demand is growing, supply is flattening to declining. Seems like an easy choice over something where the value is determined basically by the popular mood and not supply and demand. Thanks for any thoughts.
UhuruPeak Posted January 27, 2011 Posted January 27, 2011 If oil goes too high, it will lead to a recession which will slow inflation & drop oil prices back down; no such thing w/ gold/silver
Myth465 Posted January 27, 2011 Posted January 27, 2011 Im an oil guy. Though I agree with Uhuru we will have a series of rolling recessions if peak oil is correct. I prefer supply and demand to doom and gloom.
omagh Posted January 27, 2011 Posted January 27, 2011 Swizzled...why not expand the choices? When looking at commodities, every one of the posts in this thread is trying to predict future events -- an exercise fraught with error. Montier and others write about this and none of us have any special abilities to predict the future. What Buffett recommends is to look at businesses with high margins, pricing power and the ability to pass on most cost inputs to their customers. This allows these businesses to continually increase earnings on an inflation-adjusted basis. -O Wondering if anyone had any intelligent comments that could enlighten my thinking. I just read this from Sprott http://www.gurufocus.com/news.php?id=120425 I take anything from him and Embry with a grain of salt because they are after all selling their product. I can't ignore the fact that they were into this gold idea almost a decade ago. I don't know if they were lucky or smart. What I can't get my head around is why not oil instead of gold or silver to protect against all of this loose monetary policy. Oil is essential, demand is growing, supply is flattening to declining. Seems like an easy choice over something where the value is determined basically by the popular mood and not supply and demand. Thanks for any thoughts.
Myth465 Posted January 27, 2011 Posted January 27, 2011 Swizzled...why not expand the choices? When looking at commodities, every one of the posts in this thread is trying to predict future events -- an exercise fraught with error. Montier and others write about this and none of us have any special abilities to predict the future. What Buffett recommends is to look at businesses with high margins, pricing power and the ability to pass on most cost inputs to their customers. This allows these businesses to continually increase earnings on an inflation-adjusted basis. I think everyone is implicitly or explicitly making predictions about the future. Even Buffett in the recommendation is assuming high margins, pricing power, and other benefits of quality businesses persist. While many are making assumptions about the future, I dont think anyone here has made investments made on correctly predicting these outcomes (except for maybe buying gold directly). Even engaging in a discussion about how to protect against inflation is basically assuming / predicting a future which entails inflation. lol. With that said, Buffett himself predicts inflation in the long run, as does anyone else with any sense.
Guest broxburnboy Posted January 27, 2011 Posted January 27, 2011 Im an oil guy. Though I agree with Uhuru we will have a series of rolling recessions if peak oil is correct. I prefer supply and demand to doom and gloom. The gold story is not necessarily doom and gloom. Think of it as the new money...uninflatable or deflatable by self interested sovereign entities. Years of unsustainable overspending and dillution of the value of the global default currency is what produces the doom and gloom. Returning to a gold standard or partial gold standard will simply reveal real value (and realize previous losses).. a process that is necessary to return global markets to free trading. OIl prices respond to supply, demand, cartel manipulation and global liquidity induced speculation... hardly a formula for purchasing power stability or a store of value.
Myth465 Posted January 27, 2011 Posted January 27, 2011 Im an oil guy. Though I agree with Uhuru we will have a series of rolling recessions if peak oil is correct. I prefer supply and demand to doom and gloom. The gold story is not necessarily doom and gloom. Think of it as the new money...uninflatable or deflatable by self interested sovereign entities. Years of unsustainable overspending and dillution of the value of the global default currency is what produces the doom and gloom. Returning to a gold standard or partial gold standard will simply reveal real value (and realize previous losses).. a process that is necessary to return global markets to free trading. OIl prices respond to supply, demand, cartel manipulation and global liquidity induced speculation... hardly a formula for purchasing power stability or a store of value. Perhaps we have different goals. I am not trying to store money, more so make it. I like the oil story catels and all lol. You may be correct about gold, but the transition sounds pretty doomy and gloomy to me. I always want to go out and get a gun and some can food after hearing a gold bull :-[. It just doesnt strike me as happy times. Also I dont think gold will be the currency. The powers at be will push for something that will be inmo just as problematic. (I also have my doubts about free trade, without some ground rules, it seems like a race to the bottom). I like a good bull market story and I believe in the oil one. With regard to gold, I hope we will muddle through a few more generations with the USD front and center. That seems the least painful option for me and those I care about but I know its highly unlikely.
