Category: simonblack

January 7, 2014
Sovereign Valley Farm, Chile

Later this year, Google will celebrate its 10th anniversary as a publicly-traded company. And the conventional wisdom is that GOOG has been one of the best performing investments of the last decade.

If you had invested $85 in the Google IPO back in 2004, your investment would be worth over $1,100 today… a 13x return.

Over the same period, the S&P 500 has returned just 66%. And if you had taken the plunge into US Treasuries back in 2004, you would have been paid 4.15% per annum for the last ten years.

In light of all this, Google’s stock performance has been undoubtedly stellar.

But there’s an entirely different asset class that few people ever consider which has beaten the pants off of Google’s long-term performance. It’s agriculture.

I thought about this yesterday as I was walking around the orchard here picking fresh, ripe plums off the tree. We’ll be starting our harvest soon, and the workers are getting everything ready.

The average plum tree can easily produce over 100 pounds of fruit, starting a few years after you put a well-developed seedling in the ground.

And even on a standard-sized residential lot, you can plant 20+ fruit trees.

Assuming a long-term average price of just $0.50 per pound and a 2004 plant price of $4, investing $85 in plum trees 10-years ago instead of Google stock would have yielded well over $6,000 so far.

Even if you’re not a Do-it-yourselfer and allow for harvest costs, loss, pruning, water, and other expenses, you’d still be up more than GOOG. Plus you’d still be grossing $1,000 per year… not to mention the increase in your home’s market value.

More importantly, you would be owning (and producing) REAL assets instead of paper assets– something that can be traded, sold, stored, or if need be, eaten.

And best of all, you wouldn’t have had Ben Bernanke and his central banking ilk as your silent partner for the past decade, manipulating stock prices and causing asset bubbles.

The soon-departing Mr. Bernanke may be the all-powerful grand wizard of financial markets, but he has absolutely no bearing on the fruit production of well-maintainined trees in your backyard.

It’s not just plums, either. Or even fruit trees for that matter.

You could have bought $85 worth of organic tomato seeds in 2004 and grown thousands of dollars worth of organic tomatos over the last decade from your backyard.

Of course, this sort of notion makes most serious investors laugh. They can’t think past their own noses and only know how to follow the investment herd off the proverbial cliff.

And while this missive isn’t intended to convince our astute readers to rush out and plant trees, it’s at least worth pointing out that there are always profitable options far from the mainstream investment mentality.

More to follow on this soon.

from SOVErEIGN MAN http://www.sovereignman.com/trends/this-surprise-investment-has-outperformed-google-for-the-past-10-years-13364/
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January 6, 2014
London, England

[Editor’s Note: Tim Price, Director of Investment at PFP Wealth Management and frequent Sovereign Man contributor is filling in for Simon today.]

On December 31st, 1964, the Dow Jones Industrial Average stood at 874. On December 31st, 1981, it stood at 875. In Buffett’s words, “I’m known as a long term investor and a patient guy, but that is not my idea of a big move.”

To see in stark black and white how the US stock market could spend 17 years going nowhere– even when the GDP of the US rose by 370% and Fortune 500 company sales went up by a factor of six times during the same period– the price chart for the Dow is shown below.

 

So the US stock market suffered a Japan-style lost decade, and then some. Back to Buffett, again:

“To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates.

“These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities.

“So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.

“In the 1964-81 period, there was a tremendous increase in the rates on long-term government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments, but the one we noticed, of course, was the price of equities.

“So there–in that tripling of the gravitational pull of interest rates- -lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going nowhere.”

So how you feel about asset allocation this year should largely be a function of how you feel about interest rates.

And if you fear that interest rates are more likely to rise– triggered, perhaps, by a combination of Fed tapering and general weariness / revulsion at the manipulation of so many financial assets– then you should perhaps question your commitment to western equity markets as well as to bonds.

As Buffett wrote in a 1999 article in Fortune magazine, “Secular equity bull markets occur when long-term rates are dropping… and secular bears occur when rates are rising.” This is hardly rocket science.

