Vedran Vuk here, filling in for David Galland. David's schedule is packed with events down in Argentina including the Harvest Celebration at La Estancia de Cafayate, so I'll be steering the ship for the next few weeks. First today, we'll have an article from Dennis Miller on when to trust your instincts on your gold holdings. Then, I'll address the age-old question, "How come you could raise a family on a single paycheck back in the day and now you can't?" I'll give you one big reason why, as well as a way to make that old standard a reality again.
Also, make sure to check out Dennis' recent interview on Real Money Radio with David Holland (to get right into the part with Dennis, skip about the first five minutes of the program). Dennis really knocked this interview out of the park. He tells his retirement story of having a secure nest egg of CDs ripped out from under him, thanks to the 2008 crisis.
Not only does Dennis often talk about his experience in retirement, we've also been doing really well in the Money Forever portfolio. In Dennis' article titled Twelve Tips for Buying Dividend-Paying Stocks, item number ten was choosing stocks with a history of increasing dividends. Looking at our current portfolio, five out of six dividend-paying stocks have increased their dividend since becoming a part of our portfolio. The CFO of the sixth company has said a dividend increase is planned for this year, but hasn't set a specific date and amount.
These dividend increases ranged from an incremental hike of 2% to one company raising its dividend by 150%. To be fair, that company had the lowest dividend yield – 0.8% – of the six. We primarily recommended it for reasons other than its yield, but we're more than happy to be now collecting 2% on it. If you want to check out our portfolio as well as advice on planning for retirement, try out a trial subscription of Money Forever.
Before we get started today, I also want to mention the upcoming Liberty Forum at St. Kitts in the West Indies, May 15-18. Doug Casey will be the feature speaker at the forum and will be joined by Jeff Clark, Bud Conrad, and Terry Coxon as well. Many Casey Research friends will also be attending, including Jeff Berwick, Rick Rule, and my good friend Doug French. The West Indies and a panel full of excellent speakers – sounds like a great time to me. Now, let's get to Dennis' take on trusting your instincts when it comes to gold.
By Dennis Miller, Editor of Money Forever
I recall a terrifying experience years ago. It was my last flight of the year, and I was headed home for Christmas. The plane was speeding down the runway to take off, when the pilot suddenly reversed thrust and slammed on the brakes; the plane shook like I have never experienced before as the pilot aborted the takeoff. As we stopped mere feet from the end of the runway and caught our breath, the pilot came on the intercom and announced, "I'm sorry to frighten you, ladies and gentlemen. I have been flying for many years. There was nothing on our instrument panel that says we have any kind of problem. It just did not feel right, and I want to have some things checked out before we go vaulting into the air."
We taxied back to the gate and several mechanics descended on the plane. Within ten minutes they made the announcement that the flight had been canceled due to mechanical difficulties. As I exited, I stuck my head in the cockpit door and exclaimed, "Captain, I will fly with you any time – thank you! I hope you have a wonderful Christmas season." As a seasoned traveler, it was probably the only time in my life that I was happy about having a flight canceled.
As of this moment, the business columns are blaring headlines about the Dow hitting a record high. At the same time, gold and gold stocks have been taking a beating. If you are like a lot of us at Casey Research and have sizeable positions in gold and silver, it can certainly be a test of courage and patience.
At times like this, it seems appropriate to review why we made certain decisions in light of new facts. Have things changed? Is it time to adjust our holdings?
As luck would have it, Federal Reserve Vice Chairman Janet Yellen sheds some light on the subject. Bloomberg's recent headline, Yellen Says Fed Should Press on With QE Amid Limited Risk, sums it up well. Basically she reiterated that the Federal Reserve will keep on purchasing $85 billion in government debt for the foreseeable future. OK, no changes here, folks; we will continue to spend money we don't have, and the Fed will cover us.
The same day I read about Ms. Yellen, the March issue of BIG GOLD hit my inbox. In the introduction, our own Jeff Clark has this to say about the situation (italics his):
"[T]he fundamental drivers for investing in gold have not changed. If they had, then we should sell, but clearly they have not. This is a short-term correction within a secular trend, despite what some may proclaim.
The primary impetus for a sustained gold bull market is that government debt is a structural problem, in the US and across the globe. Most of it will never be paid – and more piles up every day, to the tune of tens of billions of dollars. The economies of the world's indebted nations are not and cannot grow fast enough to pay off the debt (GDP shrunk [sic] last quarter in the US, the Eurozone, and Japan), and outright default or restructuring (i.e., a "soft default") isn't an option. The only politically acceptable way out is for government to create the money to service the debt and pay its bills, inflation be damned.