omagh Posted January 27, 2011 Posted January 27, 2011 Myth...you're equating things that aren't equal, scratch a bit deeper. I'd take the Buffett approach in a heartbeat over investing in commodities and commodity producers. If you've modelled the types of businesses that Buffett recommends, you'll note a stability vs high variability. Why is that important? Things that Buffett invests in have certainty (i.e. a lack of sensitivity) when modelled. It makes a ton of difference in setting intrinsic values. With the high variability in demand for commodities, the valuation modelling and results are similarly fraught with error. I choose to let pitches labelled commodities go with very rare exceptions. Not losing money in the portfolio makes a big difference in the long run. I'm concerned about inflation just as everyone else in the thread is, but my framework for approaching the problem is different and uses another approach that may be helpful to guys who are confused into making unforced errors by the macro events. Where Buffett has invested in commodity producers (see The Midas Touch by John Train to go way back), they have been minority positions based on single company undervaluations. -O Swizzled...why not expand the choices? When looking at commodities, every one of the posts in this thread is trying to predict future events -- an exercise fraught with error. Montier and others write about this and none of us have any special abilities to predict the future. What Buffett recommends is to look at businesses with high margins, pricing power and the ability to pass on most cost inputs to their customers. This allows these businesses to continually increase earnings on an inflation-adjusted basis. I think everyone is implicitly or explicitly making productions about the future. Even Buffett in the recommendation is assuming high margins, pricing power, and other benefits of quality businesses persist. While many are making assumptions about the future, I dont think anyone here has made investments made on correctly predicting these outcomes (except for maybe buying gold directly). Even engaging in a discussion about how to protect against inflation is basically assuming / predicting a future which entails inflation. lol. With that said, Buffett himself predicts inflation in the long run, as does anyone else with any sense.
Myth465 Posted January 27, 2011 Posted January 27, 2011 Myth...you're equating things that aren't equal, scratch a bit deeper. I'd take the Buffett approach in a heartbeat over investing in commodities and commodity producers. If you've modelled the types of businesses that Buffett recommends, you'll note a stability vs high variability. Why is that important? Things that Buffett invests in have certainty (i.e. a lack of sensitivity) when modelled. It makes a ton of difference in setting intrinsic values. With the high variability in demand for commodities, the valuation modelling and results are similarly fraught with error. I choose to let pitches labelled commodities go with very rare exceptions. Not losing money in the portfolio makes a big difference in the long run. I'm concerned about inflation just as everyone else in the thread is, but my framework for approaching the problem is different and uses another approach that may be helpful to guys who are confused into making unforced errors by the macro events. Where Buffett has invested in commodity producers (see The Midas Touch by John Train to go way back), they have been minority positions based on single company undervaluations. It sounds like you are simply a guy who doesnt like commodities or commodity businesses. I can respect that. They are crappy businesses, but can be very profitable investments. I dont like them either, but I believe in the oil story (As does Buffett and Grantham). I prefer sustainable businesses, of high quality but I dont see myself making much money with Coke, MSFT, ADP, Mastercard, AON, or the 5 or 6 other large cap ideas that meet these requirements. I have a few gems in the small cap world, but for me I go where the value is. At this stage in my career I like deep value, and that usually means a commodity business. I own a number of oil companies and companies driven by the oil cycle. I agree its a crappy business, but I see 50 cent dollars with fairly pessimistic projections. I also think anything more than very basic modelling in general is fraught with error and a waste of time. There are plenty of ways to skin a cat (though I have never tried) and plenty of ways to make a dollar. I can understand why you avoid the oil patch (probably for the same reason I avoid the Uranium patch). I have no idea how Soros or Jim Simons made money but, both of them have a pretty big chip stack and I wouldnt go around quoting Buffett to them. Similarly I wouldnt do it with T Boone, Jimmy Rogers, or Sprott. Plenty of ways to skin a cat, and earn a buck. With that said, this is a commodity thread, and just about every value investor worth his salt has a commodity investment, and likely owns a commodity business or 2.... Also the one thing in life I am certain about, is few things relating to business are certain.