Of course, 2014 could be yet another year in which equity markets rise further, driven by hopes and expectations of still more QE. But that’s not a bet we’re entirely comfortable making.

Since we’re primarily attracted by valuations and not by momentum, we’re now fishing for equities in a clearly demarcated pool (Asia and Japan– because that’s where values are most compelling).

We are not interested in most western markets because the value isn’t visible to us and the underlying growth (fundamentals, anybody?) looks pathetic.

And our monetary authorities have showered financial markets with kerosene by ensuring that the conventional ‘risk-free’ alternative to equities (i.e. government debt) is anything but.

Yet our exposure to ‘alternative’ assets, primarily precious metals, proved variously problematic last year.

2013 was the year that the mainstream financial media went aggressively anti-gold, and in his magisterial (and deeply witty) 2013 Year In Review, Cornell chemistry professor and economic agent provocateur David Collum cites three pertinent quotations from the New York Times:

“There is simply nothing in the economic picture today to cause a rush into gold. The technical damage caused by the decline is enormous and it cannot be erased quickly. Avoid gold and gold stocks”;

“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels”;

“The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”

But as Collum also points out, these quotes are from 1976, when the spot price of gold fell from $200 to $100 an ounce. Thereafter, gold rose from $100 to $850.

Why do we continue to keep the faith with gold (and silver)? We can encapsulate the argument in one statistic.

Last year, the US Federal Reserve enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed’s balance sheet had grown to $800 billion.

Under its current QE programme (which may or may not get tapered according to the Fed’s current intentions), the Fed is printing $1 trillion a year.

To put it another way, the Fed is printing roughly 100 years’ worth of money every 12 months. (Now that’s inflation.)

Conjuring up a similar amount of gold from thin air is not so easy.

from SOVErEIGN MAN http://www.sovereignman.com/finance/why-do-we-have-faith-in-gold-one-simple-statistic-13355/
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January 2, 2014
Santiago, Chile

1) Politicians believe there are no consequences for destroying our liberty…

Stimulus and response. That’s the easiest way of summing this up. When politicians steal, and there are no consequences, they’re going to keep stealing.

Cyprus proved this point handily. The government froze bank accounts for everyone in the country (of course, the big bosses got their money out in time). And yet, there was no violent revolution in the streets. People just accepted it.

Poland nationalized pensions. Argentina imposed severe capital controls. The French are taxing everything under the sun. The US government was caught red-handed spying on… everyone.

And yet, there have been ZERO consequences. Citizens have been trained like caged animals to simply roll over and acquiesce. I imagine the politicians are thinking, “Holy Cow! I can’t believe we just got away with that…”

It only reinforces their behavior. With each destructive act, they become more bold, more brazen in dismantling our liberties, confident that they can continue to act with total impunity.

2) …Central bankers and economists believe there are no consequences to printing money…

The Fed expanded its balance sheet by $1.1 TRILLION in 2013, a whopping 38.5%. Nobody seems to mind. The stock market surged to all-time highs, the bond market remained stable, and everyone pronounced the ‘recovery’ was in.

I attended a dinner a few months ago where Ben Bernanke himself touted how much his quantitative had helped US economic conditions.

They really believe in what they are doing. They really believe that conjuring endless quantities of money out of thin air is the path to prosperity.

Not to mention, our modern society awards its most esteemed prizes for intellectual achievement to the likes of idiot savants like Paul Krugman who tell us that the Fed should be printing even MORE money. And people listen to him.

So we can only expect Ben “I can raise interest rates in 15 minutes” Bernanke, and his heir apparent Janet Yellen, to give us more of the same.

3) …Investors think there are no consequences to deficits, or debasement…

In 2013, headlines like “the US deficit is -only- $700 billion” were actually considered good news.

And markets have given all of these fiascos a pass– from the government shutdown to record-shattering debt levels to downgrades by the rating agencies. AA became the new AAA in 2013.