This default-by-inflation has been repeatedly employed by governments throughout history. We don't see a different outcome this time.
The Fed has said it wants inflation – and we're sure it'll get what it wants. No forecast comes with a guarantee, but it seems virtually certain that central banks will continue to print money. Since those currencies can't get "unprinted," they'll eventually enter the system and fuel double-digit rates of price inflation. When that process starts to unfold, gold and silver will respond, as they dependably have throughout history."
And of course I catch a quick glimpse of talking heads on CNBC enthusiastically discussing the Dow. One of the experts makes the snide remark that all the gold nuts talking about Zimbabwe need to step aside, because they just want to make some money.
Much like the pilot, my intuition is sending me a message – I am trying to figure out my emotional conflict at the moment. I know I'm heavily in the market with my share of metal and stocks, because I have no choice. They took away our interest income. Most all of my peers feel the same way. We are not heavily in the market because we want to be; we really have little other choice.
Maybe the Dow did hit a high, but it feels more like the Great Depression than the roaring '20s. Unemployment is through the roof, record numbers of people are on food stamps, and we see study after study about our net worth decreasing rapidly.
Let the talking heads at CNBC continue to make fun of me. I think we can do two things at once: make some money and do everything we can to protect ourselves against a possible Zimbabwe moment.
There are certain potential catastrophes that can be so threatening we must take steps to insure ourselves even though the probability of one actually occurring is slim. I cannot put my life savings and my family at risk by trivializing the dangers which are potentially on the horizon.
While CNBC may want to pooh-pooh the probability of something similar happening in our country, we all know that creating massive amounts of currency out of thin air always results in the currency collapsing or being revalued. A prudent investor (particularly one on either side of the cusp of retirement) would do well to take out some insurance. That is generally done by investing in metal, farmland, and other forms of hard assets.
In the same Bloomberg article quoting Ms. Yellen, there is another clue for us: "Kansas City Fed President Esther George has warned that prices of some farm land have hit 'historically high levels.'" I wonder if the CNBC folks feel that is a mere coincidence.
In the fall of 2011, I attended the Casey Summit, which featured three speakers who had lived through hyperinflation in their home countries. They shared their personal experiences with us.
All three speakers went through very similar cycles. All said inflation was rising and then it spiked to astronomical proportions.
The following are a couple of slides used by the speaker from Yugoslavia. Note the last line that indicated that during its hyperinflation, on average every 1.4 days prices doubled.
The presenter showed a 500-billion denominated bill, which had the same purchasing power as a 500 bill was worth just 24 months earlier. His slides documented the hyperinflation, starting at 5.00 and building up to 500 billion.
Can this happen in the United States? Are we immune from the natural laws of economics?
We see inflation on the rise in the US and know our government is not telling us the truth about it. We have discussed the record debt and Federal Reserve spending until we are blue in the face.
I have yet to see anyone present any logical economic premise that concludes that our country will not eventually see a currency collapse. Many have put us down, called us "gold nuts" and the like, and trivialized our concerns. Just show me the facts.
I see several other clues that reinforce my concerns. Throughout history thousands of currencies have collapsed, but precious metals hold their value. It should come as no surprise to learn that over the last few years China, Russia, and many central banks are stockpiling gold. Germany and Venezuela just announced they are bringing their gold back to their shores. Not wanting to start a panic or gold rush, they played it down by saying they just feel it is easier having their metal inside their own borders. It sits in a lump and earns no interest, so there must be a good reason why they are going through all that effort and expense.
At Casey Research, we have regular editors' conferences. The subject of the last two was precious metals and the direction of the market. If I may summarize, we came to several conclusions. We may be in for a rough ride in the short term; however, the fundamental reasons for owing gold and silver have not changed. If anything, the reasons to own gold and silver are more evident than ever before. At the end of the day, none of us is selling, and we are going to be ever alert for some terrific buying opportunities.
Sure, all the contraptions on the airplane might be telling us everything is just fine: the Dow reaches new highs; unemployment slowly drops; and cheap credit is endless. But as experienced pilots, we're reading into the market beyond what the gauges are saying. That's the sort of insight that can mean the difference between and a crash landing and a takeoff for the value of your portfolio.
By Vedran Vuk, Senior Research Analyst
In a discussion with a good friend, he asked me, "How come in the 1950s, you could support a family on a single paycheck, but my wife and I both have to work to make ends meet?" I've heard this question so many times, and people give innumerable reasons, from the Fed's inflationary policies to the lack of decent-paying manufacturing jobs. Usually, the explanations suggest macroeconomic shifts and major policy changes. And sure, some of those explanations are a part of it, but what's often not considered is the expense side of the equation.