omagh Posted January 27, 2011 Posted January 27, 2011 Well said. We all have our specializations and you have to do unique things to outperform. I've been down the deep value road and generally like to keep the "special situations" to a small part of the portfolio. Usually my deep value plays are good small cap businesses that have stumbled over short term issues with the business model still intact. You would be amazed at the bargains that can be turned up even after you hive off every commodity-based business in the investing universe. In baseball terms, I make a reliable living off a steady diet of hanging curveballs and don't even lift the bat for a fastball. This forum seems preoccupied with commodities at times because it's the flavour of the day, and cycles can move quickly against trend. But, moving away from where the crowd is, you can find lots of other niches that are profitable. And to stay on theme, I feel adequately protected against inflation. -O It sounds like you are simply a guy who doesnt like commodities or commodity businesses. I can respect that. They are crappy businesses, but can be very profitable investments. I dont like them either, but I believe in the oil story (As does Buffett and Grantham). I prefer sustainable businesses, of high quality but I dont see myself making much money with Coke, MSFT, ADP, Mastercard, AON, or the 5 or 6 other large cap ideas that meet these requirements. I have a few gems in the small cap world, but for me I go where the value is. At this stage in my career I like deep value, and that usually means a commodity business. I own a number of oil companies and companies driven by the oil cycle. I agree its a crappy business, but I see 50 cent dollars with fairly pessimistic projections. I also think anything more than very basic modelling in general is fraught with error and a waste of time. There are plenty of ways to skin a cat (though I have never tried) and plenty of ways to make a dollar. I can understand why you avoid the oil patch (probably for the same reason I avoid the Uranium patch). I have no idea how Soros or Jim Simons made money but, both of them have a pretty big chip stack and I wouldnt go around quoting Buffett to them. Similarly I wouldnt do it with T Boone, Jimmy Rogers, or Sprott. Plenty of ways to skin a cat, and earn a buck. With that said, this is a commodity thread, and just about every value investor worth his salt has a commodity investment, and likely owns a commodity business or 2.... Also the one thing in life I am certain about, is few things relating to business are certain.
Myth465 Posted January 27, 2011 Posted January 27, 2011 I would love to move most of my portfolio to those small cap ideas, and I probably do need to start screening a bit more. I think we are a bit too focused on gold and oil, but I also think its just highly related to the outlook. I dont really know what its like to live in an inflationary environment and from reading about Brazil and Germany, hyper inflation frankly sucks. I think we all just want to leave the table with a decent sized chip stack that can actually buy stuff should stuff hit the fan. Hopefully either more smaller cap non commodity ideas come up, or the leaders of the country come up with a credible plan which quiets the inflation talk.
frog03 Posted January 28, 2011 Posted January 28, 2011 Wondering if anyone had any intelligent comments that could enlighten my thinking. I just read this from Sprott http://www.gurufocus.com/news.php?id=120425 I take anything from him and Embry with a grain of salt because they are after all selling their product. I can't ignore the fact that they were into this gold idea almost a decade ago. I don't know if they were lucky or smart. What I can't get my head around is why not oil instead of gold or silver to protect against all of this loose monetary policy. Oil is essential, demand is growing, supply is flattening to declining. Seems like an easy choice over something where the value is determined basically by the popular mood and not supply and demand. Thanks for any thoughts. **************** I believe that Sprott and Embry are not only emphasizing inflation as a potential problem. They view gold/silver as an insurance against potentially disastrous financial outcomes. The financial system, whether it be banks/financial institutions, national or regional governments, derivatives, consumers in several large countries is way too leveraged and the time of reckoning has been postponed but is still likely.
