forest & trees june 2011

8/6/2019 Forest & Trees June 2011

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Forest & Treesreport

June 2011

BeckerAdvisory Services Issue 2

BeckerAdvisory.com 1

THE FUTURE

Always in motion is the future, and many possible futures

there are. - Yoda

If I did not work in the world of finance I would still do the same amount ofreading and study of the market. I would do the same not only for my own

investing purposes but also my interest in the history of money andinvesting. One of the blessings (or maybe curses) of my interest in financialand economic topics is that I look at many things in the world and seesimilarities in the world of finance. The quote above is a perfect example.The quote is from one of the new Star Wars: The Clone Wars cartoons thatmy two oldest sons watch.

As I watched the cartoon with them the other day the above quote reallypopped. The quote prompted a number of ideas in my head. The first ideawas that of the Boy Scouts always being prepared. The next thought wasfrom an investing standpoint and that was being prepared through

diversification. The last thought, which spurred me to write, was that it iswithin the realm of thinking that the number of possible futures willdiminish. Why would possible futures diminish? One reason would begetting closer to a point in time like the outcome of a baseball game. As theinnings pass the possible outcomes shrink to a finish. Another reasonpossible futures diminish is loss of resources that affect an outcome.

I look at our economy (and by extension the world economy) as gettingcloser to a point in time where the current debt laden system does not work.The resources to fight the possible negative futures are not working and arefrankly making matters worse. Fortunately, many of the aspects of thepresent have played out in the past. As a historian I think it is my duty to

remind everyone of the political philosopher George Santayanas famousquote Those who cannot remember the past are condemned to repeat it.

When I survey the financial battlefield it is clear that global economies havepainted themselves into a corner. There is no easy way to escape beingpainted into a corner. If you are a little painted in you can step over or jumpclear. Unfortunately, the global economy is painted in tight and the onlyway out is over miles of wet paint.

In this issue:

FORESTThe futurePainted in the cornerCharting the Forest

TREESResourcesMetalsCharting the Trees

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PAINTED IN THE CORNER

In the last few weeks, as the temperature outside has been rising, I have been trying to complete outdoorprojects around the house. One of those projects has required some painting. If you have ever painted a

floor (I had the distinct displeasure of painting a warehouse floor while in the military) or a hard to reachspace you know that even the smartest person can paint themselves into a difficult situation. While I didnot get painted into a corner recently I was alone with my thoughts long enough to recognize what toughspots global economies are presently facing.

Currencies

Even though we are lied to on a regular basis from the Fed Chairman and the Secretary of the Treasuryabout their strong dollar approach. The US dollar must remain weak for the US economy. If the dollarrises it puts downward pressure on the economy by increasing the cost of our exports. A weak dollarthough pushes up foreign currencies like the Euro and Yen making their efforts to correct their economiesthat much harder.

Interest RatesAgain, even though we were told lowering interest rates was an effort to stimulate the economy really itwas an effort to goose the stock market. If rates are low savers are forced further out on the risk returnhorizon which would lift stocks. The idea being called the wealth affect which is another way of sayingwhen peoples investments are doing better they feel wealthier and spend. Unfortunately, highunemployment and shallow consumer confidence says America is not feeling wealthier. So, the problemis, typically, when interest rates are pushed up it is when an economy is recovering and the centralauthorities are looking to tame the economy. With the Fed looking to take the stimulative punch bowlaway and not continue to prop up the treasury market interest rates may have rise to attract treasuryinvestors. Rising rates could really put a pinch on the economy.

Debt

We are living through unprecedented times where debt levels are as large as ever and now ourgovernment is begging to have the debt ceiling raised or we risk defaulting on our debts as a nation.Raise the debt ceiling and we end up with that much more debt for future generations to deal with ordont raise the debt and watch the economy go into a tailspin.

Banks

At one point the big investment banks like Goldman Sachs carefully managed their own money. Then inthe flurry of greed that encapsulates Wall Street they decided to go public and start risking other peoplesmoney for their own profit. In 2008 when the game was up the stealthy bankers of Wall Street led by thethen Treasury Secretary, Hank Paulson, convinced their compatriots in congress to hand over tax payermoney to save themselves from bankruptcy. So, here we sit with the banks earning record profits, payingbonuses, borrowing money from the Fed at 0% and buying treasuries at 2% plus for a tidy guaranteedprofit. Oh, but dont rock the Wall Street banks boats or they may cry that they are too big to fail andtheir doom would wreck the economy. In fact their demise would be to everyones profit.