Nobody cares that the US government ‘borrowed’ a record amount of money from the Social Security Trust Fund. Or that they spent a record amount just to pay interest on the debt at a time when interest rates are at all-time lows.

Rather, they just keep investing… without a single thought to the possible risks. The fear of missing the big boom is greater than the fear of losing money. But then again, it’s not their money at risk. It’s yours.

4) …But Joe Six-Pack knows this is all crap.

In 2013, the collective net worth of the 300 richest people in the world grew to $3.7 trillion, 16.5% higher than 2012. Corporate profits were also at record levels.

Fortune 500s, the super-rich, rich, and even upper middle class have largely been beneficiaries of the central bank induced asset bubble.

But everyone else is getting hammered by inflation… watching their savings and livelihoods melt away before their very eyes.

A report from the US Census Bureau this year showed that median household income has declined for five straight years. And those living in poverty, using food stamps, or receiving unemployment benefits remained at record high levels in 2013.

Meanwhile, the wealth gap has grown to its largest since 1929– the year of that fateful financial collapse.

It’s time for a reality check: something is wrong with this picture.

We’ve become desensitized to everything. “Unprecedented” monetary policy. Record debts. Massive wealth gap. Government surveillance. Theft. Deceit. Inflation.

We’ve become so accustomed to getting screwed, it’s just par for the course now. We sit quietly and wait for the next round of beatings, shrugging it all off as the new normal.

This isn’t normal. This is not how a free society is supposed to function.

A free society does not spy on its own people, threaten them with drone assassination, and award an unelected banking elite with supreme authority to rob purchasing power from the masses in favor of a bubbly stock market.

And despite the conventional wisdom, this is not a consequence-free environment.

History is full of examples of entire nations that reached their breaking points… shouting from the rooftops “I’m mad as hell! And I’m not going to take it anymore!”

2013 already saw violent unrest in some of the most stable countries in the world like Singapore and Sweden, all underpinned by absolute disgust for the status quo.

Whether today or tomorrow, this year or next, there will be a reckoning. The system is far too broken to repair, it must be reset.

It’s simply absurd to look at the situation objectively and presume this status quo can continue indefinitely… that this time is different… that we’re somehow special and immune to universal principles.

This is not some prediction for doom and gloom. Far from it.

It’s actually a message of optimism. For the sooner these crackpot criminal politicians and their central banking ilk are stricken from power, the better off we’ll all be.

Unfortunately there’s going to be quite a bit of turmoil to get there.

Here’s to 2014. It’s going to be a hell of a year.

from SOVErEIGN MAN http://www.sovereignman.com/trends/four-key-lessons-from-2013-13345/
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December 31, 2013
Sovereign Valley Farm, Chile

The other night I played my first game of Monopoly in probably 20 years.

One of my friends gave me the infamous board game for Christmas, and as I’ve had a lot of guests down here over the last few days, we all thought we’d give it a go.

Guess who won? Nope. Not me. And not any of my friends either. The bank won.

The bank actually wins every game of Monopoly.

Think about it. All of the properties are initially purchased from the bank. You mortgage them back at half the market value. Plus the bank has its own Monopoly on lending… the official rules state that only the bank can loan money to players.

Most importantly, though, the bank never goes bankrupt. Ever. If the bank runs out of that Monopoly funny money, the bank can merely create more money using anything (other paper) it sees fit.

Just like real life. And this tells you pretty much everything you need to know about money and banking.

from SOVErEIGN MAN http://www.sovereignman.com/finance/this-pretty-much-tells-you-everything-you-need-to-know-about-money-and-banking-13338/
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Recently, we’ve discussed several different economic citizenship programs around the world. And while these programs are not for everyone due to their higher costs, they have all surfaced at the same time, and I would be derelict in my duties to not to inform you about these options.

Bottom line—it’s all good news. The supply of potential second citizenships is increasing. And I’m certain it’s going to continue to in crease, even despite the occasional grumblings and misgivings.