Uccmal Posted January 28, 2011 Posted January 28, 2011 What's wrong with Real Estate, specifically REITs or rental properties, such as BAM invests in? Two birds with one stone. You get the advantage of steady income and an inflation hedge via the leverage used. Obviously you want the leverage to be manageable under crash circumstances. Equally obviously you want the asset to be in a stable political region. It will make more money than gold/silver while you wait for doomsday. BTW: I looked at gold companies as investments a while back, and unless you pick the right company the stock prices have not kept up with the commodity at all. Finally, with regards to gold: If a true worst case scenario occurs then you are going to want the actual metal in hand, not a piece of paper indicating you own gold stored in a vault somewhere, or worse, a blip on an electronic screen. Just thoughts, no disclosures here.
biaggio Posted January 28, 2011 Posted January 28, 2011 Uccmal "What's wrong with Real Estate, specifically REITs or rental properties, such as BAM invests in?" Nothing, except they seem to be fully valued or overvalued to me. I could be wrong as I have not looked at them recently.
Myth465 Posted January 28, 2011 Posted January 28, 2011 REITs are A overvalued and B will trade down inmo. With high inflation comes high fixed income yields risk free. Reits trade at 3% - 5%. In the long run you make money, they will raise rents and the debt will be inflated away but it will be painful in the short run as the yield goes back to 7%, 10%, or 15%. With that said I own a REIT or 2.
oec2000 Posted January 28, 2011 Posted January 28, 2011 What's wrong with Real Estate, specifically REITs or rental properties, such as BAM invests in? Two birds with one stone. You get the advantage of steady income and an inflation hedge via the leverage used. Obviously you want the leverage to be manageable under crash circumstances. Equally obviously you want the asset to be in a stable political region. It will make more money than gold/silver while you wait for doomsday. Have you considered the risk if interest rates move up sharply in response to inflation that cap rates spike and seriously hurt capital values? Not good for a leveraged asset. The bull market in real estate has been global in nature and has gone on even longer than the gold boom so it is arguably in a bubble too. (Should be interesting to find out how real estate did in the inflationary 1970s.) The other concern is that the current economic problems seem to have their roots in a debt bubble fueled by exceptionally stimulative monetary and fiscal policies over 20-30 years. If the cure requires a return to more responsible policies, could we see a prolonged period of debt restraint/compression which would not be good for debt-financed assets? Your point about gold stocks lagging gold prices begs the question of whether it's a Mr Market phenomenon that could be taken advantage of. Finally, as other posters have pointed out, gold needs to be looked at as more than an inflation hedge. When Eric Sprott started buying in gold in 2000/2001, he did it not as an inflation hedge but as an alternative to financial assets whose prices had been propped up by irresponsible economic policies. People forget that gold has quadrupled during a period of low inflation. Sprott's thesis is that gold is a short against bad economic policy - until there are signs that governments and central banks are changing course, gold will likely stay the currency of choice.
Uccmal Posted January 28, 2011 Posted January 28, 2011 oec, I guess my thinking is that by investing in well run residential or commercial real estate you get the advantage of locked in mortgages or bond issues that are good for greater than 10 years which is probably a reasonable window. So, your debt gets inflated down and your asset still earns money. Better than gold, no? I personally dont buy into the doomsday scenarios so I wouldn't bother with any of this. I can earn my 20% bogey using other methods, although I have never invested in an inflationary environment so that would be a new experience. We are seeing the results of inflation in Egypt and Tunisia though.
oec2000 Posted February 1, 2011 Posted February 1, 2011 oec, I guess my thinking is that by investing in well run residential or commercial real estate you get the advantage of locked in mortgages or bond issues that are good for greater than 10 years which is probably a reasonable window. So, your debt gets inflated down and your asset still earns money. Better than gold, no? I am merely throwing out the idea that the relationship between inflation and real estate may not be the simple positive correlation that most people assume when inflation is not the benign gradual type that we have experienced for the past 30 years. For example, it would be instructive to find out what happened to real estate values in the 1970s when inflation was a serious problem or in Turkey or the Latin American countries when they had their inflation problems. My concern is that all asset prices fall in response to a rise in long term interest rates (which are in turn a response to higher inflationary expectations). This is not an argument for gold; rather it is a question of whether real estate is a good inflation hedge under all conditions (I suspect it may not but until I check the numbers, it is just that - a suspicion.) Just thought you might want to take it into consideration.