Politicians

You know the drill here. It has been the same for millennia. Those in power seek to maintain power. Ifour leaders made the tough choices the economy would be like a junkie going off drugs. There would bepain but so much better on the other side. Or, they can capitulate to the Fed and Wall Street and kick thecan down the road a little further.




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CHARTING THE FOREST

Here area a few charts that give some clarity on the state of the economy.

You can see from

this chart that the

blue bars have fallen

short of the red line

which is needed to

maintain the status

quo. Without debt

expansion our

economy does not

grow.

The last time after-

tax corporate profits

were this high was

1929. Bottom line

on this chart is that

when the income

gap gets too large

the natives get

restless and the

markets suffer.




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RESOURCES

World population is 6.7 billion and counting. That is a staggering number considering that the UnitedStates only makes up only 325 million of that number. In the last century we enjoyed an almost continuos

decline in commodity prices as the world could supply enough for demand. A recent white paper titledTime to be Serious from Jeremy Grantham of GMO LLC does a spectacular job of framing the issue withresources, the paradigm shift in prices and availability of resources. Here is a link to their research page.

For those that want the cliff notes here is the opening summary straight from the report.

Summary

Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of thefood supply, ebbing and fl owing in population.

From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply,and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.

Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion,at minimum.

The rise in population, the ten-fold increase in wealth in developed countries, and the current explosivegrowth in developing countries have eaten rapidly into our finite resources of hydrocarbons andmetals, fertilizer, available land, and water.

Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people getricher, they eat more grain-intensive meat. Because the population continues to grow at over 1%, thereis little safety margin.

The problems of compounding growth in the face of finite resources are not easily understood byoptimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we

will run out of everything and crash. We must substitute qualitative growth for quantitative growth. But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices

of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From2002 until now, this entire decline was erased by a bigger price surge than occurred during World WarII.

Statistically, most commodities are now so far away from their former downward trend that it makes itvery probable that the old trend has changed that there is in fact a Paradigm Shift perhaps the mostimportant economic event since the Industrial Revolution.

Climate change is associated with weather instability, but the last year was exceptionally bad. Nearterm it will surely get less bad.

Excellent long-term investment opportunities in resources and resource efficiency are compromised bythe high chance of an improvement in weather next year and by the possibility that China may stumble.

From now on, price pressure and shortages of resources will be a permanent feature of our lives. Thiswill increasingly slow down the growth rate of the developed and developing world and put a severeburden on poor countries.

We all need to develop serious resource plans, particularly energy policies. There is little time to waste.


http://www.gmo.com/America/Research/http://www.gmo.com/America/Research/http://www.gmo.com/America/Research/


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METALS

There was an interesting banter on Twitter recently that was prompted by another advisor. The tweetstated that gold was not an investment but speculation. At first I felt sorry for this advisor then felt even

worse for his clients for his attitude toward gold. I felt it my duty to voice my opinion that first, allinvesting is speculation and second that people buy (invest) in gold for more than one reason. In my casegold and silver are insurance against massive government debts, failing currencies. More to the point Ilook at gold as an alternative currency. Lets look at some of the fundamentals reasons that make theoutlook for gold and silver still worthy of being part of a portfolio.

The world is currently awash in US dollars as well as Euros and Yen. Not only is the world awash incurrency but all currencies are fiat currencies not backed by anything. So, the continued printing ofmoney is/has destroyed currency values.

Barrick Gold, the worlds biggest gold producer says that the relatively easy-to-reach gold supplies aregone and many in-the-know state that peak gold production has passed. Further, gold production hasbeen in decline since 2002 and now we are seeing huge demand for gold.

The amount of debt in the system both government and private debt is at all time highs and by morethan a few knowledgeable people the world has gone past the point of no return where debts can berepaid. This means defaults whether outright or sneakily administered will happen.