Malta is an interesting example; after passing their new economic citizenship program, the European parliament is scheduled to have a ‘debate’ in January to discuss the program. It clearly makes a lot of politicians uncomfortable.

I shared the stage with a minister from the Maltese government at a citizenship conference in Miami a few weeks ago. It was nice to be around someone who actually ‘gets it’. We discussed how economic citizenship can be a huge benefit to the country. And in times when so many nations are broke, it’s quickly becoming a necessity.

Rather than treat people like milk cows, nations are going to have to compete with one another for the most productive citizens and residents. That includes rolling out attractive economic citizenship programs like Malta has done.

As one would expect, as the supply of these citizenship programs increases, the prices will fall… so they’ll become more affordable to the average guy.

But that’s down the road.

What we’re talking about today is something that just about everyone can do and afford today. We’ve discussed this several times before over the last year, but on the heels of so many alerts about economic citizenship opportunities, this one bears repeating.

Since last year, Panama has become the easiest and cheapest option to establish second residency. And in a thriving economy to boot.

The new residency visa category is called Permanent Residents Visa for Citizens of Friendly Nations. 45 countries are currently on the list of eligible nationalities for this program, from Australia to the United States.

This immigration program is unique in the world. It was established by presidential decree, essentially because the Panamanian economy is growing so quickly and the labor pool began to dry up.

There are simply not enough people in Panama for the number of jobs that the economy is creating. And they are in need of attracting foreign talent.

This program definitely won’t be around forever. As soon as the economy cools off, the government will most likely do away with this incredible immigration opportunity.

It’s also possible that the next President of Panama (the current President Martinelli leaves office next summer) will close the window for new enrollment.

That’s a big reason why I’m sending this out now—if you’re looking for a residency option, it’s important to take advantage of this window of opportunity now if you’re interested.

Continue Reading and Get Full Access Here >>

from SOVErEIGN MAN http://www.sovereignman.com/alerts/the-easiest-place-in-the-world-to-establish-second-residency-13328/
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December 27, 2013
Sovereign Valley Farm, Chile

In September 1939, six days after the United Kingdom declared war on Germany, Charlie Chaplin began filming one of his most epic films ever… and the first “talkie” for the silent film star.

It was a courageous project– the ‘Great Dictator’ directly poked fun at Adolf Hitler.

At the end of the movie, Chaplin looked into the camera and gave a stirring speech about timeless principles– peace, mutual respect, freedom from evil men who aspire to lead nations.

This did not win Chaplin any friends in Washington who were keen to maintain official neutrality.

And he paid dearly for it; the Great Dictator was the beginning of an entire decade of turbulent trouble between Chaplin and the US government.

FBI director J Edgar Hoover opened a file on Chaplin and launched a smear campaign to tarnish his public image. The mainstream media quickly jumped on board, accusing Chaplin of being a communist sympathizer.

Eventually they found an obscure law on the books as an excuse to haul him into court and put him in prison.

Chaplin won the trial… barely… but was then roped into the anti-communist witch hunts of Senator Joseph McCarthy.

In his autobiography, Chaplin sums up his troubles with the US government as follows:

“My prodigious sin was, and still is, being a nonconformist. Although I am not a Communist, I refused to fall in line by hating them. . . Secondly I was opposed to the Committee on Un-American Activities– a dishonest phrase to begin with, elastic enough to wrap around the throat and strangle the voice of any American citizen whose honest opinion is a minority one.”

Chaplin reached his breaking point when, as a British citizen, he realized that he would be effectively kicked out of the Land of the Free. As he wrote,

“Whether I re-entered that unhappy country or not was of little consequence to me. I would like to have told them that the sooner I was rid of that hate-beleaguered atmosphere the better, that I was fed up with America’s insults and moral poposity, and that the whole subject was damned boring.”

He moved his family to Switzerland and lived out the rest of his days in an idyllic setting near Geneva.

There was just one problem. The entirety of Chaplin’s substantial wealth was in the US. And he waited far too long– until he had been exiled from the country– to even think about moving some funds abroad.

