When to Unload

A reader (Hi, Herman) called to ask, “How will we know when it is time to sell a commodity-based stock or ETF?”

Interesting question. My first inclination is to say, “Sell when you can get positive income from a long term bond.”

Traditionally, very long bonds average 3 per cent income. If there is no inflation, 3 per cent has been the rate. For example, during the 1800’s when the dollar was backed by gold, a saver could confidently buy a 100 year bond paying 3 per cent. Today, the longest bond is 30 years long. When our great-great grandfathers bought enough bonds to pay a decent retirement, the retiree could relax in secureknowledge that the money wouldn’t run out.

There were no income taxes in the 1800s either, so it was easy to plan for retirement because no congress was going to come along and change the rules on you. Today, Congress is moving the retirement age around and raising taxes on our forced savings plan called Social Security.

Currently, we suffer severe cycles of inflation. If I were about to retire, I would put inflation at 14 per cent. The math goes like this: 30 year bond yield is 4.35 per cent; taxes on the interest paid subtract about 1 per cent; then subtract -14 per cent for inflation and you get a net negative yield of 10.65 per cent.
In other words, we’re back in that ‘70s environment when economist Franz Pick called bonds “certificates of guaranteed confiscation”.

A second decider to unload commodity stocks would be when the United States announced its military will be moth-balled. As long as the U.S. is engaged in war and buying war machines at hundreds of billions a pop, there will be deficit spending. War and inflation are partners, mostly because politicians would rather borrow and print money to fight than campaign on tax increases to pay for war materiel.

Another signal that it might be time to unload commodities as an inflation hedge would be when you hear North Dakota U.S. Senator Kent Conrad say that he voted to decrease the farm bill by billions along with a decrease in the rest of government by trillions in order to make good on Social Security promises. If this happened, the government could possibly stop printing so much money and making credit so easy to get.

Finally, and the most probable, a mile high flare would be an announcement that Fed Chair Bernanke has ordered the Fed funds rate to be 15.5 per cent, just as former Fed Chair Paul Volcker did more than 20 years ago. This would be made possible by the utterdestruction of the U.S. dollar as a reserve world currency. If no one will buy your debt anymore, you gotta pay more to get credit.

Put yourself in their shoes. Here’s Saudi Arabia with hundreds of billions worth of our dollars. The dollars have been dropping in value for 6 years. How many more declining U.S. dollars do the Saudis want to hold? My guess is, not that many more.

Part of the Saudi Arabian bin Laden family wants the U.S. out of their country, so for sure that same bin Laden scion would not want to hold infidel U.S. dollars anyway.

Not only that, how many times have your investment advisors told you to diversify?

If Saudi investment advisors are worth their outrageous fees, they’ll be telling Condo Rice’s hand-holding Saudi friend Prince Abdullah to get into DOW stocks, REITs, commodities, real money like gold and silver, infrastructure plays and holding back on the Saudi oil production as a means of storing future value. Heck, oil would probably even go up in price faster than the U.S. dollar loses value! Wouldn’t that be something?

Some people are calling our economy “stagflation”. Stagflation means that the economy is stagnant therefore wages are not going up, and at the same time prices are going up on food, energy and housing. In other words, there are too many dollars so their value is plunging. We say inflation because prices are not going up, rather the money is losing its value. The supply of money is being inflated by our government.

When it comes to money, there is a sleight of hand going on. Under these conditions, when money is not backed by gold and silver, money can silently erode while you hold it. Safe investments aren’t safe anymore while investments that do not pay an income become the safe investment. Add intolerable volatility to the picture and you leave the masses behind in confiscation.

That being said, some of the wisest old money advisors have all their money in gold and T-Bills. They are waiting for transparency in the subprime disaster. You know there’s a great deal of smart money in T-Bills because they’re selling like hotcakes at .45 per cent interest, a record low. Ironically, if the U.S. financial house of cards implodes, gold and short term loans to governments will be the safest money. As prices collapse money will grow in value.

There you have the see-saw nature of money: inflation and deflation. It’s tricky now, much trickier than the ‘74 recession. Know this: governments want to survive and they’ll do anything to make it happen. Survival comes by inflating the dollar to pay service on more than $54 Trillion in debt and future payments with easy money. Are you ready to pay a $1,000 bill for a loaf of bread? Careful conservative savers (bonds & CDs) are the bag holders.