If we're going to compare ourselves to a 1950s standard, we have to ask whether our spending is similar to the 1950s. If we strip out all of our unnecessary modern expenditures and make an apples-to-apples comparison, most of us probably could live on a single paycheck. The problem is not that our standard of living has gotten worse – it's that our expectations have far outgrown the reality of most paychecks.
Let's first start with some modern inventions which are ultimately conveniences. For example, there's your cellphone bill and monthly high-speed Internet connection. These are important tools in the modern age, but you could live without them. Then, think of the innumerable gadgets which occupy most of our homes, from iPads and iPods to laptops to flat-screen TVs to Xbox game consoles, and so on. Unless you really need these devices for your work, it's hard to argue that one couldn't live without them. People in the 1950s survived without them – and so could you.
Let's move it up a step to some bigger expenditures. According to the Department of Energy, in 1950 there were 323 vehicles per thousand people in the US. In 2010, there were 811 vehicles per thousand people. Today, every member of the family has a car, if not one to spare – and we're not talking old junkers, but pretty nice cars. I often ask myself, "How come I earn more than the US median, yet it seems like 75% of people around me are driving nicer cars?"
Now let's take it one step further to the really big expenses. Take a drive down to a middle-class neighborhood built in the 1940s and '50s. What you'll see are very modest homes – one-story buildings with a small bedroom for the parents and two to three closet-sized bedrooms for the kids, a living room, a kitchen, and a dining room. Depending on how lucky you were, there may have been two bathrooms instead of one. This cookie-cutter formula spanned the country. The houses weren't that pretty or incredible, but they got the job of raising a family done.
After your drive to that part of town, cruise into a middle-class subdivision built in the last ten or twenty years – it's a completely different picture. Every house is either a McMansion or made to resemble a smaller version of a McMansion. The kids' bedrooms in these things are bigger than my whole first apartment. Let's not even mention the size of the master bedroom; and of course nearly every bedroom has its own bath. Don't forget the additional rooms, such as "the playroom."
What's considered a middle-class lifestyle today isn't even close to the middle class of the 1950s. Add up all of these things: the gadgets, the cellphone and Internet bills, the brand-new cars for the whole family, and the mini-mansions – it's a ton of money that the last generation wasn't spending. When someone lives this sort of lifestyle and wonders, "Jeez, why do my wife and I both have to work?," my answer is, "Well duh, genius. Of course both of you have to work. Look at your lifestyle." If you lived more modestly and within your means, the necessity of two paychecks will not seem so set in stone.
Now, I'm not suggesting that everyone should live a miserly, monastic life. I'm sure that if we could send cellphones back into the past, people in the 1950s would buy them too. What I'm suggesting is simply to take a second and reconsider what really makes us happy and fulfills our needs. Did people in the 1950s live unfulfilled lives without three iPads and a McMansion?
This reevaluation of our spending priorities is especially important for retirement planning. Recently, I helped my dad crunch the numbers for his retirement plan. I have to commend him for working extra hard lately to play catch-up with his retirement. After crunching the numbers, I told my dad, "I have some really good news. If you were willing to live modestly, you could retire next year. If you moved back to Croatia, you could even live very well over there. But to reach the sort of retirement income that you have in mind, you'll have to work at least ten more years." He said, "Well, I guess I'll have to work ten more years."
There's nothing truly wrong with his answer. If he wants to work longer to earn more, that's up to him. However, at some point this sort of perspective makes you a prisoner of your own expectations. With an investment-newsletter subscription, we can recommend investments to strengthen your portfolio. While managing your investments is important, what doesn't cost a penny is adjusting expectations. It's a lot harder to earn 30% returns than to downsize to a lifestyle that might require only 8% returns. However, if your expectations are through the roof, then 40% returns and another 20 working years won't be enough to satisfy your desires.
When it comes to retirement, if you don't limit your expectations and put them into check, one of two things will happen. Either you will have to keep slaving away to bring in more income to fulfill your desires, or you'll fail to earn enough, and you'll always feel jilted and empty. Even if the first option works out, someone will always have a bigger yacht or house. At retirement, it's time to stop keeping up with Joneses (and stopping well before then can help you hold on to more of your hard-earned money). The combination of a fixed income and endless desires is a guaranteed route to misery and unhappiness.
Maybe you don't need to retire in a McMansion or have three houses in retirement or drive the newest Corvette. People have lived very well on more modest incomes long before the current era of unlimited spending and endless expectations. Maybe – just maybe – the problem in our modern society is not a paycheck which is too small, but rather expectations which are too big.