His rousing speech at the end of the Great Dictator calls for a world free of violence, intimidation, and government control. Unfortunately, we don’t get to live in that world.

We live in a world where ambitious men are willing to do anything to seize absolute power… where they can regulate every aspect of our lives, from what we put in our bodies to whether we can collect rainwater.

They confiscate our hard earned wages at gunpoint. They devalue our savings. They spy, brazenly and relentlessly, on absolutely everyone. They wage senseless wars in foreign lands. They waste. They frustrate. They destroy.

This our reality. The world is beautiful. Life is beautiful. But the leaders of humankind surely make it all damned hard to appreciate sometimes.

That’s why it makes so much sense for everyone to have a little bit of insurance– to make sure that we don’t make the same mistake as Chaplin and hold the entirety of our savings and livelihood in the same country in which we live… and one that is clearly on a downward trend.

This is our consumate focus at Sovereign Man. And with each passing day, the reasons become even more obvious. We’re going to be in for a hell of a 2014.

And now, without further ado, please enjoy Mr. Chaplin’s final speech from the Great Dictator:

from SOVErEIGN MAN http://www.sovereignman.com/trends/video-a-holiday-message-from-the-great-dictator-13334/
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December 27, 2013
Sovereign Valley Farm, Chile

In September 1939, six days after the United Kingdom declared war on Germany, Charlie Chaplin began filming one of his most epic films ever… and the first “talkie” for the silent film star.

It was a courageous project– the ‘Great Dictator’ directly poked fun at Adolf Hitler.

At the end of the movie, Chaplin looked into the camera and gave a stirring speech about timeless principles– peace, mutual respect, freedom from evil men who aspire to lead nations.

This did not win Chaplin any friends in Washington who were keen to maintain official neutrality.
And he paid dearly for it; the Great Dictator was the beginning of an entire decade of turbulent trouble between Chaplin and the US government.

FBI director J Edgar Hoover opened a file on Chaplin and launched a smear campaign to tarnish his public image. The mainstream media quickly jumped on board, accusing Chaplin of being a communist sympathizer.

Eventually they found an obscure law on the books as an excuse to haul him into court and put him in prison.

Chaplin won the trial… barely… but was then roped into the anti-communist witch hunts of Senator Joseph McCarthy.

In his autobiography, Chaplin sums up his troubles with the US government as follows:

“My prodigious sin was, and still is, being a nonconformist. Although I am not a Communist, I refused to fall in line by hating them. . . Secondly I was opposed to the Committee on Un-American Activities– a dishonest phrase to begin with, elastic enough to wrap around the throat and strangle the voice of any American citizen whose honest opinion is a minority one.”

Chaplin reached his breaking point when, as a British citizen, he realized that he would be effectively kicked out of the Land of the Free. As he wrote,

“Whether I re-entered that unhappy country or not was of little consequence to me. I would like to have told them that the sooner I was rid of that hate-beleaguered atmosphere the better, that I was fed up with America’s insults and moral poposity, and that the whole subject was damned boring.”

He moved his family to Switzerland and lived out the rest of his days in an idyllic setting near Geneva.

There was just one problem. The entirety of Chaplin’s substantial wealth was in the US. And he waited far too long– until he had been exiled from the country– to even think about moving some funds abroad.

His rousing speech at the end of the Great Dictator calls for a world free of violence, intimidation, and government control. Unfortunately, we don’t get to live in that world.

We live in a world where ambitious men are willing to do anything to seize absolute power… where they can regulate every aspect of our lives, from what we put in our bodies to whether we can collect rainwater.

They confiscate our hard earned wages at gunpoint. They devalue our savings. They spy, brazenly and relentlessly, on absolutely everyone. They wage senseless wars in foreign lands. They waste. They frustrate. They destroy.

This our reality. The world is beautiful. Life is beautiful. But the leaders of humankind surely make it all damned hard to appreciate sometimes.