ERICOPOLY Posted February 1, 2011 Posted February 1, 2011 oec, I guess my thinking is that by investing in well run residential or commercial real estate you get the advantage of locked in mortgages or bond issues that are good for greater than 10 years which is probably a reasonable window. So, your debt gets inflated down and your asset still earns money. Better than gold, no? For example, it would be instructive to find out what happened to real estate values in the 1970s when inflation was a serious problem or in Turkey or the Latin American countries when they had their inflation problems. My concern is that all asset prices fall in response to a rise in long term interest rates (which are in turn a response to higher inflationary expectations). I have a copy of Schiller's Irrational Exuberance, Vol II at home. He points out that real estate rose in the 1970s, but in some years the rise was say 7% vs a CPI of 9%. So it rose at a slower rate than CPI part of the time. However, if you have 50% equity in the property, then your ROE is 14% vs 9% CPI. So a real gain of 5%. Were the inflation rate to be 0%, then there would have likely been no real gain whatsoever. Inflation is good for the levered. Not to mention it's good for cash flow (rents going up and interest expenses are fixed). Could be different next time, I don't know. But in the 1970s it was hard to do poorly in real estate.
Guest broxburnboy Posted February 1, 2011 Posted February 1, 2011 Could be different next time, I don't know. But in the 1970s it was hard to do poorly in real estate. It was easy to get wiped out in the late 70's as interest rates soared trying to get inflation under control. In boomtime economies like Alberta, the pain was huge and widespread. Provinces/states (like Arizona) where homebuilding and all its support industries were the leading employers, it was a double whammy. This time the bust will be longer and deeper.. wages have not risen like the 70's, unemployment is increasing from a higher level and interest rates haven't even begun to rise... municipal taxes will be increased, services will be cut and neighbourhoods will erode. There are 11 million vacant housing units in the US all looking for a renter/buyer... rents must decrease and prices have a way to fall. There will be local exceptions, but the cycle needs to bottom out before there is any compelling reason to go there. Good luck.
ERICOPOLY Posted February 1, 2011 Posted February 1, 2011 Could be different next time, I don't know. But in the 1970s it was hard to do poorly in real estate. It was easy to get wiped out in the late 70's as interest rates soared trying to get inflation under control. In boomtime economies like Alberta, the pain was huge and widespread. Provinces/states (like Arizona) where homebuilding and all its support industries were the leading employers, it was a double whammy. I don't have any real estate (don't plan to either). Maybe FUR or something like that, but that's all. Your comment on interest rates -- they don't matter if you are cash flow positive and on 30 yr fixed. So stay away from short term or adjustable rates, and stay away from areas where the business of building homes is key to employment. Seems like sound advice that is easy enough to follow. Anyhow, the question was about the 1970s and I was merely answering his question. This time around you might be right with regards to rents.
Myth465 Posted February 1, 2011 Posted February 1, 2011 I think REITs will play out differently this time and so will housing. They are pretty overvalued right now and rents wont rise due to excess space. With that said, I would buy houses hand over fist if I had a skilled Manager. I want to move abroad (any volunteers).
oec2000 Posted February 2, 2011 Posted February 2, 2011 This is the best historical chart I could find on US home prices: http://mysite.verizon.net/vzeqrguz/housingbubble/ There are extended periods when prices lagged inflation but it does show, remarkably imo, that nominal prices rose steadily through the 70s, 80s, 90s, and 2000s until the bubble burst. I still can't get my head over why when interest rates (and presumably mortgage rates also) shot up to double-digits during the Volcker era, cap rates did not follow. Maybe they did but that would have meant that rents rose as fast as interest payments on mortgages did. It's hard to imagine that they would have done so during a severe economic crunch though. Maybe cap rates started off higher in the early 1970s - the rent/price chart at the bottom does show that even after the price collapse, prices are still significantly higher relative to rents vs. the 70s. Would appreciate insights from posters who remember that era.
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