History shows that no fiat currency has ever survived they all collapse or are replaced by an assetbacked currency. In the modern era the US dollar has changed form almost every 40 years. The historyof the gold standard in the United States goes from the classical gold standard from 1871 until WorldWar I (1914). The next is the gold exchange standard between the two world wars. This is followed bythe Bretton Woods international monetary system from 1944 until 1971 (gold backing). Since 1971Nixon took the world off the gold standard and since then all money has been backed by nothing. And,since 1971 the dollar has steadily declined in value as the US has racked up debt printing money. Youcan do the math that we are a little over 40 years into the current fiat system.

The next financial crisis (and there will be one since the last one was just papered over with more debt)

will likely usher in another gold standard for the dollar. If this is true then the price of gold will have tobe higher than it is today for people to trade their gold in for paper currencies.

The above conjecture that the dollar will revert to a gold standard is a direct comment on the likelyinability of the US government to get its house in order through drastic measures. In the words of JohnHathaway (manager of the Tocqueville Funds) - we cannot have sound money in a democratic welfare state.There is too big of a constituency wanting to move the dial up on benefits and entitlements. There is noeconomic footing for growth and politicians are looking to be re-elected and to save their own hidesthereby not making the tough choices and implementing desperately needed austerity in America. Thiswill lead to more money printing or debasement of currency.

Global gold discoveries peaked in 1988 and until the last few years global central banks were sellers ofgold while institutional investors had little exposure to gold. These trends have reversed as both arelooking to protect purchasing power and exposure to failing currencies.

The case for silver is that much and more as I indicated in my last issue. Silver is well off its inflationadjusted high and is much rarer than gold in the sense that there is not as much of it above the ground.All the while demand for silver has skyrocketed. Worst of all silver has been the subject ofmanipulation for years by large banks who hold huge short-positions that has suppressed the price ofsilver.

The bottom line on the precious metals is if you think there is a chance that the US political machine andFed are going to screw the pooch and be wrong about the economy (as they have been thus far) consider


http://www.scribd.com/doc/55296428/Forest-and-Trees-May-2011http://www.scribd.com/doc/55296428/Forest-and-Trees-May-2011http://www.scribd.com/doc/55296428/Forest-and-Trees-May-2011


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some monetary protection. The metals will go up and down and perhaps be quite volatile but unless theeconomic trajectory changes by somehow finding another industrial revolution or equivalent of theunleashing of the internet this economy will not go anywhere regardless of stimulus. The more they tryto stimulate and intervene the more the metals will shine.




7/9

CHARTING THE TREES

The above chart is of gold (red line) and the US dollar (black line). I think it speaks for itself why oneshould have some US dollar insurance.

The above chart from IndexMundi.com shows the drastic nature of food prices over the last 20 years.Some of this is a result of the expended money supply chasing goods and some is from shear demand.




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CHARTING THE TREES cont...

From the great team at GMO and Jeremy Grantham the above chart tells an interesting story forresources. And, no the index represented above is not driven by gold and silvers run. They are just twoof the 33 commodities that are equally weighted.


http://www.gmo.com/America/MyHome/defaulthttp://www.gmo.com/America/MyHome/default


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DISCLAIMERS

Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promiseas to any results that may be obtained from their views. At the time of writing Henry Becker and/orAdvisory Services clients holds the following securities that are related to the content of this publicationphysical silver, physical gold, and ticker symbols CEF, GTU, GDX, MOO, HAP and PBJ.

No reader should make any investment decision without first consulting his or her own personalfinancial advisor and conducting his or her own research and due diligence, including carefullyreviewing the prospectus and other public filings of the issuer.

To the maximum extent permitted by law, BAS disclaims any and all liability in the event anyinformation, commentary, analysis, opinions, advice and/or recommendations in the update prove to beinaccurate, incomplete or unreliable, or result in any investment or other losses.

The information provided in the report is obtained from sources which BAS believes to be reliable.

However, BAS has not independently verified or otherwise investigated all such information. BAS doesnot guarantees the accuracy or completeness of any such information. The commentary, analysis,opinions, advice and recommendations represent the personal and subjective views of the BAS, and aresubject to change at any time without notice.

The report is not a solicitation or offer to buy or sell any securities.



forest & trees june 2011

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