That’s why it makes so much sense for everyone to have a little bit of insurance– to make sure that we don’t make the same mistake as Chaplin and hold the entirety of our savings and livelihood in the same country in which we live… and one that is clearly on a downward trend.

This is our consumate focus at Sovereign Man. And with each passing day, the reasons become even more obvious. We’re going to be in for a hell of a 2014.

And now, without further ado, please enjoy Mr. Chaplin’s final speech from the Great Dictator:

from SOVErEIGN MAN http://www.sovereignman.com/trends/video-a-holiday-message-from-the-great-dictator-13333/
via IFTTT

December 20, 2013
Sovereign Valley Farm, Chile

In investing, it’s often said that nothing goes up or down in a straight line.

Stocks, bonds, commodities… they all go through periods of growth, correction, collapse, mania, etc.

We’re seeing this right now with respect to a substantial decline in the nominal gold price after more than 12 straight years of gains.

But I’ve just recently come across an investment trend that has posted the same results for more than 20-years straight. And it’s actually quite alarming.

Every human being on the planet requires sustenance… typically measured in Calories per day.

What’s interesting is that the global average of per-capita Calorie consumption has increased a whopping 24.6% since 1964.

So over the last fifty years, the data clearly show that human beings are eating more… now to an average of roughly 2,940 Calories per person per day.

As you can probably guess, most of the rise has taken place in East Asia just over the last two decades, owing to the increased wealth in that part of the world.

Roughly a billion people have been lifted out of poverty in Asia alone. And as people begin to generate income and accumulate savings, their dietary habits have invariably changed. They eat more, i.e. demand more Calories.

As we eat more, we require more resources from the world. And in the case of food, this means more arable land to grow crops.

But there’s another twist to this trend. As people become wealthier, they not only eat more, but they also begin to consume more resource consumptive foods– especially meat.

It takes a lot more land to grow a kilogram of beef than it does to grow a kilogram of tomatoes. The difference can often be an order of magnitude greater.

So when you look at the demand side of this equation, per capita food consumption is increasing… and we are also consuming a vastly greater amount of land-intensive foods.

In short, the global trend is that we are demanding a much greater amount of arable land per person.

Yet the data on the supply side show the precise opposite.

According to World Bank data, the global average of arable land per person has been on a one-way decline since 1992.

In fact, since 1964, there has only been one year that the global average of arable land per person has increased. In every other instance over the last five decades, arable land per person has declined.

This is an astounding trend.

Our modern ‘science’ is stepping in to address this trend. It’s why much of what we eat is now concocted in a laboratory rather than grown on a farm. It’s why McDonalds puts pink slime in its hamburgers instead of… you know… beef.

But even still, science only goes so far.

Yields for many staple crops (like wheat) essentially hit a wall about ten years ago. After decades of miraculous gains in the amount of tons, bushels, and kilograms per acre we have been able to extract from the Earth, productive capacity has largely plateaued.

In other words, we have maxed out what we can pull out of the soil for now. And the amount of soil per person that’s in production is in serious decline.

To me, this spells out an obvious case for investing in agriculture… and even more specifically, to own farmland.

from SOVErEIGN MAN http://www.sovereignman.com/correspondents/chile-correspondents/the-case-for-owning-farmland-in-one-simple-statistic-13321/
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December 19, 2013
Sovereign Valley Farm, Chile

You probably heard the announcement yesterday: the Fed decided to reduce its unprecedented bond-buying program from $85 billion a month to “only” $75 billion.

The reaction all around the world from financial analysts and commentators shows that decisions made behind closed doors by a handful of wise men and women matter more than what the actual productive economy is really doing.

It’s absurd. A tiny group of people controls the US dollar, and the dollar still rules the world, making these shadowy characters the true power behind the throne.

For the past six months the whole world has been trembling at the sounds coming from the Fed about its “imminent” tapering of flooding the world with dollars.

Entire economies and their currencies, from India to Indonesia, have taken a nosedive because of the threat that the punchbowl will be taken away.

