Tune out. Buy gold. Be happy.
By
Bill Bonner Feb 14, 2012
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Where we part company with Warren Buffett...
The Sage of Omaha explained in Fortune magazine why bonds are dangerous.
He went on to explain why he doesn’t like gold either. He points out that since 1965, the total return on gold (not adjusted for inflation) was 4,455%. But the total return on stocks was higher, at 6,072%.
The difference between the two is that gold is a ‘sterile’ investment, says Buffett. Stocks are not.
He’s right. Gold is only useful at protecting purchasing power when the monetary system is in danger. At almost all other times, you’re better off with stocks, businesses, farmland or another productive asset.
That’s why Buffett now prefers stocks. And it is why we now prefer gold.
Buffett willingly gives up the protection of gold in order to the get the upside from stocks. We willingly give up the upside from stocks in order to get the protection from gold.
Who’s right?
Only time will tell. Our guess is that time will tell us that Buffett is right in the near term. But we’re still not going to switch to stocks. Because the risk is too high that time will be on our side.
In other words, the most likely outcome, as far as we can tell, is that the financial world will stumble along more or less in the same direction it is going now. Perhaps for many years. Gold, already expensive in terms of purchasing power, may go nowhere or even down. After all, we’re still in a Great Correction. As long as we follow in Japan’s footsteps there’s no particular reason for gold to rise.
But we do not bet on the most likely outcome. We bet on the outcome that is underpriced. The outcome that is most likely to pay off or blow us up. In our view, investors do not yet fully appreciate the risks of a financial catastrophe, a war or a revolution.
In yesterday’s news, we learned that hundreds of thousands of Greeks had taken to the streets.
Meanwhile, hardly a day passes that we don’t hear of an impending attack on Iran.
The developed economies are borrowing money at two to five times the rate of GDP growth.
And the world’s major central banks eagerly print money.
Maybe Buffett will be right. Maybe the next 47 years will be like the last. But it seems like a bad bet to us. All the key circumstances are completely different – even opposite.
You remember the years from ’65 to 2012. They weren’t perfect. But they weren’t bad. The US was on top of the world and headed higher. It was owed more money by more people than any nation ever had been. It was the leading energy exporter. It was the world’s leading capital investor. Its people were earning more and more money – in real terms. Total consumer and government, as a percentage of GDP, was barely a fifth of today’s level.
Of course, it wasn’t all good. The US was getting deeper and deeper into a costly and losing war. This would lead to some big bills to pay in the ‘70s and to some tough times. But, overall, America’s best days were still ahead.
And today?
Now, the emerging markets are growing much faster, taking more and more market share from the US. America is deep in debt and adding more debt every day. Major industries have been zombified. More than half the voters depend on money from the government. America’s degenerate capitalism and is geriatric democracy cannot adapt to the challenges it faces. And the typical working man hasn’t had a real increase in wages since the Johnson administration.
In ’65, the US was heady for glory. In ’12, it may be going to Hell.
But who knows? Maybe Buffett will be right.
Still, we’ll stick to our formula.
Buy gold on dips. Sell stocks on rallies.
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And more thoughts
• “Wanna lose some money?”
Easy. Buy Facebook. It’s said to be going public at 150 times earnings.
In order to justify the price, says our colleague, Chris Mayer, Facebook would have to sign up every human being on the planet and a few extraterrestrials too.
The whole internet complex is a “bubble that’s about to pop,” he says.
“It’s rumored that Facebook’s IPO will value the company somewhere between $75 and $100 billion – about 150 times 2011 net income, 212 times free cash flow, and just shy of 27 times last year’s sales. Facebook’s sales have grown 77-fold since 2006, and its valuation based on private secondary markets has soared 92-fold during the same time.”
Wow! How do you beat that?
We tried to use Facebook. It just seemed like too much trouble. And what do you get out of it? Another way to keep up with your friends? That is, another way, in addition to phone, mail, SMS, email and carrier pigeon. Seems like more than enough ways already.
We also tried LinkedIn. We signed up. But we could never figure out what the point is.
So, we apologise to all the many people who offered to make us a ‘friend’ or a 'contact’. I’m afraid we had to ignore them all. Not because we don’t want them as friends and contacts. But simply because we can’t keep up with the volume of contacts we have already.
Our advice to dear readers: Sell Facebook and LinkedIn, as soon as you get a chance. Turn off Facebook. Unplug yourself from LinkedIn.
Tune out. Turn off. Buy gold. Be happy.
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