Here's a very funny spoof of the Pentagon's worries about the sequester cuts from The New Yorker:
Posted by Andy Borowitz
WASHINGTON (The Borowitz Report) – The spending cuts mandated by the sequester may hamper the United States's ability to invade countries for absolutely no reason, a Pentagon spokesman warned today.
The Pentagon made this gloomy assessment amid widespread fears that the nation's ability to wage totally optional wars based on bogus pretexts may be in peril.
"Historically, the United States has stood ready and able to throw billions of dollars at a military campaign with no clear rationale or well-defined objective," said spokesman Harland Dorrinson. "Our capacity to wage war willy-nilly is now in jeopardy."
In the past, Mr. Dorrinson said, the Pentagon has had the resources to fight three meaningless and completely random wars at any given time, "but now in our planning meetings we are cutting that number back to two."
Sen. Lindsey Graham (R S.C.) agreed about the catastrophic effects of the Pentagon cuts, telling reporters, "The ability of the United States to project its military power in an arbitrary and totally capricious way must never be compromised."
The cuts are already being felt in a tangible way at the Pentagon, which today cancelled an order for a nine-thousand-dollar pen.
Here's some more spoof news, but from the almost-too-funny spoof site The Onion. These stories are just overflowing with sarcasm. First, on the topic of the American Airlines and US Airways merger:
FORT WORTH, TX – American Airlines and US Airways stunned the aviation industry Thursday upon announcing the two air travel titans have combined in an $11 billion merger that sources say will unite the industry powerhouses into the world's largest and most complete pain in the ass. "Today we embark upon a bold and unprecedented new venture into customer frustration," American CEO Tom Horton said of the historic alliance, which analysts predict will pose an immediate threat to rivals United and Delta in the air travel industry's key areas of flight delays, lost luggage, and useless customer service. "When you take our general administrative incompetence and integrate it with our new partner's long-proven inability to meet flyers' needs in any capacity, you've got a brilliant new model in passenger aggravation and travel plan disruption. This truly will be the leading entity in the hassle industry." Horton also confirmed the new multi-billion-dollar headache hopes to f*** up more than 4,000 flights a day.
Here's one on AIG:
NEW YORK – Wall Street narrowly dodged a devastating blow to its reputation Wednesday as insurance giant American International Group seriously considered suing the federal government over the terms of its 2008 bailout, a move that experts agreed would have destroyed the tremendous amount of trust and affection the U.S. populace currently feels toward big banks.
Sources said if AIG had decided to join a $25 billion lawsuit over the assistance it received from from [sic] taxpayers following a devastating economic crisis for which no one has been held accountable, then citizens who now feel a deep fondness for the nation’s financial institutions may have become outright angry with them instead.
"Wall Street really won me over in 2008 when it veered toward total collapse after years of predatory lending practices," said Jessica Woodward, 37, a Cincinnati-based software engineer. "And the banks definitely had a special place in my heart after they continued foreclosing on homeowners they shouldn't have loaned money to in the first place."
"But if AIG had gone ahead with this lawsuit – well, I'm not sure that's something I could have turned a blind eye to," she added.
Many Americans echoed Woodward's disapproval, saying it would have been "terribly unfortunate" if the company had gone ahead with its plan to sue the government just a few years after receiving a $182 billion bailout package, considering all the work Wall Street had done to rebuild its good name by granting top-ranking officials obscene bonuses, systematically lying to investors, and failing to reform its practices.
"Thankfully, AIG has avoided any action that might have sullied the public's view of the financial industry as a whole," said Sam Kerr, a father of three in Boise, ID. "Their decision today showed a tremendous amount of respect for the American taxpayer."
"Honestly, they deserve a round of applause for this," he added.
This last one on the sequestration is a little longer; so I'll just post an excerpt. Click on the title for the whole thing:
"Experts say that without reaching a deal this Friday, the automatic $85 billion reduction in government spending will immediately slow the U.S. economy and impact thousands of middle-class citizens. Officials said the same exact thing will happen next month, the month after that, and the month after that if Obama and Congress fail to meet deadlines created by the preceding, incomplete deals.
"If the president and Congress are unable to reach a grand bargain by Mar. 1, what they will likely do is reach a set of 100 or so smaller bargains, all with their own deadlines, and all of which could potentially plunge the U.S. economy into a recession," said Princeton economics professor Marshall Kahn. "So, the Mar. 1 deadline is absolutely crucial. Just like the one next month will be. And the 12 deadlines in May. And the bi-daily deadlines that will kick in during the summer."
"Based on the way the president and Congress deal with one another," Kahn added, "in 2014, there will need to be 4,562 budget deals."
That's it for today. Thank you for reading and subscribing to the Casey Daily Dispatch. See you next week.
Casey Senior Analyst