In the end what happened is comical. The Fed’s decision to reduce money printing by $10 billion a month means that now they’ll ‘only’ create $900 billion worth of new currency units per year.

And the reaction has spawned epic debates, discussions, and analysis about what’s next.

Here’s the bottom line– the Fed is still driving down a lonely stretch of road, pedal to the floor, steering straight into the great financial abyss ahead.

All of this debate and discussion is simply about whether the Fed is in 4th gear or 5th gear. Ultimately it’s irrelevant… because they no longer have any brakes.

They simply cannot stop. Ever. If they stopped printing, the whole phony financial system in place today would crash miserably and take down whole governments and countries with it.

And that is where this chapter of the financial system will end. Reset. And start anew on a fresh page… this time underpinned by sound money.

If this seems fatalistic, it’s not. It’s just a dose of reality. Printing money has always been the last, desperate attempt of insolvent nations.

History can produce a grand total of ZERO examples of nations that printed their way into prosperity.

And it would be foolish to think that this time is any different.

from SOVErEIGN MAN http://www.sovereignman.com/trends/video-the-feds-tapering-absurdity-in-one-simple-analogy-13318/
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December 18, 2013
Hong Kong

 

[Editor’s Note: Tim Staermose, Sovereign Man’s Chief Investment Strategist, is filling in today while Simon is scouting new agricultural properties.]

Earlier this year I ate a $36 hamburger in Sydney.

And after the sticker shock wore off, I wrote about the Australian dollar’s massive, obvious overvaluation.

When the Aussie dollar passed A$1.04 per US dollar, I advised readers of my premium investment newsletter to protect the value of their portfolios with a trade that profits as the Australian dollar falls.

This call paid off for my readers; the Aussie dollar is now below $0.90. But I believe it has much further to fall.

For starters, Reserve Bank Governor Glenn Stevens (Australia’s equivalent of Ben Bernanke) said in a widely publicized interview last week that he wants the Australian dollar at 85c or below.

In response, global hedge funds are now selling it with abandon and helping Mr. Stevens get his wish sooner rather than later.

As with most targets, it will probably overshoot significantly, and I wouldn’t be surprised to see the Aussie fall to 80c or less over the coming year.

Simultaneously, the recently installed coalition government’s statements this week on the state of the Aussie government’s finances and economy have been almost comical.

The government has admitted that, contrary to its election promises, a budget surplus will be impossible during the course of its term.

This year’s budget deficit is expected to be A$47 billion, more than 50% higher than the A$30.1 billion predicted as recently as August.  And it’s sliding even deeper into the red for the next three years.

A projected A$4.2 billion surplus in 2016-17 proved wishful thinking.  The government now says it is heading for a A$17.7 billion deficit– over 4x higher.

Economic growth next year is now forecast to remain at a sluggish 2.5%, and the unemployment rate is forecast to stay at elevated.

This means that future interest rates cuts are likely.

That’s a further blow to the Aussie dollar, which has been a beneficiary of global investors seeking Australia’s higher-than-average interest rates.

On top of everything else, Australia’s reputation as an open, business-friendly economy, welcoming of foreign investment, has taken a severe beating, after the new government rejected a high-profile takeover deal last month.

Archer Daniels Midland was told it would not be allowed to invest billions of dollars in Australia’s Graincorp because it is “against [Australia’s] national interest.”

After a black eye like that, it’s highly doubtful that other US businesses will be bringing their greenbacks to invest Down Under any time soon.  And that’s more bad news for the currency.

This is a major turn of events given that, over the last few years, Australia had become a ‘new Switzerland’ of sorts—a safe haven currency with a pristine government balance sheet.

Now, this isn’t the end of the world for Australia– the situation with both the money supply and national finances is still far superior than most of the West.

But there’s simply too much negative momentum right now.

And while a brief counter-trend rally is certainly possible, it’s my firm conviction that a longer-term bearish bet on the Australian dollar will prove lucrative.

from SOVErEIGN MAN http://www.sovereignman.com/expat/perfect-storm-sending-the-a-below-85c-13315/
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